Source:
Hawaii International Conference on System Sciences, Honolulu, HI (2003)
Abstract:
We examine IT contracting in one particular
segment of the IT outsourcing market - the
market for large scale packaged software
implementations such as Enterprise Resource
Planning (ERP) systems. Using a small sample
of actual outsourcing contracts in several
industries and a review of the relevant
outsourcing literature, we determined the
common provisions and structural
characteristics of these contracts. We then used
this description to develop an analytical model
of IT outsourcing, using principal agent
techniques. Our model captures key
characteristics of these IT contracts including a
multi-stage project structure, vendor learning,
probabilistic binary outcomes (success/failure),
use of incentive contracting, and implementation
risks. In addition to deriving the optimal IT
contract; we specifically focus on how vendor
learning affects the optimal structure of the
contract. In particular, we find that with rapid
vendor learning at the early stage of the
contract, it is often more efficient to use a multistage
contracting procedure, even if it is not
technically required, as this enables stronger
incentives to be given to the vendor and creates
greater profit and surplus.
Notes:
A full version of this paper is now available. See 34. Wu, D.J., Ding, Ming, and Lorin M. Hitt (April 2007). “IT Implementation Contract Design: Analytical and Experiemental Investigation of IT Payoff, Learning and Contract Structure,” in review.