Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms [1 ed.] 9783842829534, 9783842879539

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Daniel Kuhlmann

Copyright © 2012. Diplomica Verlag. All rights reserved.

Governing IT Outsourcing Relationships The roles of contract, control, and relational norms

Diplomica Verlag

Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

Daniel Kuhlmann Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms ISBN: 978-3-8428-2953-4 Herstellung: Diplomica® Verlag GmbH, Hamburg, 2012

Copyright © 2012. Diplomica Verlag. All rights reserved.

Dieses Werk ist urheberrechtlich geschützt. Die dadurch begründeten Rechte, insbesondere die der Übersetzung, des Nachdrucks, des Vortrags, der Entnahme von Abbildungen und Tabellen, der Funksendung, der Mikroverfilmung oder der Vervielfältigung auf anderen Wegen und der Speicherung in Datenverarbeitungsanlagen, bleiben, auch bei nur auszugsweiser Verwertung, vorbehalten. Eine Vervielfältigung dieses Werkes oder von Teilen dieses Werkes ist auch im Einzelfall nur in den Grenzen der gesetzlichen Bestimmungen des Urheberrechtsgesetzes der Bundesrepublik Deutschland in der jeweils geltenden Fassung zulässig. Sie ist grundsätzlich vergütungspflichtig. Zuwiderhandlungen unterliegen den Strafbestimmungen des Urheberrechtes. Die Wiedergabe von Gebrauchsnamen, Handelsnamen, Warenbezeichnungen usw. in diesem Werk berechtigt auch ohne besondere Kennzeichnung nicht zu der Annahme, dass solche Namen im Sinne der Warenzeichen- und Markenschutz-Gesetzgebung als frei zu betrachten wären und daher von jedermann benutzt werden dürften. Die Informationen in diesem Werk wurden mit Sorgfalt erarbeitet. Dennoch können Fehler nicht vollständig ausgeschlossen werden und der Verlag, die Autoren oder Übersetzer übernehmen keine juristische Verantwortung oder irgendeine Haftung für evtl. verbliebene fehlerhafte Angaben und deren Folgen. © Diplomica Verlag GmbH http://www.diplomica-verlag.de, Hamburg 2012

Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

Table of Contents List of Figures ..........................................................................................................................iii List of Tables ............................................................................................................................ iv List of Abbreviations ................................................................................................................ v List of Keywords ...................................................................................................................... vi Abstract ..................................................................................................................................viii 1

Introduction ...................................................................................................................... 1 1.1 Motivation and Objectives ......................................................................................... 1 1.2 Structure of the Study ................................................................................................. 2

2

Theoretical Foundations .................................................................................................. 3 2.1 IS Outsourcing ............................................................................................................ 3 2.2 IS Outsourcing Relationships ..................................................................................... 5 2.2.1

IS Outsourcing Relationships as Inter-Organizational Exchanges ................ 5

2.2.2

Underlying Challenges of IS Outsourcing Relationships ............................ 12

2.2.3

IS Outsourcing Relationship Governance Modes ........................................ 18

2.2.3.1 Contractual Governance.......................................................................... 21 2.2.3.2 Relational Governance ............................................................................ 25 2.3 Control ...................................................................................................................... 29 2.4 IS Outsourcing Success ............................................................................................ 38 3

Research Model and Propositions ................................................................................. 39 3.1 Research Approach ................................................................................................... 39

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3.2 Research Model ........................................................................................................ 42 3.2.1

Research Questions, Objectives, and Approaches ....................................... 42

3.2.2

Towards an IS Outsourcing Relationship Framework ................................. 43

3.2.3

Description of the Research Model .............................................................. 47

3.2.4

Summary of Propositions ............................................................................. 56

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

4

Case Study ....................................................................................................................... 57 4.1 Methodology............................................................................................................. 57 4.2 Setting ....................................................................................................................... 61 4.3 Results ...................................................................................................................... 62 4.4 Analysis .................................................................................................................... 74

5

Discussion ........................................................................................................................ 81 5.1 Interpretation of Findings and Implications for Theory and Practice ...................... 81 5.2 Limitations ................................................................................................................ 87 5.3 Further Research ....................................................................................................... 89

6

Conclusion ....................................................................................................................... 91

Appendix A – Case Study Protocol ........................................................................................ ix

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References .............................................................................................................................. xxi

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

List of Figures Figure 1 - Outsourcing phases (Dibbern et al. 2004)............................................................ 4 Figure 2 - Outsourcing stages (Alborz et al. 2003)............................................................... 8 Figure 3 - Outsourcing relationships: interaction approach (Kern & Willcocks 2002) ...... 9 Figure 4 - Outsourcing relationship model (Goles & Chin 2002) ..................................... 10 Figure 5 - Control framework (Flamholtz 1983) ................................................................ 29 Figure 6 - Core control system (Flamholtz 1983) .............................................................. 30 Figure 7 - Portfolios of control mechanisms (Rustagi et al. 2008) .................................... 34

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Figure 8 - Research model................................................................................................... 47

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

List of Tables Table 1 - Overview of IS outsourcing relationship literature ............................................... 7 Table 2 - Challenges derived from TCE ............................................................................. 13 Table 3 - Challenges derived from agency theory .............................................................. 15 Table 4 - Relationship challenges and mitigation strategies .............................................. 22 Table 5 - Contractual elements in IS outsourcing (Chen & Bharadwaj 2009) .................. 22 Table 6 - Contractual elements in IS outsourcing (Goo 2010)........................................... 24 Table 7 - Relationship constructs in research literature...................................................... 26 Table 8 - Control modes and mechanisms .......................................................................... 33 Table 9 - Units of analysis in control literature .................................................................. 36 Table 10 - Research approach (based on Saunders et al. 2007) ......................................... 41 Table 11 - Corresponding relationship constructs .............................................................. 45 Table 12 - Relationship constructs and related authors ...................................................... 46 Table 13 - Research constructs and definitions .................................................................. 50 Table 14 - Overview of case study key facts ...................................................................... 61 Table 15 - Summary of case study results .......................................................................... 73 Table 16 - Overview of empirical support for propositions ............................................... 80

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Table 17 - Sources of interview questions .......................................................................... xx

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

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List of Abbreviations CMO

current mode of operation

e.g.

exempli gratia (for example)

et al.

et alii (and others)

FMO

future mode of operation

i.e.

id est (that is)

ibid.

ibidem (in the same place)

IS

information systems

IT

information technology

RET

relational exchange theory

SLA

service level agreement

TCE

transaction cost economics

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List of Keywords Agency theory

Theory

that

describes

challenges

prevalent

to

relationships characterized by information asymmetry, uncertainty and risk. Contractual governance

Effect on relationships caused by written forms of terms and expectations: Rules of Conditions.

Control

Attempts to influence the behavior of individuals or groups to ensure that they are working towards organizational goals. Comprises formal and informal control modes.

Current mode of operation

Here: current design of IT infrastructure in place.

Future mode of operation

Here: to-be design of future IT infrastructure.

IS outsourcing

Contracting-out of IS functions to an external service provider.

IS outsourcing success

Achievement of predefined organization-specific IS outsourcing goals.

Relational exchange theory

Theory that considers both contractual and relational dimensions of relationships.

Relational governance

Effect on relationships caused by relational norms and

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behavioral expectations: Rules of Behavior. Relationship

Multi-dimensional phenomenon that embodies the ongoing exchange between two parties. Can be represented by a comprehensive but non-exhaustive set of relationship characteristics.

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

Relationship characteristics

Relationships can be represented by six dimensions or characteristics:

trust,

flexibility,

interdependence,

commitment, cultural compatibility, and consensus. Relationship governance

Multi-dimensional

phenomenon,

represented

by

a

comprehensive but non-exhaustive list of governance modes: control, contractual governance, and relational governance. Relationship governance is an abstract term that embodies the joint effect of single governance modes on relationship characteristics. Service level agreement

Formally defined and agreed level of service.

State of relationship

Joint

and

specific

occurrence

of

relationship

characteristics. Transaction cost theory

Theory to explain the existence of firms in relation to market-based

exchanges.

Suggests

that

different

organizational forms exist due to costs caused by transactions. Describes challenges prevalent to inter-

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organizational exchanges.

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

Abstract The dynamics of the relationship between service recipient and service provider in IS outsourcing relationships recently gained increased attention as relationships are believed to have a considerable influence on IS outsourcing success. This study adds to this growing field of interest by developing an IS outsourcing relationship framework in the form of a process model. Three rather disjointed areas of research, namely contractual governance, relational norms, and control, have been set in a common context by interrelating them as the three main governance modes that jointly influence the relationship. One in-depth case study has been conducted in order to provide first empirical evidence and to gain deeper insights into the dynamics of relationship governance. The proposed model could be confirmed in general, revealing the following insights: first, contractual and relational governance modes determine the rules that govern the relationship while control is used to execute and enforce specified rules. All three jointly influence the state of the relationship. Second, relational norms have only been observed at an individual level and not at an organizational one. Third, formal control modes have been used to execute and enforce relational norms. This finding contradicts current control theory. Fourth, while contractual and relational governance are seen as complementary and equally important, relational norms have been left completely unmanaged in the observed organization due to a lack of adequate approaches. These results are discussed in detail to outline opportunities for further

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research.

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1 Introduction 1.1 Motivation and Objectives This paper attempts to provide deeper insights into a long-discussed yet not satisfyingly explained phenomenon in information systems (IS) outsourcing: the dynamics of the relationship between service recipient and service provider. There is a wide variety of theories in place about what constitutes and characterizes the mutual exchange between organizations. There are, however, hardly any explanations about how these relationships can be systematically influenced. This question is highly relevant to theory and practice. From an academic point of view, the decision process of IS outsourcing has been thoroughly examined (Dibbern, Goles, Hirschheim & Jayatilaka 2004). Research on the implementation phase, however, has remained fragmentary and has only recently gained increased attention. Although the impact of relationship management on outsourcing success has long been recognized (McFarlan & Nolan 1995), even today a “greater understanding of how to manage IT outsourcing relationships that create and sustain strategic value […] is highly desired” (Goo & Huang 2008, p. 216). IS practitioners have a strong interest in relationship management as well (Beimborn et al. 2008; Blumenberg 2009). Although failure and dissatisfaction in IS outsourcing projects can often be traced back to challenges during the implementation and operation of outsourcing agreements (Würz & Blankenhorn 2010), existing practitioner literature is regularly limited to the definition and monitoring of performance targets, providing very little advice on how inter-organizational relationships can be developed and

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maintained. The purpose of this study is therefore to investigate how contract, control, and relational norms interact to influence and govern inter-organizational relationships. Three research questions will be examined: 1. What mechanisms can be used to govern IS outsourcing relationships? 2. How are these mechanisms interrelated? 3. How do organizations employ these mechanisms? 1

Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

1.2 Structure of the study The study is divided into two parts: one is conceptual and the other is empirical. Chapter 2 starts with a brief outline of the IS outsourcing research context in order to integrate the paper into existing literature and to define the context to which the suggested findings can be applied. Afterwards, an overview of existing theories about inter-organizational relationships in general and IS outsourcing relationships in particular is given, covering organizational, economic, managerial and IS research areas. The underlying challenges of inter-organizational relationships are described from both an economic and a social theory point of view. Based on the review of theoretical foundations, the research approach and research model are presented in Chapter 3. Prior research is consolidated into a new framework in order to clearly distinguish between relationship characteristics and relationship governance modes. Following the overarching research questions, the research model is developed by describing proposed constructs and respective interconnections. Finally, a set of propositions is derived from the research model to allow for empirical validation. The suggested research model is empirically evaluated using a case study, which is presented in Chapter 4. After demonstrating the applied methodology, empirical findings are presented and it is analyzed whether the examined propositions can be supported empirically. In Chapter 5, theoretical and practical implications, as well as the generalizability and limitations of the findings, are discussed. Based on the results of this study, possible directions for future research are presented.

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Finally, a conclusion is given in Chapter 6.

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2 Theoretical Foundations 2.1 IS Outsourcing IS outsourcing can be defined as “a decision taken by an organization to contract-out or sell the organization's IT assets, people, and/or activities to a third party vendor, who in exchange provides and manages assets and services for monetary returns over an agreed time period” (Kern & Willcocks 2000a, p. 322). Having a history of more than two decades, IS outsourcing has received a great deal of attention since the seminal article of Loh & Venkatraman (1992). In their remarkable and influential literature review, Dibbern et al. (2004) provide a comprehensive discussion of IS outsourcing definitions, concepts, and theories. A more recent review, identifying today’s research agenda, is given by Chadee & Raman (2009). Focusing on the key concepts that are relevant to this study, two perspectives on IS outsourcing will be briefly discussed: the scope or target and the different phases. Following Lacity & Willcocks (2003), three different layers of IS outsourcing can be distinguished. The first layer comprises IS infrastructure, i.e. networks, hardware provision, and data center facilities. The second layer covers application hosting and management. The top layer, finally, corresponds to business process outsourcing, where entire processes are handed over to the service provider, including physical requirements for the provisioning of the service (Halvey & Melby 2007). In addition, information systems development projects can be outsourced as well. Contrary to the three layers described above, the latter is organized as a project and therefore fundamentally differs from the more operational character of infrastructure, application, or business process outsourcing agreements. As detailed in Chapter 5.2 Limitations, the Copyright © 2012. Diplomica Verlag. All rights reserved.

conceptual model and empirical foundation in this study focus on the management of long-term routine operations. Findings are therefore not assumed to be applicable to the outsourcing of projects. The second perspective on IS outsourcing addresses the chronological sequence of IS outsourcing decisions and implementations. Dibbern et al. (2004) propose a five-stage model, subdivided into two main phases (see Figure 1). Phase 1, referred to as the decision process, encompasses the stages why, what, and which. This phase covers the 3

Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

general decision to outsource; the question of which IS part or function should be outsourced; and finally the procedures and guidelines necessary to decide between different outsourcing alternatives. After the decision to outsource has been made, phase 2, referred to as the implementation phase, becomes relevant. This phase covers the stages of how to outsource and what the desired outcomes of the outsourcing decision are. Relevant to this study is the how stage as it covers the building and maintaining of the relationship between service recipient and service provider. The research model and empirical foundation of this study are focused on this stage as the relationship during the ongoing operation of the outsourcing agreement is examined. A closer examination of what exactly characterizes this relationship is given below.

Outsourcing Stages

What

Phase 1: Decision Process

Why

Application of Outsourcing Stages

• Determinants • Advantages/disadvantages

Outsourcing alternatives: • Degree of ownership • Degree of outsourcing

Guidelines, procedures and stakeholders of decision initiation, evaluation and making

How

Phase 2: Implementation

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Which

• Vendor selection • Relationship building • Relationship management

• Experiences/learning • Types of success • Determinants of success

Outcome

Figure 1 - Outsourcing phases (Dibbern et al. 2004)

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2.2 IS Outsourcing Relationships 2.2.1 IS Outsourcing Relationships as Inter-Organizational Exchanges As outlined in the previous chapter, Kern & Willcocks (2000a) define IS outsourcing as “a decision taken by an organization to contract-out or sell the organization's IT assets, people, and/or activities to a third party vendor, who in exchange provides and manages assets and services for monetary returns over an agreed time period” (ibid., p. 322). This characterization implies that outsourcing inherently is a form of interorganizational relationship. Ongoing exchanges between two distinct but interrelated organizations on a contractual basis have been thoroughly investigated in IS and management literature in the past. Important contributions have been made in the fields of organizational theory (Oliver 1990; Ring & van de Ven 1994), marketing (Anderson & Narus 1990; Dwyer, Schurr & Oh 1987), and IS (Bensaou & Venkatraman 1996; Henderson 1990).1 Although every theoretical perspective emphasizes certain facets, a relationship can be generally defined as “a long-term commitment, a sense of mutual cooperation, shared risk and benefits, and other qualities consistent with concepts and theories of participatory decision making” (Henderson 1990, p. 8). The importance of the relationship between service recipient and service provider has been recognized early on in IS outsourcing research (e.g. Klepper 1995; McFarlan & Nolan 1995; Willcocks & Choi 1995). Nevertheless, research in this area has long been restrained by misleading naming (Lacity & Willcocks 1998) and by a lack of conceptual focus leading to a corresponding inconsistent treatment of constructs (Kern & Willcocks 2002; Goles & Chin 2005). As a result, characteristics and determinants of relationships are not always clearly distinguished. These shortcomings in general, and three

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relationship models in particular, will be discussed below. First, the understanding and use of the term relationship has been inconsistent (Sargent 2006). Due to the strategic importance of IS, outsourcing arrangements have often been labeled as partnerships (Grover, Cheon & Teng 1996; Klepper 1995; Lee 2001; Lee & Kim 1999, 2003) or strategic alliances (Das & Teng 1998, 2001; McFarlan & Nolan 1995). However, a closer look often reveals that outsourcing agreements rarely satisfy the requirements of a partnership or alliance (Willcocks & Choi 1995). Lacity & 1

An extensive overview of influential literature in these fields can be found in Kern (1997).

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

Willcocks (1998), for example, found that 45 out of 46 analyzed agreements were feefor-service contracts and not alliances in the sense of risk sharing and goal alignment. Therefore, the more neutral term outsourcing relationship is used in this study, following the definition of Goles & Chin (2002): “For the purposes of this research an outsourcing relationship is defined as an ongoing, long term linkage between an outsourcing vendor and customer arising from a contractual agreement to provide one or more comprehensive IT activities, processes, or services with the understanding that the benefits attained by each firm are at least in part dependent on the other.” (ibid., p. 227) Second, IS outsourcing relationships have been analyzed using a variety of theoretical lenses. Dibbern et al. (2004) provide an extensive overview of related IS outsourcing relationship articles from 1988 through 2000. Table 1 gives an overview of articles that investigate IS outsourcing relationships in and of themselves, in contrast to related topics like contract design or relationship governance. A comparison among prior research articles reveals that almost every new effort to build a relationship framework is based on a different theoretical lens. As a consequence thereof, similar named constructs are often used in different ways. Goles & Chin (2005) illustrate the problematic

overlap

between

constructs

by

comparing

the

definition

of

“communication” among five studies. The very same construct is viewed as an element of relationship building (Kern 1997) and contract structuring (Willcocks & Kern 1998), as an attribute of relationship quality (Klepper 1995; Grover et al. 1996), and as a determinant of relationship quality (Lee & Kim 1999). Additionally, a multitude of constructs have been used in different combinations, leading to several attempts of consolidation and categorization (Alborz, Seddon & Scheepers 2003; Goles & Chin 2002, 2005; Lee & Kim 1999). This lack of conceptual focus can at least partly be Copyright © 2012. Diplomica Verlag. All rights reserved.

attributed to an often unsatisfying explanatory value of suggested frameworks. It appears that researchers have yet to find a conclusive approach to the “often messy reality of relational exchange” (Goles & Chin 2005, p. 50).

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

Relationship Relationship development Relationship development Relationship quality Alliance Alliance

Interaction approach

None

Evolutionary partnering framework

Social exchange theory Power-political theory

None

Strategic partnering framework

Kern & Willcocks (2002)

Kishore et al. (2003)

Klepper (1995)

Lee & Kim (1999)

McFarlan & Nolan (1995)

Willcocks & Choi (1995)

Table 1 - Overview of IS outsourcing relationship literature

Relationship development

None

•

•

7

Alliances are determined by context and action factors

Structuring and managing the alliance

Conceptual model with partnership quality components and determinants

Partnership development can be supported by management actions during different partnership stages

• •

Relationships develop among the types of support, alignment, reliance, and alliance

Relationships can be described among four groups of variables: environment, atmosphere, parties, and interactions

• •

Case description of an outsourcing agreement that failed because of a lack of shared norms

•

Embedded in contextual and behavioral dimensions

•

Kern & Blois (2002)

Relationships as an ongoing interaction of contractual and normative nature

•

Relationship

Social exchange theory Social contract theory

Kern (1997); Kern & Willcocks (2000a)

The constructs that comprise a relationship can be grouped into attributes (inherent characteristics or properties) and processes (the means by which the attributes are developed)

•

Relationship

Relational exchange theory

Goles & Chin (2002, 2005)

Structural, contractual, contextual, and interaction determinants influence relationship quality

•

Relationship quality

Relational exchange theory

Blumenberg (2009)

Relationship quality can be measured using a multi-dimensional construct

Relationship quality is influenced by outsourcing configuration and operationalization

•

Relationship quality

None

Alborz et al. (2004) •

Efficacy of a relationship is influenced by eight factors that can be mapped to these stages

•

Configuration shapes the outsourcing agreement through intent, due diligence, contract, and governance agreements; operationalization reflects the day-to-day decisions

Three temporal stages: pre-contract, contract, and post-contract

•

Efficacy of relationships

None

Alborz et al. (2003)

•

Main Findings

Unit of Analysis

Theoretical Lens

Author(s) and Year

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Nevertheless, existing research already achieved some very valuable, albeit fragmentary, insights into the nature of outsourcing relationships. Particularly noteworthy for the purposes of this study are the contributions of Alborz et al. (2003), Kern & Willcocks (2002), and Goles & Chin (2005) as they are useful in defining the scope and focus of the current study. Alborz et al. (2003) propose a temporal model comprising three sections: the precontract, contract, and post-contract stage (see Figure 2). Every stage is then linked with different factors influencing IS outsourcing relationship efficacy. An insight that can be drawn from this work is that relationships exist from the very beginning and not only after signing the contract. Moreover, they evolve and change over time. A comprehensive relationship model should therefore reflect the dynamics of a relationship or at least clearly state which stage is modeled by the framework. This study focuses on the post-contract stage, i.e. the day-to-day operational activities of an outsourcing arrangement.

Pre-Contract Stage

Operationalization Outsourcing Strategy

Inf luence

Due Diligence

Inf luence

Contract Development

Inf luence

Negotiation

Contract Stage

Phases Scoping & Evaluation

Stages

Post-Contract Stage

Transition, Middle, and Mature

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Governance Performance Management Contract Management Working Relationship Management Knowledge Management Time

Efficacy of Outsourcing Relationship

Outsourcing Success as Perceived by Stakeholder

Figure 2 - Outsourcing stages (Alborz et al. 2003)

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Kern & Willcocks (2002) draw on the work of the industrial market and purchasing group (IMP group). This group has been particularly influential in the field of buyersupplier exchange relationships as it was among the first ones to enhance strictly economic relationship models by considering the social embeddedness of relationships (Granovetter 1985; Cunningham & Tynan 1993; Uzzi 1997). Based on this research, Kern & Willcocks (2002) adopt the interaction approach from Hakansson (1982) to provide a more holistic model of outsourcing relationships (see Figure 3). This model is based on four main groups of variables: the environment of the interaction, the atmosphere that characterizes the relationship, the parties and their organizational and individual characteristics, and finally the interaction process, covering service, information, financial, and social exchanges. Kern & Willcocks (2002) found the framework to be too general for a detailed analysis of outsourcing relationships. Nevertheless, it is highly useful in classifying and illustrating the complexity and diversity of relationship factors. It is at least a very valuable macro framework that can be used to position further research. This study focuses on the interaction process, i.e. the attributes and influencing factors of relational exchanges.

ENVIRONMENT Market Structure; Dynamism; Internationalisation of the Market; Social System

ATMOSPHERE Power/Dependence; Cooperation; Closeness Supplier A

ORGANIZATION

Customer B Product/Service Inf ormation Financial Social

Short-Term Exchange Episodes

ORGANIZATION

INTERACTION PROCESS

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INDIVIDUAL

Long-Term Relationships

Institutionalisation Adaption

INDIVIDUAL

Figure 3 - Outsourcing relationships: interaction approach (Kern & Willcocks 2002)

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Goles & Chin (2002, 2005) suggest a relationship framework (see Figure 4) that is particularly interesting as it clearly distinguishes and links prerequisites, relationship dimensions, relationship measurements (quality), and relationship outcomes (success). Goles & Chin (2002, 2005) reviewed the existing relationship literature to produce a compilation of relationship factors. The generated list with a total of twenty-three factors was then consolidated into eleven constructs drawing on relational exchange and contract theory. Afterwards, the constructs were grouped into attributes (inherent characteristics or properties) and processes (the means by which the attributes are developed). With the aim of setting the described core relationship dimensions in the context of a more comprehensive view, the vendor and customer capabilities are integrated as input factors. Quality and success are considered to be output factors. The described model will serve as a guiding framework in this study as it (a) makes a clear statement on the dimensions representing the relationship itself, instead of investigating peripheral constructs, and (b) distinguishes between attributes as inherent characteristics of a relationship and factors by which these attributes are developed and influenced.

Vendor Capabilities • Technical Competence • Business Understanding • Relationship Management

Customer Capabilities

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• Technical Understanding • Managerial Competence • Relationship Management

Relationship Attributes • • • • • •

Commitment Consensus Cultural compatibility Flexibility Interdependence Trust

Processes • • • • •

Quality

Success

• Systems • Information • Service

Benef its attained • Economic • Technological • Organizational • Equity • Satisfaction

Communication Conflict resolution Coordination Cooperation Integration

Figure 4 - Outsourcing relationship model (Goles & Chin 2002)

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Among the articles in IS outsourcing relationship research listed in Table 1, only Kern (1997), Kern & Willcocks (2000a, 2002), and Goles & Chin (2002, 2005) strive to develop a model of the relationship itself. The unit of analysis in the remaining literature often embraces a construct peripheral to relationship, like quality, efficacy or development. This is somewhat surprising as a common understanding about what attributes and dimensions determine the relationship itself is still to be developed. To conclude, it can be said that there is a lack of a clear differentiation in IS outsourcing relationship literature between what attributes define a relationship, what determinants influence these attributes, what constructs represent the quality of a relationship, and how a relationship can be managed, developed and governed. The most comprehensive model is the one of Goles & Chin (2002, 2005) as it clearly differentiates between relationship characteristics and determinants. It is beyond the means of this study to solve all discussed shortcomings. Nevertheless, an attempt will be made to integrate existing outsourcing relationship literature in order to build a modified relationship framework. The proposed model does not claim to explain relationships entirely. However, it aims to meet the purposes of this study by clearly defining and linking the components necessary to describe the relationship itself and the approaches to govern this relationship. To this end, an overview of the underlying challenges inherent to relationships will be discussed in the next chapter, followed by an examination of governance modes.

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Finally, an integrative outsourcing relationship framework will be developed.

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2.2.2 Underlying Challenges of IS Outsourcing Relationships As the main purpose of this study is to investigate relationship governance mechanisms, a closer look at the challenges these governance mechanisms should solve is needed. Economic theories, or more specifically transaction cost economics (TCE) and agency theory, have been widely used as a theoretical lens for the analysis of interorganizational relationships in general (Cannon, Achrol & Gundlach 2000; Claro, Hagelaar & Omta 2003; Ferguson, Paulin & Bergeron 2005; Logan 2000; Rindfleisch & Heide 1997; Sheng, Brown, Nicholson & Poppo 2006; Wathne & Heide 2000, 2004) and IS outsourcing relationships in particular (Aubert, Rivard & Patry 1996, 2003b, 2004; Aubert, Houde, Patry & Rivard 2003a; Gellings 2007a, 2007b). Both theories offer precise and well-known instruments to model the underlying challenges of interorganizational relationships. Therefore, an overview of challenges is given here, while mechanisms to mitigate these are explored in the subsequent chapters.2 Based on well-known early works (Williamson 1975, 1985) and versions later reviewed and extended (Williamson 1991a, 1991b, 1992, 1993, 1996), TCE has identified a set of governance problems, like safeguarding specific assets, and related governance mechanisms, like markets, hierarchies or hybrids, to manage these problems. TCE is built on the notion that transactions cause costs (Coase 1937), e.g. for drafting and negotiating contracts or monitoring and enforcing agreements. As different governance mechanisms differ in their costs and in their ability to mitigate underlying problems of transactions, the final goal is about finding an optimal – i.e. cost-minimizing – governance structure. In order to solve this problem, Williamson integrates different theoretical perspectives by synthesizing Coase’s (1937) conception of transaction costs, Commons’ (1934) focus on transactions as units of analysis, Simon’s (1957) suggestion of bounded rationality, and Knight’s (1921) argument that individuals behave Copyright © 2012. Diplomica Verlag. All rights reserved.

opportunistically. In sum, transaction cost economics rests on two key attributes of transactions (asset specificity and uncertainty) and two main assumptions of human behavior (bounded rationality and opportunism). Bounded rationality is the assumption that decision makers have constraints on their rationality due to limited information processing and communication ability. In combination with the key attribute uncertainty, this imposes two problems: environmental conditions surrounding a 2

The summary for TCE is based on Rindfleisch & Heide 1997, who give a great review of transaction cost theory and related research in the field of marketing.

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transaction cannot be specified ex ante (environmental uncertainty) and performance is difficult to evaluate ex post (behavioral uncertainty). Environmental uncertainty creates an adaption problem; that is, it leads to difficulties in adapting the agreement to changing environments. The behavioral uncertainty results in a performance evaluation problem; that is, it causes difficulties in deciding whether specified agreements have been fulfilled. Opportunism is the assumption that the actions of decision makers may be guided by their self-interest, which can lead to lying, cheating, or otherwise violating the agreement. As it can be difficult to know beforehand who is trustworthy (Barney 1990), opportunism is especially problematic in combination with specific assets that have limited value outside the relationship. This creates a safeguarding problem to protect the specific asset. These challenges are summarized in Table 2. The described attributes and resulting problems are particularly prevalent in inter-organizational relationships. Asset specificity in IS outsourcing agreements is usually high. While single hardware components and standard software packages are commodities, the entire IS environment is generally tailored to the individual organization. The configuration of the IS environment, the knowledge about the demand and needs, as well as the knowledge of the particular processes of an organization, are highly specific and create a lock-in effect for both service provider and recipient. Environmental uncertainty is typically high as well. Future demand is difficult to forecast in both volume and manner. IS is closely coupled with business needs, which can be highly volatile due to changing factors inside and outside the organization. Furthermore, evolution of technology might have a profound influence on both business needs and IS implementation.

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TCE Construct

Underlying Assumptions

Description

• Opportunism

The contract has to be adapted to future changes in an environment that cannot be foreseen. A contract partner could exploit this situation in an opportunistic way.

Adaption Problem

• Environmental uncertainty

Performance Evaluation Problem

• Opportunism

Safeguarding Problem

• Opportunism

• Behavioral uncertainty

• Asset specificity

As behavior cannot be fully observed, performance may be difficult to evaluate. A contract partner could exploit this situation in an opportunistic way. Relationship specific assets create a lock-in effect. It is therefore difficult to protect against opportunistic behavior.

Table 2 - Challenges derived from TCE

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Behavioral uncertainty is high as well. The service is rarely provisioned on the premises of the recipient and in addition, the provider’s employees are not under the authority of the customer. Therefore, it might be difficult to observe behavior and evaluate performance. In summary, IS outsourcing relationships are highly susceptible to the hazardous assumptions of TCE, which is, in turn, applicable to IS outsourcing contexts (cf. Poppo & Lacity 2006). The second economic approach relevant to this study is agency theory (Arrow 1976, Jensen & Meckling 1976; Ross 1973; Wilson 1968). Following Eisenhardt’s (1989a) excellent review, agency theory is concerned with a situation where one party (the principal) delegates work to another party (the agent). The relationship between the principal and the agent can be modeled by a contract (Jensen & Meckling 1976). Underlying assumptions of human behavior are, similar to TCE, opportunism, bounded rationality, and risk aversion. In addition, two organizational assumptions are made: a partial goal conflict and an information asymmetry between principal and agent. Out of these assumptions, two problems arise: a risk-sharing problem and an agency problem. The risk-sharing problem occurs when principal and agent have different risk preferences and thus prefer different actions. The agency problem occurs when the goals of principal and agent conflict and when it is difficult or expensive for the principal to observe the agent’s behavior. Two appearances are mentioned in the literature for this problem: moral hazard and adverse selection. The former refers to the problem where the agent does not make the agreed effort, i.e. is shirking. The latter refers to the problem where the principal cannot verify the abilities claimed by the agent. An alternative view on the challenges underlying a relationship between a principal and an agent is based on the assumption of information asymmetry. Depending on the type of information that is unavailable to the principal, three different

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problems can be defined: hidden characteristics, hidden information, and hidden action (cf. Küpper 2008). Hidden characteristics refer to (negative) characteristics of the agent that are covert before the contract is signed. The resulting problem corresponds with adverse selection. Hidden information refers to the moral hazard of the agent to manipulate or only selectively reveal private information for personal advantage. Hidden action is also a form of moral hazard. It refers to the problem of unobservable behavior and therefore possibly undetected opportunistic behavior. The described challenges are summarized in Table 3. 14

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Agency Theory Constructs

Moral Hazard

Underlying Assumptions

• Opportunism • Information asymmetry

Adverse Selection

• Opportunism

Risk-sharing Problem

• Opportunism

• Information asymmetry

• Different risk preferences

Description It is difficult or expensive for the principal to verify whether the agent puts forth the agreed effort. The agent can blame bad performance on events beyond his control. Corresponds to hidden information and hidden action. It is difficult or expensive for the principal to verify the abilities claimed by the client. Corresponds to hidden characteristics. Principal and agent prefer different actions due to different risk preferences.

Table 3 - Challenges derived from agency theory

The described assumptions and resulting problems are again particularly prevalent in inter-organizational IS outsourcing relationships. As described in the section about TCE, outsourcing services are usually provisioned remotely and behavior is difficult to observe, leading to information asymmetry. The service provider may be tempted to reduce its effort and blame low performance on circumstances outside of his control. Due to the complexity of outsourcing agreements and the often limited experience in conducting outsourcing projects, service recipients suffer from information asymmetry during the vendor selection phase. Furthermore, the outsourcing market is dominated by a small number of global organizations. While these huge companies may have a uniform appearance on the market, the competences of the teams which ultimately execute the outsourcing project may differ. Finally, the objectives of the service recipient and service provider are typically diametrically opposed. While the recipient strives for high service quality and low costs, the service provider is incentivized to invest only a little effort while maximizing payments. Risk preferences may therefore

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differ considerably between both parties. Opportunism is a necessary assumption for all problematic outcomes in TCE and agency theory. Wathne & Heide (2000) refine the general construct of opportunism in their insightful article by indicating that actually several forms of opportunism exist. They identify four different types along the dimensions behavior and circumstances. A passive behavior under existing circumstances can lead to evasion or shirking (corresponding to the performance evaluation problem and hidden information form of moral hazard). A passive behavior under new circumstances can lead to a refusal to 15

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adapt (corresponding to the adaption problem). Active behavior under existing circumstances can lead to violation, i.e. engaging in prohibited behavior (corresponding to the hidden action form of moral hazard). The last type, forced renegotiation, is caused by active behavior under new circumstances and refers to the cases where new circumstances are used to enforce concessions. Both TCE and agency theory share an economic perspective and see (formal) contracts as a way to govern relationships and mitigate presented problems. A good amount of research has thus been undertaken in order to design optimal – i.e. cost minimizing – contracts for various kinds of relationships.3 As discussed, the economically derived challenges of a relationship are supposedly accurate, applicable and relevant in an IS outsourcing context. Likewise, contracts are an appropriate way to mitigate and, to some extent, even solve described problems. Nevertheless, as the discussion about relationship frameworks has shown, interorganizational transactions are embedded in a social context. Governing mechanisms that are purely based on formal contracts are likely to be insufficient if applied on their own, as are mechanisms that are purely based on social theories, like social exchange theory (Blau 1964; Emerson 1972; Homans 1961). Thus, some researchers (e.g. Goles & Chin 2002) draw upon relational exchange theory (RET), which is “based on the notion that parties to an exchange are in mutual agreement that the resulting outcomes of the exchange are greater than those that could be attained through other forms of exchange, or from exchange with a different partner” (Goles & Chin 2002, p. 227). In contrast to purely economic and purely social theories, relational exchange theory takes into account the fact that exchanges between two organizations are governed by both contractual and relational dimensions.

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Based on the work of Macaulay (1963), Macneil (1974, 1978, 1980) is one of the most influential advocates of relational exchange theory. RET emphasizes the fact that contracts are incomplete as they cannot anticipate or specify every contingency that arises during the life of the contract. TCE and agency theory neither assume nor postulate complete contracts. However, in contrast to economic theories, RET considers relational norms as a way to strengthen the relationship by complementing this 3

Gellings (2007b) is as an example for contract-based governance in IS outsourcing relationships.

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incompleteness. As both parties acknowledge the benefits of the mutual exchange, the relationship is valued in and of itself. Relational norms transform the nature of the contract from a contract-in-law (one that is restrained to legally enforceable agreements) to a contract-in-fact (one that includes interactions to preserve and harmonize the relationship) (Goles & Chin 2005). To conclude, economic theories are helpful and valuable in describing the underlying challenges of IS outsourcing relationships. Nevertheless, (formal) contracts alone are not sufficient to mitigate these challenges due to the social embeddedness of relationships. Thus, both contractual and relational mechanisms to govern relationships

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are discussed in the following section.

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2.2.3 IS Outsourcing Relationship Governance Modes As outlined in the previous chapter, the understanding of relationships has developed from a purely economic, transaction-based perspective to one of a socially embedded mutual exchange based on relational norms. Together with this change of perspective, the mechanisms used to manage and direct relationships, i.e. relationship governance mechanisms, have adjusted as well. (IS) governance is often understood in a broad sense (de Haes & van Grembergen 2006). Webb et al. (2006), for example, define IS governance as “the strategic alignment of IT with the business such that maximum business value is achieved through the development and maintenance of effective IT control and accountability, performance management and risk management” (ibid., p. 7). This broad understanding consequently includes elements like strategic alignment, risk management, roles and responsibilities and so forth. For the purposes of this study, however, governance refers to “the formal and informal rules of exchange between partners” (Vandaele, Rangarajan, Gemmel & Lievens 2007, p. 237). Following this narrow understanding, the definition of Heide (1994) is used in this study: "Governance is a multidimensional phenomenon, encompassing the initiation, termination and ongoing relationship maintenance between a set of parties. […] Essentially, governance includes elements of establishing and structuring exchange relationships as well as aspects of monitoring and enforcement." (ibid., p. 72) According to Vandaele et al. (2007), early versions of TCE (Williamson 1979, 1985) focused on single and unilateral transactions. Given this, markets and hierarchies have been appropriate governance forms to mitigate the challenges outlined in the previous chapter. Markets refer to market-based exchanges where transactions are governed by Copyright © 2012. Diplomica Verlag. All rights reserved.

legal and formal terms (David & Han 2004). Hierarchies refer to vertical integration where transactions are internalized by the organization (Rindfleisch & Heide 1997). As the perspective on inter-organizational relationships changed to one of a bilateral, relational exchange, TCE has been further developed to include intermediate, or hybrid, governance modes (Williamson 1991b). In today’s understanding, principles of TCE and social theories are combined, shifting the focus of analysis from the transaction to the relationship itself (Vandaele et al. 2007). Since then, two types of governance 18

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strategies have been investigated: economic-based strategies, such as contracts, and relational-based strategies, such as relational norms (Griffith & Myers 2005). A classification into these two categories is prevalent in current research, although different terms are used: hard and soft sides of outsourcing management (Barthélemy 2003), formal contracts and relational/social norms (Cannon et al. 2000; Dahlstrom, McNeilly & Speh 1996), formal and informal management (Heckmann 1999), and formal contracts and psychological contracts (Koh, Ang & Straub 2004; Miranda & Kavan 2005). This study adopts the terms contractual governance and relational governance (Chaudhary & Kishore 2010; Ferguson et al. 2005; Vandaele et al. 2007) for two reasons: first, the similar naming emphasizes the complementarity and equality of the two concepts; second, the word governance clearly distinguishes the function as a governing mechanism from underlying principles like social norms. According to Ferguson et al. (2005), contractual governance can be defined as “the degree to which the formal contract is currently implemented in established service exchanges” (ibid., p. 219). It refers to formal, explicit and typically written contracts. Contracts are legally binding agreements that detail the roles and obligations of both parties. They can therefore be considered as substitutes for the formal governance mechanisms of hierarchies (Ferguson et al. 2005; Vandaele et al. 2007). Relational governance can be defined as “a social institution that governs and guides exchange partners on the basis of cooperative norms and collaborative activities” (Poppo, Zhou & Zenger 2008, p. 1197) while relational norms are “the bilateral expectations that exchange partners will act in ways that assist each other during the course of the relationship” (Vandaele et al. 2007, p. 241). Thus, compared with contractual governance, relational governance is rather informal and social.

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A good amount of research has been invested into the question of whether contractual and relational governance function as substitutes or complements (Lazzarini, Miller & Zenger 2004; Poppo & Zenger 2002). The substitution view (Adler 2001; Bernheim & Whinston 1998; Bradach & Eccles 1989; Dyer & Singh 1998; Granovetter 1985; Gulati 1995; Uzzi 1997) argues that extensive formal agreements might undermine trust between both parties (Ghoshal & Moran 1996; Macaulay 1963). Other authors (Hill 1990; Uzzi 1997) suggest that relational governance might act as a safeguard in complex and uncertain environments that are less costly than extensive contracts. The 19

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complementary view, on the contrary, considers the joint use of contractual and relational governance mechanisms to be more effective than each one on its own. The main argument is based on the notion that incomplete contracts facilitate the selfenforcement of informal agreements as incentives or punishments reduce gains from short-term opportunism while increasing the value of respecting informal agreements (Baker, Gibbons & Murphy 1994; Klein 1996; Pearce & Stacchetti 1998; Poppo & Zenger 2002; Schmidt & Schnitzer 1995). Recent conceptual and empirical research provide strong support for the complementary view (Lazzarini et al. 2004; Poppo & Zenger 2002). This study therefore follows the notion that contractual and relational governance function as complements. More specifically, the interrelation between both governance modes and control as a shared implementation mechanism is investigated. Both modes are therefore examined in more detail in the subsequent chapters while control is

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examined thereafter.

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2.2.3.1 Contractual Governance As one of the main objectives of transaction cost economics and agency theory is the design of optimal contracts, formal agreements are a natural choice for governing relationships. Thus, contractual governance has often been the focus of research about IS outsourcing relationships (Aubert et al. 2003a, 2003b; Chen and Bharadwaj 2009; Gellings 2007a, 2007b; Goo 2009, 2010; Goo & Huang 2008; Goo, Huang & Hart 2008; Goo, Kishore, Rao & Nam 2009). Contracts mitigate the underlying challenges of relationships outlined in Chapter 2.2.2 Underlying Challenges of IS Outsourcing Relationships in several ways. Opportunism and information asymmetry can be countered in two principal ways. First, the reasons for opportunistic behavior can be reduced by aligning the goals of the service provider and service recipient. Rewards can be used to incentivize beneficial behavior while penalties reduce the payoff for unfavorable actions (Gellings 2007a). Additionally, long-term contracts can protect against short-term profit maximization (Aubert et al. 2003b). Wathne & Heide (2000) give an interesting overview of contractual and noncontractual mechanisms to avoid different types of opportunism. Second, creating transparency inherently reduces information asymmetry and can also reveal opportunistic behavior, making it less likely. Transparency can be achieved by clearly defined performance standards, ongoing monitoring, and external benchmarks. Different risk preferences can be aligned through risk and profit sharing or by using incentives. Contracts can be an effective instrument to implement these mechanisms. Nevertheless, outcome-based measures are limited if behavior cannot be separated from non-influenceable environmental conditions. Furthermore, contracts have particular difficulties in mitigating uncertainty. Due to bounded rationality, it is not possible to foresee every contingency in dynamic environments and long-term agreements like IS Copyright © 2012. Diplomica Verlag. All rights reserved.

outsourcing. Uncertainty can be partly compensated for through specification or by defining contingency clauses that define processes to cope with change. However, the limited use of contracts regarding these points is one of the reasons for the increasing interest in relational governance. Table 4 provides an overview of relevant challenges and contract-based strategies to mitigate them.

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Challenge

Contractual Mitigation Strategy Goal alignment (reduces reasons for opportunism)

Opportunism Information asymmetry

Different risk preferences

•

Rewards incentivize beneficial behavior

•

Penalties reduce payoff from harmful behavior

•

Long-term contracts protect against short-term profit optimization

Monitoring (detects opportunism, creates transparency) •

Performance standards and benchmarks

•

Difficult to indentify non-influenceable environmental conditions

• Align preferences through incentives • Risk and profit sharing • Difficult to mitigate as contracts can hardly specify all contingencies

Uncertainty

• Partly compensable through contingency provisions • Partly compensable through costly specification

Table 4 - Relationship challenges and mitigation strategies

In IS outsourcing contract research, two articles provide a notably comprehensive view of contract content and structure. Chen & Bharadwaj (2009) derived a contract structure from 112 IS outsourcing contracts. They identified 16 major clauses among the four dimensions monitoring, dispute resolution, property rights protection, and contingency provisions (see Table 5). Their work allows a valuable insight into how outsourcing partners structure contractual governance provisions in practice.

Contract Category

Contract Clauses • Periodic progress reporting and reviewing • Auditing on vendor's performance and benchmarking of service quality

Monitoring

• Technology and software refresh, periodic training sessions • Transition plan of assets

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• Staffing and disaster recovery plan Property Rights Protection

• Rights to use of existing technologies • Ownership of new development and derivative assets • Confidentiality and noncompetition clauses • Escalated dispute resolution mechanisms

Dispute Resolution

• Arbitration/mediation clauses • Litigation clauses • Termination for convenience

Contingency

• Right to amend/modify the contract • Contingency for specific event

Table 5 - Contractual elements in IS outsourcing (Chen & Bharadwaj 2009)

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Another perspective is given by Goo (2010), whose work is based on contract, control, and relational exchange theory. Goo (2010) theoretically derives and empirically validates 11 contractual elements in three categories using grounded theory (Strauss & Corbin 1990) and quantitative analysis. The three categories, or characteristics as they are called, reflect common underlying themes in governing outsourcing relationships. Foundation characteristics define performance standards, common objectives, and roles and responsibilities of the parties. Change characteristics outline processes for adapting the contract to future needs and changing objectives. Governance characteristics define management mechanisms such as communication protocols, reporting policies, and administrative procedures. An overview and definition of contractual elements and characteristics is given in Table 6. The work of Chen & Bharadwaj (2009) might be somewhat more comprehensive compared to Goo (2010), comprising practically relevant clauses like property rights, staffing, or training. Nevertheless, the framework of Goo (2010) is chosen to define the contractual governance dimensions in this study as it is a conceptually sound approach based on the theories that also underlie this study, i.e. contract, control, and relational exchange theory. Nevertheless, it is important to state that it is not the contract itself that serves as a governance mechanism. It is the application, not the existence, of contractual clauses that governs the relationships. Contractual governance is therefore not measured using the specificity or completeness of the contract. Instead, what is relevant is the degree of

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implementation of, or reliance on, the contract (Ferguson et al. 2005).

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Underlying Themes in Common Foundation Characteristics (FC) • Publicizing common values, beliefs, or a philosophy within a clan (Kirsch 1997) • Resulting in sharing a common ideology, internalizing a set of values, and committing to a clan (Choudhury & Sabherwal 2003) • Providing means to create a general commitment between partners from which desirable actions evolve (Williamson 1985, 1991b)

Change Characteristics (CC) • Specific rules and procedures which would lead to a desired outcome if followed (Choudhury & Sabherwal 2003; Kirsch 1997) • Mechanisms that facilitate joint adaption to problems raised from unforeseeable changes in the contract (Williamson 1996) • Methodology aligned to match known exchange hazards, particularly those associated with uncertainty (Williamson 1985)

Governance Characteristics (GC)

Contractual Elements

Contractual Issues in IT Outsourcing

Service Level Objectives

Spirit of contract and publicity of common values, beliefs, and philosophy between organizations to ensure performance

Process Ownership Plan

Number of companies taking part in some aspect of the IS portfolios when outsourced

Service Level Contents

Specification of obligations in terms of a statement of work, the associated and required service levels, and the price to be paid into all sourcing agreements

Future Demand Management Plan

Planning the process and methodologies for coping with changes and contingencies in long-term engagements; agreeing to agree

Anticipated Change Plan

The joint development of expectations about perceived uncertainties, especially concerned with anticipated conflicts of interest and potential trouble

Feedback Plan

Continuous processes for changing interfaces, approaches, and attitudes toward better service delivery states within a deal based on learning by doing

Innovation Plan

Cooperative innovation, especially joint efforts at continuous performance improvement and planning

Communication Plan

The approach for disseminating contractrelated information to all of the parties involved in the relationship through scheduled interaction and communication such as formal meeting and reporting

Measurement Charter

Tactical measurements for calculating and reckoning of service performance as well as success metrics derived from the SR’s strategic plan

Conflict Arbitration Charter

Balance of power that imposes one’s will on others

Enforcement Plan

Carrot-and-stick; sharing of benefits and burdens

• Mechanisms that mitigate disruptions (Williamson 1996)

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• Rewards or sanctions for meeting or missing targets (Klein et al. 1978) • Setting and checking performance targets and interim milestones to ensure that the relationship remains on course (Choudhury & Sabherwal 2003; Kirsch 1997; Ouchi 1979)

Table 6 - Contractual elements in IS outsourcing (Goo 2010)

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2.2.3.2 Relational Governance Due to the social character of inter-organizational relationships, relational norms as governance mechanism have received broad attention in organizational research in general (Claro et al. 2003; Greenberg, Greenberg & Lederer 2008; Joshi & Stump 1999a, 1999b; Larson 1992; Noordewier, John & Nevin 1990; Poppo et al. 2008; Sheng et al. 2006; Wathne & Heide 2004) and IS outsourcing research in particular (Beimborn et al. 2008; Blumenberg 2009; Blumenberg, Beimborn & Koenig 2008; Lee, Huynh & Hirschheim 2008; Zaheer & Venkatraman 1995). In contrast to contractual governance, relational norms are endogenous in relational governance (Joshi & Stump 1999a). Behavior is not controlled through incentives, but regulated through moral control (Larson 1992). As Joshi & Stump (1999a) remarkably point out, relational norms evolve from description (“this is the way we do things in the relationship”) to expectation (“this is the way things should be done in the relationship”). Thus, relational norms become a moral control mechanism that promotes behavior that is beneficial for the relationship (e.g. cooperation) and inhibits adverse behavior (e.g. opportunism). Opportunism can then be hindered either by social pressure in case of exposure or by goal alignment through socialization processes (Wathne & Heide 2000). The social context itself then functions as a protection and a governance mechanism to mitigate the challenges underlying the relationship (Macneil 1980; Wathne & Heide 2000, 2004; Joshi & Stump 1999a). Nevertheless, even after relational norms are established, they require continuous maintenance and development (Dwyer et al. 1987; Larson 1992). A review of existing relational governance literature reveals that many different constructs exist to represent relational norms, relational governance, relationships or

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relationship quality. While trust and commitment are often used elements, most articles use neither congruent sets nor even define the constructs in a homogenous way. RET and thus the constructs defined by Macneil (1980) are a common base, but they are only selectively chosen among different articles. Table 7 gives an overview of reviewed articles and used constructs.

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Author(s) and Year

Relationship Constructs • Trust • Solidarity (fairness)

Barthélemy (2003)

• Cooperation • Information sharing • Durability Relationship quality (paper 3) • Commitment • Communication quality

Blumenberg (2009)

• Conflict • Consensus • Forbearance • Mutual understanding • Trust • Flexibility • Solidarity

Cannon et al. (2000)

• Mutuality • Harmonization of conflicts • Restraint in the use of power

Claro et al. (2003) Chaudhary & Kishore (2010)

• Joint planning • Joint problem solving • Trust • Harmonization of conflicts

Ferguson et al. (2005)

• Solidarity • Flexibility • Information sharing Attributes • Commitment • Consensus • Cultural compatibility • Flexibility • Interdependence

Goles & Chin (2002)

• Trust

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Processes • Communication • Conflict resolution • Coordination • Cooperation • Integration Table 7 - Relationship constructs in research literature

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Author(s) and Year

Relationship Constructs Mediators • Trust • Commitment

Goo (2009) Goo & Huang (2008)

Outcomes • Acquiescence • Relationship durability • Cooperation • Harmonious conflict resolution • Active information exchange • Trust • Commitment • Harmonious conflict resolution

Goo et al. (2009)

• Solidarity (relational norm) • Information exchange (relational norm) • Flexibility (relational norm) • Mutual dependence • Information exchange

Griffith & Myers (2005)

• Flexibility • Solidarity Common contract norms • Role integrity • Mutuality • Implementation of planning • Effectuation of consent • Flexibility • Contractual solidarity

Macneil (1980)

• Linking norms: restitution, reliance, expectation interests • Creation and restraint of power • Harmonization with the social matrix Relational contract norms • Role integrity • Preservation of the relation

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• Harmonization of relational conflicts • Supracontract norms • Trust Sheng et al. (2006)

• Loyalty • Shared values

Table 7 - Relationship constructs in research literature (continued)

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Author(s) and Year

Relationship Constructs • Trust

Poppo et al. (2008)

• Information exchange (routine) • Collaboration (routine) • Communication • Sharing of information

Poppo & Zenger (2002)

• Trust • Dependence • Cooperation Structure • Degree of vertical quasi-integration

Zaheer & Venkatraman (1995) Process • Joint action Table 7 - Relationship constructs in research literature (continued)

The diversity of constructs shows that no common understanding about relational norms exists. The reviewed articles use a mix of characteristics (e.g. trust), activities (e.g. information sharing), and qualities (e.g. communication quality). The perception of linkages between and antecedents of different constructs vary as well. Greenberg et al. (2008), for example, suggest that trust is a determinant for TCE characteristics like asset specificity and uncertainty, while Poppo et al. (2008) found the relationship to be vice versa. However, due to the complexity of social realities, these findings are not necessarily contradicting. As Noordewier et al. (1990) point out, relational governance “does not exist in a context-free vacuum. It must be operationalized in the context of a specific exchange.” (ibid., p. 84) For the sake of a more consistent and uniform understanding of used constructs in IS outsourcing relationship research, an integrative IS outsourcing relationship framework is developed in this study, bringing together the examined components of relationship Copyright © 2012. Diplomica Verlag. All rights reserved.

characteristics as well as contractual and relational governance. In order to do this, a third relationship governance mechanism, control, is examined in the following chapter.

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2.3 Control “Control theory attempts to explain how one person or group in an organization can ensure that another person or group works toward and attains a set of organizational goals.” (Kirsch 1996, p. 1) Control has long been of interest to researchers and practitioners alike, resulting in numerous definitions, theoretical foundations, and implementation designs. Two oftenused perspectives on control are organizational and economic theory, especially agency theory (Eisenhardt 1985). The underlying theme to the organizational control approach is the question of which mechanisms can be used to manage an organization so that it moves towards its goals (Ouchi 1979). Agency theory, on the other hand, provides a theoretical foundation to describe and model the relationship and its inherent challenges between two contracting parties with divergent objectives (Ross 1973; see Chapter 2.2.2). Both approaches are concerned with how to influence the actions of individuals or groups and therefore jointly provide the foundation for a behavioral understanding of control (Eisenhardt 1985). Following this view, control can be defined as an attempt to influence the behavior of individuals or groups to ensure that they are working towards organizational goals (cf. Jaworski 1988; Kirsch 1996). Flamholtz (1983) suggests a meta-framework that can be used to elaborate different dimensions of a control system and to contrast the behavioral understanding with other perspectives on control. In Figure 5, the control system is represented by three concentric circles, surrounded by the organizational

environment.

Organizational Environment

The

Organizational Culture

innermost circle, the core control system,

Organizational Structure

consists of an integrated structure based

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on four basic organizational processes: Core Control System

planning, operations, measurement, and evaluation-reward (see Figure 6). This structure represents the “classic” control process where the results of operations, i.e.

the

activities,

day-to-day are

organizational

measured

against

a

predefined set of goals and performance Figure 5 - Control framework (Flamholtz 1983) 29

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standards. If performance deviates, corrective actions can be taken by either adapting operations or goals. Additionally, rewards can be granted for motivational reasons. Flamholtz (1983) argues for a broader understanding and suggests that a control system is not only determined by the outcome-oriented mechanisms just described. Additionally, organizational structure represents an independent component of a control system. The structural dimensions of an organization – like the degree of centralization, specialization or integration – influence the behavior and the decisionmaking process of individuals and groups (Flamholtz 1983; Otley & Berry 1980; Perrow 1977). The third component of a control system is the organizational culture, which is understood as shared beliefs, values and social norms that influence and guide the actions of organizational members (Flamholtz 1983; Ouchi 1979). Flamholtz’ (1983) article is a very valuable contribution as its ideas serve as a foundation for several concepts and constructs developed by successive researchers referred to in this study. First of all, its framework can be used to distinguish between two common perspectives on control theory. The core control system (Figure 6) corresponds to the cybernetic understanding of control, emphasizing the process of standard setting, monitoring, evaluating, and taking corrective actions if desired performance is not achieved (Flamholtz 1983; Green & Welsh 1988; Merchant 1988). 4

EvaluationReward System Corrective feedback

1

2

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Planning System

Operations

Decisions and actions

Results

Corrective feedback 3

Measurement System

Performance measurement

Figure 6 - Core control system (Flamholtz 1983)

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This study adopts the broader perspective of a behavioral understanding as it integrates the structural, cultural, and environmental dimensions of a control system as well (Choudhury & Sabherwal 2003; Eisenhardt 1985; Jaworski 1988; Kirsch 1996; Ouchi 1979). Two main implications arise from this: first, the emphasis of control is on influencing behavior, not on evaluating performance standards; second, control is not limited to outcome-oriented methods, but also comprises behavior-oriented or culturebased mechanisms, as described later on. A good amount of research has been done to investigate the determinants for the design of a control system. A common framework for explaining the choice of control governance structures is transaction cost economics. As outlined in Chapter 2.2.2 Underlying Challenges of IS Outsourcing Relationships, governance structures, which can either be based on markets, hierarchies, or a hybrid form, are determined by the transaction characteristics uncertainty and asset specificity (Williamson 1979, 1991a). These characteristics can be applied to an intra-firm, inter-firm or outsourcing context (Birnbirg 1988; Geringer & Hebert 1989; Jap & Ganesan 2000; Speklé 2001; van der Meer-Kooistra & Vosselman 2000). However, TCE-based frameworks have been criticized for insufficiently taking into account the social context of a transaction. Broader contingency frameworks have thus been developed to integrate contextual factors like attitudes or personal relationships (Harmanciouglu 2009; Kumar & Seth 1998; Langfield-Smith & Smith 2003). Nevertheless, as this study does not investigate the determinants of control system design, a closer examination of mentioned theories is not required. Control is ultimately exercised via control mechanisms that can be described as measures taken to regulate behavior. Based on the work of Ouchi (1979) and Eisenhardt (1985), Jaworski (1988) introduced the nowadays widely acknowledged distinction Copyright © 2012. Diplomica Verlag. All rights reserved.

between formal and informal modes as a way to classify control mechanisms. Formal controls are “written, management-initiated mechanisms that influence the probability that employees or groups will behave in ways that support the stated […] objectives” (ibid., p. 26). Informal controls can be defined as “unwritten, typically worker-initiated mechanisms that influence the behavior of individuals or groups” (ibid., p. 26). Examples for formal control include performance requirements or project plans while self-set project milestones or dinner meetings are typical informal control mechanisms. 31

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The concept of control modes was advanced in Kirsch’s (1996) seminal paper about control in software development projects. Kirsch (1996) consolidated prior research into a framework with two formal and two informal control modes: outcome and behavior control as formal modes and clan and self control as informal modes. In outcome control, the controller focuses on the outputs of a process while it is not of interest how this output is achieved. Hence, rewards are granted if goals are met, assuming that the controllee can be made fully accountable for process results. As a prerequisite, desired outcomes must be known and measurable. Behavior control, however, focuses on the process itself. The controller influences and rewards the behavior of the controllee by specifying rules and procedures to follow. Thus, the controllee is made responsible for compliance, but not for outcome. To exercise this mechanism, the behavior has to be specifiable and observable. In clan control, on the contrary, neither outcome nor behavior can be specified. A clan, i.e. a group of individuals, defines and enforces acceptable behavior by sharing a common set of beliefs, values, and social norms. In cases where behavior is not observable and outcome is not measurable, clan control can at least maintain the integrity and adherence to shared norms of group members. In self control, task goals and procedures are set, monitored and evaluated by the controllee himself and can therefore be either outcome or behavior oriented. Choudhury & Sabherwal (2003) further examined the implementation of control modes. They suggested that two types of mechanisms are necessary to implement formal modes: specifying and evaluating mechanisms. Applied to an outsourcing context, performance standards like service level agreements specify desired outputs in outcome control and need complementary monitoring and evaluating mechanisms. Detailed job descriptions specify desired behaviors while client personal on vendor premises are a way to evaluate compliance to these descriptions. Clan control, on the other hand, is

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implemented by aligning controller’s and controllee’s preferences, values and beliefs. A typical mechanism is socialization through regular joint meetings. Self control can, due to its nature, not be implemented systematically. Nevertheless, the controllee can be encouraged to implement measures on his own by valuing his intrinsic motivation and rewarding his ability to self manage.

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

Control Mode

Common values, beliefs, and social norms

Self management

Controllee can be made accountable for outcome

Process can be prescribed Behavior is observable

Relationship is close enough to allow for shared values, beliefs and social norms

Controllee is empowered and able to set goals and regulate own behavior

•

•

•

•

Outcome is measureable

•

•

Prerequisites

Table 8 - Control modes and mechanisms

Process and behavior

Output of a process

Focus

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Formal

Informal

Outcome

Behavior

Clan

Self

Controllee determines goals and behavior

•

33

Rewarding autonomy and self management

Social pressure in case of deviant actions

•

•

Mechanisms of socialization and sharing

•

Training necessary skills for self management

Aligning preferences, values, and beliefs

•

•

Rewards granted for adherence

Mechanisms to specify desired behavior

•

•

Corrective actions and rewards based on output achievement

•

Information-gathering mechanisms to observe and evaluate behavior

Mechanisms to measure and evaluate outputs

•

•

Mechanisms to specify desired outputs

•

Implementation

Information systems (e.g. progress reports, meetings) (Eisenhardt 1985)

•

Autonomy in what and how work is done (Henderson & Lee 1992) Self-set project milestones (Kirsch 1997)

• •

Selection and socialization of members (Boland 1979; Orlikowski 1991; Ouchi 1979)

Direct observation (e.g. personnel on vendor premises) (Choudhury & Sabherwal 2003)

•

•

Job description (Orlikowski 1991; Henderson & Lee 1992)

•

Sharing experiences and rituals in informal meetings (Daityari et al. 2008; Kirsch 1996; Ouchi 1980)

Interim milestones (Henderson and Lee 1992)

•

•

Setting of performance targets (Eisenhardt 1985; Snell 1992; Kirsch 1996)

•

Typical Mechanisms

Due to the multifaceted nature of day-to-day organizational activities, control mechanisms are rarely implemented in isolation. Rather, several mechanisms and modes are combined to achieve the desired effects. These combinations, referred to as portfolios of control, have been subject to extended research (Choudhury & Sabherwal 2003; Daityari et al. 2008; Harmancioglu 2009; Jaworski 1988; Jaworski, Stathakopoulos & Krishnan 1993; Kim 1984; Kirsch 1997; Rustagi, King & Kirsch 2008). Thus, within a portfolio of control, each control mode is implemented through several control mechanisms (see Figure 7). Choudhury & Sabherwal (2003) point out that some control mechanisms can support more than one control mode. For example, a meeting can be used to evaluate outputs in outcome control, to specify rules in behavior control, to socialize in clan control or to encourage self control. Another subject to research has been the process of constructing a portfolio of control. According to Kirsch (1997) this process comprises three steps, each one being influenced by task characteristics, role expectations, and knowledge and skills. Primarily, controllers judge the appropriateness of pre-existing formal control mechanisms. If pre-existing formal mechanisms are not sufficient, new mechanisms of formal control are defined. In most cases, formal controls are then supported and complemented with informal control mechanisms. Choudhury & Sabherwal (2003) and Daityari et al. (2008) further investigated the dynamics in the construction of a control portfolio in an outsourcing

Control Modes

Formal Control

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Behavior Control

A

B

C

Informal Control

Outcome Control

D

PF01

E

F

Clan Control

G

H

PF02

I

Self Control

J

K

PF03

L

M

Control Mechanisms

Portfolios of Control Mechanisms

Figure 7 - Portfolios of control mechanisms (Rustagi et al. 2008)

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context. Both works add a longitudinal perspective to Kirsch’s (1997) framework. It was found that initial portfolios were mainly based on existing formal mechanisms. As time evolved, different encounters, like negative experiences or malperformance, triggered a re-evaluation and adjustment of control portfolios. Relevant influencing factors for the reassessment have been the client’s perception of vendor’s knowledge, role expectations, difficulties in monitoring behavior and prior vendor performance (Choudhury & Sabherwal 2003), respective partnership quality, relationship encounters, and learning curve benefits (Daityari et al. 2008). Control theory reviewed so far has been independent of the organizational context and can be applied to intra-firm and inter-firm environments. However, of particular interest to this study is whether the discussed control theory is applicable to an outsourcing context, and if so, to what extent. Control in inter-firm relationships has long been of interest to researchers. Pioneering work has been done at the organizational level, focusing on cooperation, joint ventures, and strategic alliances (Birnbirg 1998; Das & Teng 1998, 2001; Geringer & Hebert 1989; Jap & Ganesan 2000; Kumar & Seth 1998; van der Meer-Kooistra & Vosselman 2000). These works have shown the applicability of previously reviewed control theory in an inter-firm context and have shed some light on the particularities of these relationships. Another research stream has investigated control in outsourcing relationships outside of an IS context (Daityari et al. 2008; Harmancioglu 2009; Langfield-Smith & Smith 2003; Linder & Sawyer 2003). The explanatory value of reviewed control theory has been shown in this context as well. Regarding control theory in an IS outsourcing context, three broad streams can be distinguished. Practitioner literature (Gómez, Junker & Odebrecht 2009; Kendrick 2009; Kütz 2005) is governed by a cybernetic understanding of control, emphasizing the process of setting, Copyright © 2012. Diplomica Verlag. All rights reserved.

measuring and evaluating performance standards in terms of service level agreements (SLAs). In academic literature, most work focuses on project-based contexts, like inhouse or outsourced software development projects (Boland 1979; Choudhury & Sabherwal 2003; Henderson & Lee 1992; Kirsch 1996, 1997, 2004; Kirsch, Sambamurthy, Ko & Purvis 2002). Until now, little attention has been paid to control in a non-project-based IS outsourcing context, like infrastructure outsourcing (Kern & Willcocks 2000b; Rustagi et al. 2008). Kern & Willcocks (2000b) analyzed the role of contracts in supplier-buyer relationships and found that contracts, beyond their legal 35

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nature, outline a number of control dimensions that are then enforceable during postcontract management. Rustagi et al. (2008) investigated the amount of formal control, defined as the “variety of mechanisms used by a client to exercise control over a vendor and the extent to which the mechanisms are used” (ibid., p. 126). Empirical evidence suggests that major antecedents for the amount of control are task uncertainty (positively correlated), trust, and technical and relationship management knowledge on the client’s side (all negatively correlated). Table 9 provides an overview of the discussed works and their respective units of analysis. Resuming the discussion about relationship challenges in Chapter 2.2.2 Underlying Challenges of IS Outsourcing Relationships, important similarities are revealed. Both control and relationships can be modeled using the same economic theories, especially agency theory. Moreover, the interaction between controller and controllee and between principal and agent is exactly this: a relationship. In outsourcing, relationship governance mechanisms are employed to ensure that organizational objectives are met. A lack of direct authority due to the inter-organizational nature of the relationship does not prevent the application of control mechanisms. On the contrary, more sophisticated

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mechanisms are needed to influence behavior of the opposite party. Unit of Analysis

Author

Intra-organizational

Eisenhardt 1985; Flamholtz 1983; Green & Welsh 1988; Jaworski 1988; Jaworski et al. 1993; Kim 1984; Merchant 1988; Orlikowski 1991; Ottley & Berry 1980; Speklé 2001; Ouchi 1979, 1980; Perrow 1977; Snell 1992

Inter-firm relationships (general, e.g. buyersupplier)

Birnbirg 1998; Das & Teng 1998, 2001; Geringer & Hebert 1989; Jap & Ganesan 2000; Kumar & Seth 1998; van der Meer-Kooistra & Vosselman 2000

Outsourcing (BPO, non-IS)

Daityari et al. 2008; Harmancioglu 2009; Langfield-Smith & Smith 2003; Linder & Sawyer 2003

IS (project-based, in-house and outsourcing)

Boland 1979; Choudhury & Sabherwal 2003; Henderson & Lee 1992; Kirsch 1996, 1997, 2004; Kirsch et al. 2002

IS outsourcing (non-projects)

Kern & Willcocks 2000; Rustagi et al. 2008

Table 9 - Units of analysis in control literature

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As discussed before, control mechanisms have been widely examined in inter-firm environments. IS outsourcing relationships are a type of inter-firm relationships where the underlying challenges mitigated by control mechanisms are particularly pronounced. The deep integration of IS into business processes leads to high complexity: there are numerous elements in IS and business, all contingent upon each other due to their interrelationships. In addition, IS outsourcing is a highly dynamic environment as both business and technology constantly evolve and transform, leading to ever-changing needs. Together with a characteristically long time horizon, it is impossible to fully foresee and adjust for all contingencies. Thus, IS outsourcing relationships cannot be prescribed in advance or easily adapted by switching solutions. Control mechanisms as measures to constantly influence and adapt behavior are therefore applicable and appropriate means to govern IS outsourcing relationships. Some insights from the discussed control theory can be drawn that are important for this study. First of all, control is not merely applicable to IS outsourcing relationships, it is also highly relevant. As Daityari et al. (2008) put it, “the truly critical success factors associated with successful outsourcing are those associated with vendor governance” (ibid., p. 29), of which control is an important part. Nevertheless, very little research has been done to investigate the effect of control on the relationship between service recipient and service provider in a non-project-based IS outsourcing agreement: Das & Teng published two papers on control and trust (Das & Teng 1998, 2001); Kern & Willcocks (2000b) investigated the relationship between control and contracts. The call for closer examination has already been made by Choudhury & Sabherwal (2003) who wrote in their paper about control in software development projects that "further research is needed to examine control in other IS outsourcing situations (e.g., outsourcing of IS infrastructure management)" (ibid., p. 313), emphasizing that findings

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made for project-based outsourcing should be evaluated in a non-project context. Possible insights are expected to be of interest to practitioners as well. Managers are in need of a deeper understanding of control to cope with the rapid progression that outsourcing projects have made over the past few years: “as outsourced activities have become more complex and sophisticated, the control procedures that were in place for simpler activities have merely been continued” (Rustagi et al. 2008, p. 139). This study aims to close this gap by investigating the link between control and other governance mechanisms in IS outsourcing relationships. 37

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2.4 IS Outsourcing Success Although outsourcing success is not the direct focus of this study, the assumption is made that the relationship between service recipient and service provider has a significant impact on the success of the outsourcing project. Only if this is the case can a closer examination of control on the relationship be justified. Hence, a short overview of this study’s understanding of IS outsourcing success and its link to outsourcing relationships is given here. However, the concept of success is much more complex and ambiguous than presented here and a more detailed discussion can be found at Dibbern et al. (2004), Chadee & Raman (2009) or Gonzales, Gasco, & Llopis (2005). Several studies have investigated the link between the elements of an outsourcing relationship and outsourcing success. McFarlan & Nolan (1995) were among the first to examine how to manage an IS outsourcing relationship. Coming from a more managerial point of view, one of their key conclusions is the importance of the customer/vendor relationship in achieving outsourcing success. Later on, Grover et al. (1996) and Lee & Kim (1999) showed that partnership quality has a positive influence on outsourcing success. Recent articles have furthered these findings by investigating the link between relationship dimensions and success on a contractual (Gellings 2007a, 2007b; Goo et al. 2008) and relational (Beimborn et al. 2008; Blumenberg 2009) level. Based on the work of Grover et al. (1996), Cullen, Seddon & Willcocks (2008) developed a framework to measure IS outsourcing success. Responding to concerns (Lacity, Willcocks & Feeny 1996; Lacity & Willcocks 2001; King & Malhotra 2000) about prior approaches, their framework explicitly takes into consideration two arguments: first, success has to be defined specifically for each organization, negating commonly valid goals such as cost savings; second, organizational goals change over

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time, and so does the assessment of IS outsourcing success. Thus, Cullen et al. (2008) assess success using two steps: first, organizations are asked what outcomes were most important to them at various points in time and second, to what extent these outcomes were achieved. As an instrument, Cullen et al. (2008) developed a questionnaire listing 25 possible outcomes in the categories value for money, improved financial results, operational, and strategic (cf. Appendix A). For each outcome it is indicated whether it was, is, or will be sought after and, if relevant, the achievement of the outcome is rated on a scale of 1 (very dissatisfied) to 5 (very satisfied). 38

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3 Research Model and Propositions 3.1 Research Approach The choice of underlying philosophical assumptions and research approaches has major implications on the overall configuration of the research design along with its results (Easterby-Smith, Thorpe & Lowe 1991). As no design is superior per se but rather more or less suitable dependent on the context of the examined questions, research conducted in social science needs to define its beliefs about the physical and social reality (ontology), about knowledge (epistemology), and about the relationship between theory and practice (Orlikowski & Baroudi 1991; Chua 1986). Saunders, Lewis & Adrian (2007) propose a six-dimensional framework to characterize research design: philosophies, approaches, strategies, choices, time horizons, and techniques and procedures. The chosen approach will be described along these dimensions in the following paragraphs. Philosophical perspectives are often described based on a continuum between two basic types of epistemology: positivism and interpretivism/phenomenology (Dibbern et al. 2004). A positivist stance “implies that the researcher is working with an observable social reality and that the end product of such research can be the derivation of laws or law-like generalizations similar to those produced by the physical and natural scientists” (Remenyi, Williams, Money & Swartz 1998, p. 32). On the other hand, interpretivism assumes “that people create and associate their own subjective and intersubjective meanings as they interact with the world around them” (Orlikowski & Baroudi 1991, p. 5). Interpretive studies reject the idea of an objective and factual truth that can be assessed by a priori identified relationships. Consequently, the intent of Copyright © 2012. Diplomica Verlag. All rights reserved.

interpretive research is to understand the examined phenomenon while a generalization of the findings is often of minor importance. (Orlikowski & Baroudi 1991) Since neither of these two extreme positions is adequate for the research context and questions of this study, the underlying philosophical assumptions are further described building on Orlikowski & Baroudi (1991) and Dubé & Paré (2003). Epistemologically, constructs are believed to be identifiable and measurable independent of the used method. Findings are assumed to be generalizable so patterns of behavior can be 39

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predicted across situations. Knowing the context and premises, prediction and control are possible, at least to some extent. Therefore, relationships within the phenomenon are a priori derived in a hypothetic-deductive way and anticipated links are stated as explicit propositions. Ontologically, constructs are assumed to exist independent of the context. Observed events can be modeled and measured using an appropriate set of constructs. Thus, the research approach mainly follows a positivistic perspective and should therefore satisfy the following criteria (Dubé & Paré 2003): •

Formal research hypotheses or propositions

•

Qualitative and/or quantitative measures of variables or constructs

•

Purpose of theory testing or theory building

•

Concern for validity and reliability issues

However, regarding the relationship between theory and practice, the research design in this study is not following a strict positivistic understanding. IS research is believed to have an impact on IS practice, even without being normative (Lee 1999). With this “reciprocal and reflexive relationship between information systems research and social reality” (Orlikowski & Baroudi 1991, p. 12), value-neutrality and objectivism cannot be absolute as it may be required from a strict positivistic perspective. Furthermore, the social and historical context is believed to have a significant influence on the observed phenomena. A strict positivist perspective, however, may neglect the context of a phenomenon and may therefore lead to deterministic explanations. Non-deterministic and reciprocal relationships are difficult to grasp with such an approach. “Research can only discover one-sided things if it insists on setting up one-sided relationships” (Rowan 1973, in: Orlikowski & Baroudi 1991, p. 13).

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Therefore, regarding the second dimension of research design, this study will not rigorously apply a deductive approach, where a theory is developed first and tested after. Rather, inductive procedures, where theory is built based on data analysis, are followed as well. The resulting course of action is to develop constructs and relationships a priori based on literature and prior theories, and to revise and adapt the proposed hypotheses while empirical evidence emerges. (Saunders et al. 2007) From the third dimension, research strategy, the case study method is selected as the most appropriate strategy. A case study is defined as “an empirical inquiry that 40

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investigates a contemporary phenomenon in depth and within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident” (Yin 2009, p.18). This research strategy is particularly suitable when “how” and “why” questions are being asked with a focus on contemporary events and where control over these events is neither required nor possible (Yin 2009). Outsourcing is a contemporary and prevalent phenomenon that is examined in a real-life context in this study. Although widely used among numerous organizations, the specifics of each outsourcing relationship are unique. The complexities of an outsourcing arrangement can hardly be captured with a quantitative research approach, but rather call for a deeper understanding gained through qualitative methods (Eisenhardt 1989b). Case studies can be used for descriptive, explanatory, or exploratory purposes (Dubé & Paré 2003; Yin 2009). While the case studies in this study were conducted to explain previously specified propositions, they mainly follow an exploratory rationale. As the research focus of this study is relatively unexplored, further insights were expected to be found during the field work. Case studies are seen as a particularly suitable method for this combination of positivist/interpretive and deductive/inductive approaches where theoretical models are not only tested but rather refined based on new findings gained during the analysis phase (Lee 1989; Yin 2009). Regarding the remaining dimensions of Saunders et al.’s (2007) research framework, the research approach can be described as a multi-method qualitative study as several qualitative data collection and analysis techniques and procedures, namely interviews and documentary analysis, are used. It is a cross-sectional study as all interviews are conducted over a short period of time. Table 10 provides a summary of the previously

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explained characteristics of the research approach this study is following. Dimension

Specification

Philosophy

Mainly positivistic

Approach

Mainly deductive (a priori specification of constructs and propositions)

Strategy

Exploratory case study

Method

Multi-method qualitative study

Time horizon

Cross-sectional

Techniques

Interviews, documentary analysis

Table 10 - Research approach (based on Saunders et al. 2007)

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3.2 Research Model 3.2.1 Research Questions, Objectives, and Approaches The purpose of this study is to investigate the interaction of contract, control, and relational norms as governance mechanisms in IS outsourcing relationships. The topic will be approached in two ways. First, a detailed investigation of IS outsourcing relationship dimensions and governance modes is conducted. Second, the way in which governance modes interact to influence relationship characteristics is examined. Based on this purpose, three research questions will be examined: 1. What mechanisms can be used to govern IS outsourcing relationships? 2. How are these mechanisms interrelated? 3. How do organizations employ these mechanisms? The objective of the first question is to identify distinct modes of governance and their respective dimensions. The selected approach is a conceptual framework in the form of a process model that depicts different constructs representing governance modes and relationships. The objective of the second question is to establish causal links between the identified governance modes. The causal links will be integrated into the conceptual framework and further specified using research propositions. The aim of the selected approach is to deduct relationships a priori based on prior literature and to empirically investigate and further refine the hypothesized links by conducting case studies. The objective of the third question is to assess whether organizations use certain governance modes in an exclusive or complementary way. The purpose of this question Copyright © 2012. Diplomica Verlag. All rights reserved.

is to answer whether organizations are aware of the possible interrelationships between the governance modes and whether they consider these links deliberately while designing governance mechanisms. Case studies are selected as a suitable approach.

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3.2.2 Towards an IS Outsourcing Relationship Framework In order to answer the named research questions, a more specific understanding of the terms relationship and relationship governance has to be developed. A distinct set of constructs will be presented below, based on the concepts identified in the literature review. These constructs will then be related to each other in the subsequent chapter. So far, a few insights into the conceptual understanding of IS outsourcing relationships can be made. First, IS outsourcing relationships are determined by contractual and relational aspects, which is reflected by multiple theoretical groundings. Broadly speaking, economic theory in the form of transaction cost economics and agency theory, social theory, and relational exchange theory are often used as lenses in reviewed articles. Second, a fairly detailed understanding of contract design and contractual governance exists. Third, the understanding of relationship norms, characteristics and relational governance is rather heterogeneous, if not to say inconclusive. Fourth, control has been shown to be an appropriate and applicable measure to govern inter-firm relationships. Nevertheless, research about control in IS relationships has been limited to application development environments, lacking an examination of control in a nonproject context. An integration of existing approaches seems to be difficult as frameworks and theoretical groundings are too different. This study therefore suggests consolidating prior research in the form of a conceptual framework based on existing definitions. The first aim is to clearly distinguish between the relationships in and of themselves and the mechanisms used to govern these relationships. The question of what constitutes a relationship itself is basically a question about inherent characteristics or properties whereby a relationship can be described. A characteristic is a distinguishing quality, Copyright © 2012. Diplomica Verlag. All rights reserved.

understood as an essential and distinctive attribute. A property is a basic or essential attribute shared by all members of a class. Thus, qualifiers of a relationship have to be abstractions, abstract nouns, or terms, comparable to the category of attributes from Goles & Chin (2002). Referring to the relationship governance definition from Poppo et al. (2008), which is used in this study, governance is understood as the act of governing. Governing means

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to bring something into conformity with rules or principles of usage. Thus, relationship governance mechanisms have to be activities, routines, or processes. As a next step towards a relationship framework, relationship constructs identified in Chapter 2.2.3.2 Relational Governance, Table 7, are consolidated by merging corresponding products based on the definitions in respective articles. Macneil (1980) is excluded from this consolidation as his work was included in Table 7 for reference only. As a result, 14 distinct construct categories have been identified and listed in Table 11 together with their respective articles. One term from each category is selected to represent the underlying construct. The resulting terms are then grouped into attributes and processes based on previously derived definitions. Table 12 provides an overview of the grouped constructs together with an overview of articles using the respective constructs. As Table 12 shows, the framework from Goles & Chin (2002) is comprehensive, only leaving out the attributes forbearance and relationship durability. However, it can be argued that relationship durability is not an attribute but rather an outcome and may better serve as a construct to measure relationship quality than to characterize the relationship itself. Forbearance seems to be a reasonable attribute to describe relationships. Nevertheless, it is not further considered in this study for the following reasons. First, it has been used in only one article while all other constructs have been used in several papers, leading to a more robust foundation for comparisons of findings in this study to prior research. Second, a list of relationship attributes ought to be comprehensive but is unlikely to be exhaustive. A complete list of attributes is neither possible nor desirable due to the diversity of varying contexts. Thus, not to include single attributes does not have to result in an inconsistent research design. Third, the

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main purpose of this study is to examine the governance mechanisms, so the definition of a relationship itself is a necessary precondition. The focus of this study is the configuration and interrelation of governance modes, not the extension of existing relationship definitions. Findings are expected to be more reliable and more comparable if an existing relationship definition is adopted, using proven and accepted constructs as a basis. Named constructs and their interrelation are further detailed in the following chapter. Therefore, the framework of Goles & Chin (2002) is adapted as a theoretical foundation. 44

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To conclude, the following components of a relationship framework are suggested: •

Relationship is described using identified attributes

•

Relational governance is described using identified processes

•

Contractual governance is described using identified contractual elements

•

Control is described using identified control modes

Corresponding Constructs

Author(s) and Year

Trust

Barthélemy (2003); Blumenberg (2009); Chaudhary & Kishore (2010); Goles & Chin (2002); Goo & Huang (2008); Goo et al. (2009); Sheng et al. (2006); Poppo et al. (2008); Poppo & Zenger (2002)

Commitment

Blumenberg (2009); Goles & Chin (2002); Goo & Huang (2008); Goo et al. (2009)

Flexibility Acquiescence

Cannon et al. (2000); Ferguson et al. (2005); Goles & Chin (2002); Goo & Huang (2008); Goo et al. (2009); Griffith & Myers (2005)

Solidarity Loyalty

Barthélemy (2003); Cannon et al. (2000); Ferguson et al. (2005); Goo et al. (2009); Griffith & Myers (2005); Sheng et al. (2006)

Mutuality Mutual understanding Mutual dependence Interdependence Dependence Degree of quasi-integration

Blumenberg (2009); Cannon et al. (2000); Goles & Chin (2002); Goo et al. (2009); Poppo & Zenger (2002); Zaheer & Venkatraman (1995)

Cultural compatibility Shared values

Goles & Chin (2002); Sheng et al. (2006)

Consensus

Blumenberg (2009); Goles & Chin (2002)

Forbearance

Blumenberg (2009)

Relationship durability

Goo & Huang (2008)

Harmonization of conflicts Harmonious conflict resolution Conflict resolution Conflict Joint problem solving

Blumenberg (2009); Cannon et al. (2000); Claro et al. (2003); Ferguson et al. (2005); Goles & Chin (2002); Goo & Huang (2008); Goo et al. (2009)

Information sharing Communication (quality) Information exchange Sharing of information

Barthélemy (2003); Blumenberg (2009); Ferguson et al. (2005); Goles & Chin (2002); Goo & Huang (2008); Goo et al. (2009); Griffith & Myers (2005); Poppo et al. (2008); Poppo & Zenger (2002)

Coordination Joint planning

Claro et al. (2003); Goles & Chin (2002)

Cooperation Collaboration Joint action

Barthélemy (2003); Goles & Chin (2002); Goo & Huang (2008); Poppo et al. (2008); Poppo & Zenger (2002); Zaheer & Venkatraman (1995)

Integration Restraint in the use of power

Cannon et al. (2000); Goles & Chin (2002)

Table 11 - Corresponding relationship constructs

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Claro et al. (2003)

x x x

46

Goles & Chin (2002) define solidarity as a combination of commitment and conflict resolution

Coordination

Integration

Conflict Resolution

x

x

Cooperation

x

x

x

x

x

x

x

Information Sharing

x

x

x

x

x

Goo (2009) Goo & Huang (2008)

Relationship durability x

x

Forbearance

x

x

x

x

x

x

(x)1)

x

Consensus

x

x

x

Ferguson et al. (2005) x

x

Chaudhary & Kishore (2010) x

Goles & Chin (2002)

Cultural compatibility

Table 12 - Relationship constructs and related authors

1)

x

Commitment

x

x

x

Interdependence

x x

x

Solidarity

Blumenberg (2009) x

Cannon et al. (2000)

Flexibility

x

Barthélemy (2003)

Trust

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Attributes

Processes

Goo et al. (2009) x

x

x

x

x

x

x

Griffith & Myers (2005) x

x

x

Sheng et al. (2006) x

x

x

Poppo et al. (2008) x

x

x

Poppo & Zenger (2002) x

x

x

x

x

x

Zaheer & Venkatraman (1995)

3.2.3 Description of the Research Model Previously identified constructs are proposed to be organized and to be set into relation with each other as presented in the research model shown in Figure 8. Definitions and measures of constructs and relationships are given below.

State of Relationship (Characteristics)

Relationship Governance Control (Execution and Enf orcement of Rules)

Formal

Informal

Contractual Governance

Relational Governance

(Rules of Conditions)

(Rules of Conduct)

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direct inf luence

f eedback loop

not in scope

Figure 8 - Research model

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Definition of Constructs State of Relationship: A relationship embodies the ongoing exchange between service provider and service recipient. It is a multi-dimensional phenomenon, represented by a comprehensive but non-exhaustive set of six inherent characteristics: trust, flexibility, interdependence,

commitment,

cultural

compatibility,

and

consensus.

These

characteristics (further defined in Table 13) are identical to the attributes category from Goles & Chin (2002). Of interest to this study is not the relationship itself, but rather a specific State of Relationship, defined as the joint occurrence of relationship characteristics. This differentiation is an important prerequisite for the research model. As relationships are inherent to social exchanges and cannot not exist4, relationship governance cannot be causal for relationships per se. Nevertheless, relationship governance can be causative5 for a certain state a relationship enters as it influences its characteristics. It is not in the scope of this study to develop concrete measures for the state of relationships. Relationship Governance is a multi-dimensional phenomenon, represented by a comprehensive but non-exhaustive list of governance modes. Governance is understood as formal and informal rules of exchange, embracing elements of establishing, structuring, monitoring, and enforcing exchanges. Governance modes determine the characteristics of a relationship. Three modes have been identified based on prior research: control, contractual governance, and relational governance. Relationship governance is an abstract term that embodies the joint effect of single governance modes. It is not in the scope of this study to develop concrete measures for this joint effect. Control is the attempt to influence the behavior of individuals or groups to ensure that

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they are working towards organizational goals. It comprises behavior influencing mechanisms that can be grouped into formal and informal control modes. Formal controls are written management-initiated mechanisms, while informal controls are unwritten worker-initiated mechanisms. There are two formal and two informal control modes: outcome and behavior control as formal modes and clan and self control as informal modes (see Table 13). Control can be understood as a mechanism for the 4

Or as Zen-master Suzuki says: “You have to do something, or you have to do not-doing. Not-to-do something is doing something.“ (Suzuki 2005, p.30) 5 A more specific definition of causality is given in the following subsection about causal links.

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Execution and Enforcement of Rules. In this sense, it is an executing mechanism that is based on rules specified by other mechanisms, namely contractual and relational governance. Control is measured using a variety of control mechanisms and the (perceived) degree of reliance on these mechanisms. Contractual Governance defines the Rules of Conditions; that is, a written form of terms and expectations. It comprises formal and explicit agreements representing legally binding obligations. Contractual elements can be categorized into foundation characteristics, change characteristics and governance characteristics. Overall eleven distinct contractual elements can be attributed to these categories. Both characteristics and elements are adopted from Goo (2010) and further defined in Table 13. Nevertheless, the contract itself does not unfold a governance effect. Contractual governance is measured by the degree of reliance on the contract. This can take effect in two ways: firstly by actively applying and enforcing contractual agreements, and secondly due to the passive effect that both parties avoid to enforce the contract, as this would demonstrate a severe relational resentment. Relational Governance defines the Rules of Behavior; that is, informal expectations of behavior. Relational governance is a multi-dimensional phenomenon, represented by a comprehensive but non-exhaustive list of relational norms. As such, relational governance affects exchanges through the use of social mechanisms. Groups align other groups or individuals to shared expectations about “how things should be done”. These expectations refer to the underlying relational norms cooperation, coordination, integration, conflict resolution, and information sharing. These relational norms (further defined in Table 13) are identical to the processes category from Goles & Chin (2002) and represent the dimensions of relational governance. Similar to contractual governance, relational norms can be compared to contract clauses for being underlying Copyright © 2012. Diplomica Verlag. All rights reserved.

specifications, while their function as a governance mechanism comes second. Relational governance is therefore measured by the degree of reliance on social mechanisms that align both parties to a shared understanding of relational norms. Comparable to the construct of relationship, relational norms cannot not exist. Cooperation, for example, is inherent to social exchanges, at least in the form of refused cooperation. If relational governance is actively shaped, it is referred to a certain occurrence of relational norms and therefore to a certain state of relational governance. 49

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Construct (Source)

Relationship (Goles & Chin 2002)

Control (Kirsch 1997)

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Contractual Governance (Goo 2010)

Relational Governance (Goles & Chin 2002)

Dimension

Description

Trust

The expectation that a party will act predictably, fulfill its obligations, and behave fairly even when the possibility for opportunism is present.

Flexibility

The willingness of both parties to make adaptations as circumstances change.

Interdependence

The extent to which each party’s attainment of goals is dependent on the other party.

Commitment

The willingness of the parties to exert effort and devote resources in order to sustain an ongoing relationship.

Cultural compatibility

The extent to which each party can coexist with the others’ beliefs and values.

Consensus

The extent of general agreement between parties.

Outcome (formal)

Mechanisms to monitor, evaluate, reward, and sanction the achievement of articulated outcomes and goals. Rewards are based on producing outcomes and goals.

Behavior (formal)

Mechanisms to monitor, evaluate, reward, and sanction the compliance of articulated rules and procedures. Rewards are based on following rules and procedures.

Clan (informal)

Mechanisms to identify and reinforce acceptable behavior based on common values and beliefs.

Self (informal)

Mechanisms to monitor, evaluate, reward, and sanction selfdefined task goals or procedures. Mechanisms are set and executed by the individual itself.

Foundation characteristics

Comprise service level objectives, service level contents, and process ownership plan. Define performance standards, common objectives, and roles and responsibilities of the parties.

Governance characteristics

Comprise future demand management plan, anticipated change plan, feedback plan, and innovation plan. Outline processes for adapting the contract to future needs and changing objectives.

Change management characteristics

Comprise communication plan, measurement charter, conflict arbitration charter, and enforcement plan. Define management mechanisms such as communication protocols, reporting policies, and administrative procedures.

Cooperation

Undertaking complementary activities to achieve mutual benefits.

Coordination

Managing interdependencies between parties to accomplish agreed-upon tasks.

Integration

The extent to which attributes and processes of the relationship are intertwined into each party’s structure, policies, and procedures.

Conflict resolution

Amicably replacing disagreement with agreement.

Information sharing

Proactive formal and informal sharing or exchange of meaningful and timely information between parties.

Table 13 - Research constructs and definitions

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The definitions given above lead to proposition (1) and (2): Proposition 1: IS outsourcing relationships are governed by contractual and relational rules Proposition 2: These rules are executed and enforced using control mechanisms

Definition of Causal Links As outlined in the research questions and objectives, the main purpose of this study is to explain how and why presented constructs are interrelated. If the underlying structure is well understood, it is, at least to some extent, possible to predict certain outcomes as well. The presented theory is therefore one of explanation and prediction (Gregor 2006). As such, the logical structure of the presented research model can either be a variance or a process model (Markus & Robey 1988). The focus of this study is on causal explanations about the interaction of relationship governance mechanisms. It is not intended to deterministically predict quantifiable changes in outcome. This is reflected in the chosen qualitative research method based on case studies. Therefore, the presented research model is a process model (Mohr 1982). The proposed relationships are to be understood as causal relationships and do not predict an exact level of outcome. Process theory is an approach well suited to modeling social exchanges (Markus & Robey 1988). Due to the difficulties of exactly defining and measuring abstract constructs like trust, probalistic approaches are difficult to grasp. What, for example, does it mean if trust is raised by 0.3 units? Causal relationships, in contrast, are more intuitive. Common wisdom holds, for example, that trust is necessary for a good relationship, or as Otley (1980) put it: “It is unrealistic to expect purely statistical Copyright © 2012. Diplomica Verlag. All rights reserved.

methods of analysis to unravel a complex pattern of interaction.” (ibid., p. 424) Furthermore, social phenomena are often too complex to be sufficiently modeled in their entirety. Process theory recognizes this by assuming that outcomes might occur if necessary conditions are met. However, random events play a role as well, so that causes are only understood as necessary conditions, not as sufficient ones. Third, while variance theory often implies a one-sided, linear relationship between two variables, process theory better acknowledges the dynamic, interrelated, system-like nature of social phenomena. 51

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However, before defining suggested interconnections between governance modes, the underlying understanding of causality has to be clarified. Markus & Robey (1988) state that “causation consists of necessary conditions in sequence” in the sense of “if not x, then not y” (ibid., p. 590). Nevertheless, this strictly counterfactual understanding does not hold in all cases, e.g. when two potential causes for an effect are both present (cf. Rueger 2006). Therefore, this study follows Lewis’ (2000) understanding of causation as influence, which roughly means that without the cause, the event “would not have occurred at all, [...] or would have occurred in a manner different from the manner in which it actually did occur” (ibid., p. 187). This extension of the counterfactual understanding is an important prerequisite for a process model in the present research context. Given that relationships cannot not exist, relationship governance could not be causative for the relationship, if the understanding of Markus & Robey (1988) is followed. Applying the definition of Lewis (2000), relationship governance can indeed be causative for the relationship, namely for a certain state of relationship. The connections in the research model described below are therefore to be understood in the following way: one construct might not be causative for the existence of another construct per se, but it is causative for a certain occurrence of associated constructs. Or as Lewis (2000, p. 188) put it: “Without C, the alteration of E which actually did occur would not have occurred.” The causal connections in the research model can be divided into two categories: direct influences that represent causal connections in the sense that construct A is causative for the state of construct B; and feedback loops that represent adjustment mechanisms used to monitor and influence the overall system state. A description of and reasoning for the proposed connections is given in the following.

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Direct Influences (1) Contractual specifications determine the implementation of formal controls A coordinated and directed form of outcome and behavior control is based on defined regulations. In this sense, control is used as a mechanism to execute and enforce specified rules. As outcome and behavior control are formal control modes, specified rules and measures have to be formal and binding as well. As such, they are part of the contract or related contractual agreements. As the contract is set up 52

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before the day-to-day control takes place, contractual governance is causative since determinant for formal controls. Two approaches are used to measure the influence of contractual governance on formal control. The first is to evaluate the extent to which future formal control has influenced the design and content of the contract. The second is to measure the (perceived) degree to which control influences the relationship. This includes the question of whether control is actively seen as an instrument to influence relationships or whether it is solely used for other reasons, e.g. for claim management or accounting purposes. (2) Relational norms determine the implementation of informal controls Clan control embraces informal and social mechanisms to enforce common values and beliefs. These values and beliefs are represented as relational norms. Corresponding to the contract for formal control, relational governance, and more precisely underlying relational norms, are causative since determinant for clan control. Self control takes a special position as it is inward oriented. Nevertheless, in the sense of being in or between companies, certain expectations to implement self control can exist. Thus, relational governance is causative since determinant for self control. This causal link is measured by the (perceived) degree of influence from relational governance on informal control. Both of the described direct influences lead to proposition (3): Proposition 3: Different control modes are used to execute and enforce contractual and relational rules Propositions (4) and (5) further detail proposition (3) by linking contractual governance to formal control modes and relational governance to informal control

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modes: Proposition 4: Contractual governance determines the actual implementation of outcome and behavior control Proposition 5: Relational governance determines the actual implementation of clan and self control

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(3) Defining behavioral contract clauses fosters the development of relational governance Relational norms can neither be enforced nor prescribed as they are difficult to measure. Nevertheless, expectations about behavior, e.g. a shared knowledge approach, fostered by regular information exchange, can be agreed on in the contract. In case of doubt, relational norms are barely legally enforceable. Yet, a written agreement on how relational norms should be can shape and influence, thus causally determine relational governance. To empirically validate the supposed connection, it is evaluated whether expectations about relational norms have been deliberately included in the contract. This understanding leads to proposition (6): Proposition 6: Contractual governance fosters the development of shared relational norms (4) The combined effects of governance mechanisms determine the state of relationship As control acts as an executing mechanism, it can be expected that control has a direct influence on the state of relationship. As one example, regular outcome control, e.g. the monitoring of service levels, can built trust in the capability of the service provider. However, the execution and enforcement of the rules specified in contractual and relational governance is not the only means of influencing the state of relationship. The existence of relational norms or contractual agreements themselves can influence behavior and therefore the relationship. Kern & Willcocks (2000) illustrate this effect using a quotation from one of their case studies: “Occasionally we get the contract out and we refer to what it actually says… And if

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we get the contract out, we've failed in our ability to manage the situation” (ibid., p. 12). It is therefore the joint effect of considered and even not considered relationship governance mechanisms that constitute a combined effect that influences the relationship. It is, however, not in the scope of this study to define or measure the exact influence on particular relationship characteristics.

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Feedback Loops (1) Control is the prior mechanism to assess the state of relationship Control comprises mechanisms of interaction between service recipient and service provider. By performing these mechanisms, the state of relationship becomes .

apparent. Therefore, control is, among considered governance modes, the primary mechanism to assess the state of relationship. In addition, every other form of direct collaboration will indicate the state of relationship. (2) If the state of relationship is unsatisfying, governance mechanisms will be adjusted Vice versa to described influences, feedback loops exist to adjust the implementation and execution of governance modes if the overall state of relationship is unsatisfying. For example, delivered services may be monitored more closely (outcome control) if doubts about the reliability of the service provider exist (insufficient trust); or, if outcome monitoring proves to be difficult as no detailed specifications about expected outcomes exist, the contract may be adjusted or extended. The explanations given above lead to proposition (7): Proposition 7: Feedback loops exist to adjust governance components as long as the system state is unfavorable In addition to the theoretically derived propositions stated above, two exploratory propositions are made to examine how organizations understand and implement the described governance mechanisms:

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Proposition 8: Outsourcing organizations purposely rely on contractual and relational

governance

as

equally

important

and

complementary mechanisms Proposition 9: Organizations deliberately use governance mechanisms to influence the state of relationship

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3.2.4 Summary of Propositions Based on the definitions and interconnections of constructs and their respective reasoning presented in the last chapter, the research model can be expressed using the following propositions: Question: What mechanisms can be used to govern IS outsourcing relationships? Proposition 1: IS outsourcing relationships are governed by contractual and relational rules Proposition 2: These rules are executed and enforced using control mechanisms Question: How are these mechanisms interrelated? Proposition 3: Different control modes are used to execute and enforce contractual and relational rules Proposition 4: Contractual governance determines the actual implementation of outcome and behavior control Proposition 5: Relational governance determines the implementation of clan and self control Proposition 6: Contractual governance fosters the development of shared relational norms Proposition 7: Feedback loops exist to adjust governance components as long as the system state is unfavorable Question: How do organizations employ these mechanisms? Proposition 8: Outsourcing organizations purposely rely on contractual and relational

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governance as equally important and complementary mechanisms Proposition 9: Organizations deliberately use governance mechanisms to influence the state of relationship

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4 Case Study 4.1 Methodology According to Yin (2009, p. 27), there are five essential components to describe a research design when conducting case studies: 1. Research questions 2. Derived propositions 3. Unit of analysis 4. The logic linking the data to the propositions 5. The criteria for interpreting the findings Research questions and propositions have been detailed in the previous chapter. The unit of analysis is the organization, as IS outsourcing is a context-specific phenomenon. It is expected that findings can be generalized ensuring applicability to comparable IS outsourcing environments. However, every relationship between service provider and service recipient is unique, so a case covering this relationship on an organizational level seems appropriate. Although relationships are always two-sided, it is not imperative to examine both service provider and service recipient in the case, as the study focuses on how one side perceives and governs the relationship. The logic linking the data to the propositions and the criteria for interpreting the findings are both means to ensure credible and comprehensible empirical research and will be further detailed below. Four criteria have to be considered to judge the quality of research designs that are built on case studies: construct validity, internal validity, external validity, and reliability

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(Yin 2009). The following sections describe which tactics and concrete measures are chosen to ensure the rigor and validity of the research design and empirical findings. Construct validity is given if “correct operational measures” (Yin 2009, p. 40) are used to examine constructs. The tactics used are mainly relevant during the data collection and composition phase. In this study, construct validity is addressed in three ways. First, most of the applied measures and constructs have been used in prior research. Besides

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building trust and reliability, this tactic facilitates comparability to prior findings as well. Second, a two-step approach as postulated by Yin (2009) is followed: used constructs have first been defined in terms of specific concepts, and then operationalized using concrete measures as detailed in Chapter 3.2.3 Description of the Research Model. Third, three different tactics are used to increase construct validity. (a) Multiple sources are used to triangulate data, making them more reliable. The main sources of evidence are semi-structured interviews, complemented with further evidence provided by interview partners in the form of organizational documents. To increase validity, the procedures and questions for the interviews have been discussed with one researcher and one management consultant, both experts in the topic of IS outsourcing as well as in planning and conducting interviews. To allow for a deep understanding of selected cases, several interview partners have been selected. As recommended by Eisenhardt (1989b), all interviews, each lasting about one hour, have been recorded and transcribed for further analysis. As far as possible, interview questions adapt the questions used in prior research for respective constructs. (b) A chain of evidence is maintained to further enhance the reliability of information (Yin 2009, p. 122). Based on the stated research questions, concrete propositions have been derived. Based on these propositions, questions for the interviews have been developed and described in a case study protocol (see Appendix A). Oral answers and further documents provided by the interview partners are stored in a case study database. Selected quotes and evidence from this database are then used to compose the case study report (i.e. Chapters 4.2 to 4.4). As the interviews have been conducted in German, the case study database includes a document that lists all quotes used in this study in both German and their respective translation. Translations have been made as literally as possible, correcting grammatical Copyright © 2012. Diplomica Verlag. All rights reserved.

mistakes without interpreting the statements. Conclusions are drawn based on these quotes as detailed in the case study results and analysis sections in this study (Chapters 4.3 and 4.4). This approach allows consistent reconstruction of the links between the initial research questions and the final conclusions in both directions. To ensure anonymity, the quotes are not related to interviewees in this study. Instead, a separate document in the case study database provides the mapping of quotes to the respective transcripts. (c) Interview partners have been asked to review a draft case study report to 58

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ensure that selected quotes and provided evidence truly reflects the circumstances in observed organization. Internal validity is concerned with establishing causal relationships among observed constructs. It is therefore addressed in the data analysis phase. Following Yin (2009), four different tactics are adapted in this study to ensure internal validity. The first aim is to gain a strong theoretical foundation of assumed causal relationships by building on prior research, resulting in a detailed research model and specific propositions. Second, pattern matching is applied as a technique to analyze the case study evidence by comparing empirically based patterns with the ones predicted based on the research model (Yin 2009, p. 136). Third, explanation building is used with the goal to “analyze the case by building an explanation about the case” (Yin, p. 141). To this end, a presumed set of causal links is given in the research model, which is open to iterative refinement based on evidence found in the case studies. Fourth, as the research model is given in the form of a process theory, it is inherently an organizational-level logic model. If the sequence of actions can be observed as predicted by the logic model, internal validity can be expected to be strong. External validity is concerned with the domain to which findings can be generalized. It is addressed in the research design. Using a case study exclusively based on qualitative methods, analytical generalization is applied as opposed to statistical generalization based on quantitative analysis (Lee & Baskerville 2003). Using analytical methods, a priori developed theory is used as a template to which empirically based patterns are compared. Based on the empirical findings, the derived propositions may be supported or rejected (Dubé and Paré 2003). Following Yin (2009), this kind of generalization is an analytical one.

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As this study adopts a single case design, constraints are given regarding external validity as the case may be vulnerable to misleading generalizations. Nevertheless, even a single case can be of value if conducted under the right circumstances and if chosen for the right rationales. First of all, the selected case is believed to be a “representative and typical case” (Yin 2009, p. 48). The observed outsourcing agreement between a major European company and a major global outsourcing provider is sufficiently complex and comprehensive to allow for an in-depth analysis of a typical outsourcing 59

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scenario. Second, the research model is extensively built on existing theory, allowing for analytical generalization even if a single case is used (cf. Yin 2009, p. 43). Third, the proposed research model has partly an explorative character. Focusing on a single case allows for a more in-depth analysis given the external constraints of available time and resources. The consequences and limitations that result from a single case study design are further examined in Chapter 5.2 Limitations. Reliability is given if the “operations of study […] can be repeated with the same results” (Yin 2009, p. 40). It is addressed in the phase of data collection. Two tactics are applied to ensure reliability. First, a case study protocol (see Appendix A) is developed to document procedures and questions to be followed during the interview. Second, a case study database is designed to contain transcripts and documents provided by the interview partner. Both the case study protocol and the database are important

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components to maintain the chain of evidence as described above.

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4.2 Setting HEALTH is a multi-national corporate group with headquarters in Germany and more than 20 national affiliates (referred to hereafter as business units or BUs) around the world. While the business units have managed their IT locally in the past, HEALTH started a global outsourcing project centrally in 2008. The scope of the outsourcing deal is the contracting-out of all IT infrastructure services (desktop and server infrastructure, voice, local and global networks) throughout the corporate group, affecting more than 40,000 users. Contractually agreed on volume is about 60 million Euros per year, not including changes in volume or demand. The pre-contract stage started in 2008. After identification of one preferred provider (in the following called PROV) and 6 months of contract negotiation, transition to the provider started in early 2009. Currently, HEALTH is in the transition phase, which means that a stable and routine operation of IT infrastructure services is not yet in place. There was an initial plan to implement the future mode of operation (FMO), i.e. the designed to-be IT infrastructure, by the end of 2010. However, the project did not advance as planned. It is currently expected that the transition phase will be completed by the end of 2011. One of the main objectives for the outsourcing deal was cost savings. It was expected to save several hundred million Euros during the coming years. While this expectation has already been communicated

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to the equity markets, savings have not yet been realized as expected. Category

Occurrence

Industry

Pharmaceutical and healthcare market

Employees1)

40,000

Contract volume

60 million Euros per year

Current outsourcing phase

Transition

Scope

IT infrastructure • Program manager

Interviewees

• Contract expert • Demand manager • Outsourcing consultant

1)

The exact number cannot be shown in order to ensure anonymity

Table 14 - Overview of case study key facts

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4.3 Results In the following section, the outsourcing context and actual states of the theoretical constructs relationship, contractual governance, relational governance, and control are described. It should be noted that the service quality provided by the provider has not been objectively assessed for the purpose of this study. All descriptions and quotes are based on interviews with the managers of the service recipient and are therefore highly subjective. Nevertheless, the focus of the case study is on the recipient’s perception of the relationship. It is not evaluated if this perception can be justified. Unless otherwise stated, all given quotes have been made by one of the interviewees listed in Table 14. To ensure full anonymity even among the participants, it is not further indicated which respondent has made which statement. This level of anonymization does not affect the interpretation of statements or the traceability of suggested findings as the unit of analysis is the organization. Since the statements of individuals are aggregated to determine the occurrence of observed constructs on an organizational level, it is not necessary to reassign single statements to specific roles to validate drawn conclusions.

State of Relationship: The relationship between HEALTH and PROV is very strained, which has been emphasized by all interviewees. • “The relationship is difficult.” • “It is sheer desperation on both sides.” • “It is a great disappointment. There is the feeling our provider is doing this for the first time.” • “We are frustrated. We have to work overtime because our provider is not able to Copyright © 2012. Diplomica Verlag. All rights reserved.

fulfill its tasks.” The interviewees provided remarkable examples for adversarial or ignorant behavior. One such case took place during a meeting of the steering committee. The corporate head of technology asked the client director of the service provider for cost estimates in order to be able to evaluate a set of alternatives. The client director then affronted the HEALTH manager by replying: “Your role is global head of technology. I will not talk with you about prices.” 62

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The most evident issue is a lack of trust. First, HEALTH has lost its confidence in the capabilities of PROV to provide adequate services. It should be noted that PROV is one of the biggest and most renowned outsourcing providers in the world. • “I am surprised how little PROV understands our business.” • “PROV has started the whole outsourcing deal in a way that has not been feasible in our eyes.” • “The execution of the transition phase is amateurish. After one and a half years, there is still no thorough and traceable planning for the transition.” Second, HEALTH is under the impression that PROV is taking advantage of them. The transparency of service provisioning and invoicing is perceived to be low while the overall quality is unsatisfying. For instance, it has been agreed to appoint about 30 additional consultants from PROV in order to support the transition in the local business units. When asked for records of performance, PROV refused to supply them, with the argument that this had not been agreed in the contract. Another example of opportunistic behavior is deliberate inactivity. While the original scope of the outsourcing deal covered the whole organization of HEALTH, a small part was descoped due to its unique requirements. Originally, the plan was to negotiate a separate deal to cover the needs of this organizational part; however, “as soon as PROV realized that this deal doesn’t pay off, they slowed down the project. They kept us at arm’s length wasting away in this project.” The following quotes illustrate HEALTH’s impression of opportunistic behavior from PROV. • “Both parties, HEALTH and PROV, are of the opinion that PROV is responsible

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for the delay. Nevertheless, PROV says that HEALTH is responsible for the delay, because in the end, it is all about legal matters. And that annoys me.” • “It takes a great effort to create transparency. There are examples of proposals that have been exorbitantly priced but adjusted to market prices shortly afterwards.” HEALTH does think that PROV is willing to work towards a good relationship. Nevertheless, at the time of the interviews the relationship was characterized by a high 63

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degree of distrust and it becomes more and more common that lawyers attend regular meetings. Another often-mentioned criticism was that PROV lacks flexibility. • “I expected much more flexibility.” • “Processes at PROV are virtually not changeable.” • “PROV is certainly willing to adapt – as long as they get paid for it.” All interviewees agreed upon a high interdependency. In their view, this interdependency is the main reason why PROV is maintaining the outsourcing deal. • Question: “Do you think PROV would invest in a good relationship?” Answer: “Yes, because they have their backs to the wall like us.” • “The nervousness raises, but we know we’re all in the same boat and we are not getting out of this very easily. So it’s clear that we have to find solutions and that brings us together. We certainly have the will to find solutions.” Although trust is low, commitment is high on both sides. For example, PROV is willing to invest resources and to change staff if necessary. This is probably due to the fact that the interdependence between both parties has been recognized. • “The resources provided by PROV have not always lived up to our expectations. But PROV is quite open now. They even made considerable changes in their staffing.” Cultural compatibility is deemed to be very low. Managers from HEALTH consider the culture to be fundamentally different. However, although the differing cultures are seen as problematic, HEALTH does not expect PROV to align to their cultural Copyright © 2012. Diplomica Verlag. All rights reserved.

expectations: • “A service provider has many customers. Should it have separate norms and cultures for each one? That’s not feasible.” Since the contract is not overly specific, as will be further detailed below, and the outsourcing deal is in its transition phase, several aspects have to be clarified between HEALTH and PROV. Consensus is therefore naturally low. 64

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• “I wouldn’t say that there is much agreement. However, sometimes I think we should argue even more, considering what it is about.” To conclude, the relationship between HEALTH and PROV is not in a very favorable state.

Success It was not possible to receive a formal assessment of the outsourcing success based on prepared questionnaire (see Appendix A). According to statements of the interviewees, one of the main objectives, cost savings, could not yet be achieved as expected.

Contractual Governance It should be noted that the contract has not been thoroughly reviewed for the purpose of this study. The issue that is relevant to the examination of the research model is whether the contract is extensive and detailed and whether it has a significant influence and presence in daily cooperation. Therefore, the exact content of the contract has only been examined selectively. Due to the scope and geographical coverage of the outsourcing deal, the underlying contract is quite extensive. The general structure of the contract follows the IT organization with components covering corporate issues and separate elements covering local, i.e. business unit related, issues. The corporate component of the contract covers general agreements and aspects relevant for all business units. It is split into a Master Service Agreement and a Master Transfer Agreement. The latter defines the rules and conditions for the transfer of existing staff, assets, and contracts from HEALTH to

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PROV. In addition, separate Local Service Agreements and Local Transfer Agreements exist for the business units. Overall, the initial version of the contract spanned over 700 pages. After the signing of the contract, about 80 documents of approximately 100 pages each have been added to further specify services. Furthermore, more than 100 change requests to the contract exist. Due to the volume and supported by statements from the interviewees, the contract can be seen to be comprehensive, covering most contractual elements specified for this construct. One element that has not been covered is the Process Ownership Plan. This element should include a complete list of affected 65

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business processes and respective responsibilities. As the scope of the outsourcing deal only covers the IT infrastructure and as applications remain in-house, this element has deliberately been omitted by HEALTH. • “We only outsource our infrastructure. Applications and application management remain in-house. As there is no link, like from applications to business processes, these processes are not directly affected by the outsourcing deal.” Despite the broad coverage of elements, interviewees agreed that the contract is not specific and detailed enough. • “In hindsight, yes, it could have been more detailed.” • “As I always say, I’d do things differently in my next life.” • “Sometimes it would be better if the contract was more precise. It has intentionally been left unspecific as one didn’t know better.” • “In the contract, service levels are partly defined. But not necessarily complete.” A great amount of time is spent on clarifying points of dispute due to a differing understanding of the contract. • “Now we are in a situation where certain points leave room for interpretation, and where we have, let’s say, much extra work to align our understanding of the contract with the one from PROV.” • “The signing of the contract has been two years ago now. Yet, three weeks ago we started a project with the aim to establish a common understanding about some contract clauses and to identify issues that have been left open. That is, a major part of the organization is still busy with clarifying the contract.”

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According to the understanding of the interviewees, outsourcing deals of this size and complexity cannot be perfectly specified in advance. • “Such a contract is never perfect. In a contract of 700 pages there are certainly ambiguities. We are discussing these and we have to find solutions. Maybe there will never be a contract without ambiguity.” However, the contract has not been fully put into force yet as HEALTH is still in the transition phase and certain measures are not applied until daily operations, i.e. the 66

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future mode of operation (FMO), are in place. This is seen as a point of criticism in the current contract. • “In FMO, PROV is obliged to deliver a proposal within 10 days. Currently, as we are not in FMO yet, the proposals take way too long. 10 days are just a dream. But at the moment, I have no other possibility besides escalating the request to senior management.” • “We are lacking a specification of the transformation phase. How to deal with financial aspects and especially the scope. When is transition completed? When does the future mode of operation start? These are things that are missing.” Not least due to its lacking specificity, the contract has a considerable presence in dayto-day work. Both parties refer to the contract very often, although there is a tendency to jointly determine solutions. The reliance on the contract is therefore high. • “Managers from PROV quickly return to legal arguments.” • “If the service is not being delivered, if SLAs are constantly not met, if projects are continually delayed, then you’ll get out the contract again. That happens sometimes and it is happening right now.” • “Regarding commercials, the contract is very present. […] Regarding projects not so much.” • “At the beginning, PROV slavishly followed the contract.” The reliance is reinforced due to the complexity of the contract. As mentioned before, the original contract, additional specifications, and change requests have to be considered to determine the effectual agreement. This complexity leads to uncertainty and therefore to a need for clarification. In addition, this complexity is used to block

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unfavorable requests. • “The employees [from HEALTH] do refer to the contract every now and then. But they are very unsure if the information is still valid or if they are interpreting the contract in the right way.” • “The provider hasn’t yet processed and provided the content of the contract for its employees in a way that they could reference it without difficulty as well. In the end, this leads to a total blockade attitude. As soon as something smells like extra 67

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costs, the provider rejects it wholesale, knowing that both have to analyze contract and change requests first.” To conclude, the contract is extensive and covers many aspects. However, many open issues exist due to a lack of specification. The contract is therefore very present and reliance on written terms is high.

Relational Governance Contrary to the other constructs, it has been difficult to obtain clear and consistent evidence based on proposed dimensions for relational governance. The interviewees found it difficult to make general statements about examined dimensions. • “This is not measurable.” The organizational structure is an important influencing factor here. Both companies are split into a central unit and several local units. Relational norms are not consistent among these parts neither within nor in-between both organizations. • “What does it matter if we [HEALTH Central] agree with PROV Central if we don’t take it out to our local units? Actually, who is working with whom on whose relationship? There are so many to consider.” Thus, there is no homogeneous occurrence of relational norms among the organization. Judgments about relational norms therefore have to be taken with care as they are individual perceptions, not organizational ones. As this is contrary to what has been expected before, further analysis is provided in Chapter 5.1 Interpretation of Findings and Implications for Theory and Practice.

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Nevertheless, it can be said that both parties have realized and acknowledged their interdependency. Processes and structures are intertwined – at least between the central units of both organizations. Overall integration is high, which is associated with high coordination. The most distinct example is the organizational two-in-a-box structure for the outsourcing project where counterparts from HEALTH and PROV are jointly responsible for a single function. While integration and coordination is high on the

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central level, it cannot be said to be true in-between local units and between the local and the central units of both companies. • “PROV Central likes to talk with HEALTH Central and that’s the end of it for them. But in our opinion we need much more empowerment in the local units. Sometimes in the local units, HEALTH employees work together with PROV employees to find a solution that is then overruled by PROV Central. And that is very frustrating for all parties involved.” Due to the interdependency, cooperation is usually high as well, notwithstanding continuous debates about how to interpret the contract for financial reasons. • “There is too much at stake to not support each other.” For the same reason, information sharing is not an issue either. • “I always got the information I needed.” • “After all, we communicate openly as far as necessary for our collaboration.” Consistent with these findings is the intention to resolve conflicts amicably, although overarching structures and objectives might interfere. • “Sometimes they absolutely have the will to find a solution. But single persons often can’t do anything about it.” • “We all do have the will to bring this to a good end.” Besides the difficulties in isolating relational norms using proposed dimensions, there clearly are behavioral expectations – or Rules of Conduct as they are named in this

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study – present. • “I expect that people act professionally and that they react according to their role.” • “There are business ethics. We have to adhere to that. PROV has to adhere to that as well. We have to play by the rules. Otherwise it won’t work.” • “There are rules and obligations. And these things are highly important for me. I have a contract, that’s well and good, but at daily work, the relationship has to be

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resilient. If somebody says he will deliver by Friday, I expect him to deliver by Friday.” These “unwritten” and “un-formalized” rules and expectations do have a significant influence in day-to-day cooperation. Actions of consequence are taken based on these norms. An example of this is the repeated replacement of employees who do not conform to behavioral expectations. • “There are customers [from HEALTH] saying that they cannot work together with certain staff from PROV. Eventually, these employees [from PROV] are removed from our account.” • “There are requests [from HEALTH] to replace employees from PROV because they are not able to perform according to their role. One example is the client director from PROV, who has been responsible for the deal, and who behaved in a very uncooperative way and ran down employees from HEALTH in major meetings. Nowhere has it been specified that a client director has to have social skills. But in the end, he got replaced.” The interviewees considered relational norms and relational governance as essential and highly relevant. Nevertheless, they did not find it to be feasible to systematically manage these “soft facts”. • “I have the feeling that it is underrated in the business world how personal sensitivities influence collaboration. In my eyes, it is highly underrated. If for example someone gives you the last piece of information or not is not always by intention. Sometimes you just sit and talk five more minutes with someone than you have to and then you get this additional piece of information. In the end, these

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human things make up a successful collaboration. I have done many projects in my life and I have always asked myself why some things work better than others. And I always come to the conclusion that it’s the human factor.” • “I don’t think it is possible to centrally manage relationships. There are just too many points of contact.” • “I don’t think it is feasible to manage relationships on such a scale. I’m really not having enough fantasy to imagine how one could do that. I’d say we gave up on this.” 70

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Control The predominant formal control mode in the outsourcing deal is outcome control. As a primary mechanism, SLAs are defined and linked to rewards and penalties. Governance documents specify responsibilities, reports, and meetings where SLAs are evaluated and actions are taken if necessary. However, most of the defined SLAs are not in force during the transition phase. Not least because of this, escalation is frequently used as a control mechanism in the current situation. As documents provided by the interviewees show, the escalation structure and processes are well defined from a local level to the top management level. Local meetings and tracking mechanisms are widely used to control progress and outcomes. If an outcome is unsatisfying and a solution on the local level cannot be found, the issue will be escalated. Additionally, benchmarks will be conducted after the transition phase to ensure competitive prices. Remarkably, the provider tries to circumvent outcome control in several ways. According to the interviewees, the provider repeatedly declines responsibility due to a lack of participation by HEALTH. • “Participation of the customer is necessary for the provision of the service and PROV very, very often refers to that.” Another example is a deliberate manipulation of performance indicators. • “An SLA for the helpdesk has been set up defining a first call solution rate. That is, I call, I am helped, I hang up. But the helpdesk is not knowledgeable enough yet and essentially can’t comply with the first call solution rate. PROV avoids this situation by letting customers hold the line for up to two hours, while the helpdesk tries to find a solution. What is actually happening is that no one is willing to wait Copyright © 2012. Diplomica Verlag. All rights reserved.

two hours for a solution. So the customer hangs up. But then the calls are rated differently. The call is then rated as canceled or interrupted. It’s unbelievable.” There is no use of behavior control. HEALTH sees the delivery of the service in the responsibility of the provider. This decision has been made deliberately as HEALTH wants the provider to be fully responsible for the delivered outcomes.

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• “For me, it’s a black box. I deliver the input to the system, the provider starts processing and in the end I am expecting an output as it has been defined.” • “Based on my experience, a black box is the right design. Finally, it has to be the responsibility of the provider to deliver the service in his way. It is important that the delivered service conforms to the expectations of the customer.” Regarding informal control modes, clan control does play an important part in daily collaboration. Social control mechanisms serve as a first instance to solve problems and can indeed lead to actions of consequence as outlined in the section about relational governance. Nevertheless, clan control could only be observed on an individual level. There is no evidence for group-wide norms or mechanisms. • “[Social mechanisms] exist and they can result in sanctions.” • “Personally, I try to solve problems on my level. For example, I go to take a coffee, or a cigarette, or whatever with the counterpart from PROV and address the issue. That’s how I prefer it. But it doesn’t always work like that. Sometimes it is out of limits or has a political impact. Than it has to be raised to more official levels by email or steering boards. […] There are projects that have a certain priority or impact. In these cases it’s nice to have a chat about it at the coffee machine and to be comfortable with oneself. But this is not always enough. You have to get authority for that.” As HEALTH has increasingly lost its confidence in the abilities of PROV, self control becomes a topic. Fostering and engaging self control could not be observed, but it becomes clear that HEALTH does see self control of PROV as an issue. • “[HEALTH does] no longer believe that PROV is exercising any kind of control

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before handing over deliverables.”

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Table 15 summarizes the results of the case study among the examined constructs. It can be said that HEALTH and PROV are in a difficult situation as initial objectives, i.e. cost savings for HEALTH and profit margins for PROV, could not be accomplished as expected on both sides. Facing these difficulties, the relationship is heavily strained. Regaining trust and establishing agreed-upon control structures and forms of collaboration will most likely be an important challenge in the future. Construct

Description

Context

IT infrastructure outsourcing on a global scale.

State of Relationship

Relationship is strained. Especially trust and flexibility are low although both parties are still committed due to a recognized interdependency.

Contractual Governance

The extensive contract covers many aspects. However, many open issues exist due to a lack of specificity. Reliance on the contract is high. The contract is very present in daily collaboration.

Relational Governance

Relational norms are present in daily work. Due to an acknowledged interdependency, all proposed dimensions are found to be pronounced. Additional expectations not covered by observed dimensions have been found. Fundamental actions, like the replacement of employees, are taken based on relational norms. However, norms are neither homogenous within/in-between organizations nor actively managed.

Control

Outcome-based control modes are predominant. However, as SLAs are often not in force during the transition phase, escalation is an important mechanism to achieve agreement. Behavior control is deliberately not used as service provisioning is seen as a black box. Clan control is exercised on an individual level as a first instance for solving problems. Self control on the side of PROV is deemed to be low, but measures to encourage self control have not been observed.

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Table 15 - Summary of case study results

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4.4 Analysis In this section, the extent to which the propositions stated in Chapter 3.2.4 Summary of Propositions are supported by empirical evidence from the case study will be analyzed.

The first research question, covering propositions (1) and (2), is: What mechanisms can be used to govern IS outsourcing relationships?

Proposition 1

IS outsourcing relationships are governed by contractual and relational rules

As presented in Chapter 4.3 Results, a broad range of rules and specifications have been identified in the case study. These rules and specifications have been mapped to contractual and relational governance modes as well. Contractual rules include SLA content, SLA reporting processes, rewards, penalties, and external and internal governance models. The governance models define communication, escalation, organization, and meeting structures as well as processes, roles, and responsibilities. Relational rules include described expectations about professional and adequate behavior which include but are not limited to expectations about proposed relational norm dimensions. Thus, contractual and relational rules are evident and influence the relationship as described in the last chapter. To ensure that no rules outside of contractual and relational dimensions have been omitted, open questions have been used at the beginning of the interviews to ask the participants about rules and mechanisms. By using open questions before asking for specific contractual and relational rules, influences on given answers have been kept to a minimum. Nevertheless, no rule could be found that could not be classified as either Copyright © 2012. Diplomica Verlag. All rights reserved.

contractual or relational. To conclude, contractual and relational rules, i.e. contractual and relational governance modes, are predominantly influencing the relationship. The case study provides empirical support for proposition (1).

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Proposition 2

These rules are executed and enforced using control mechanisms

As presented in Chapter 4.3 Results, both contractual and relational rules, or Rules of Conditions and Rules of Conduct as they are named in this study, are executed and enforced by control mechanisms. Predominant mechanisms have been escalation (e.g. the steering committee) and informal meetings (e.g. at the coffee machine). A more detailed discussion of what control mechanisms are used for which rules is given along the propositions (3) to (5). As the execution and enforcement of rules can be mapped to one of the control modes, empirical support is provided for proposition (2).

The second research question, covering propositions (3) to (7), is: How are these mechanisms interrelated?

Proposition 3

Different control modes are used to execute and enforce contractual and relational rules

As explained in further detail for propositions (4) and (5), formal and informal control modes are used to execute and enforce contractual and relational rules. However, formal control modes are used for both contractual and relational rules. Thus, it cannot be said that different modes are exclusively used for each set of rules. Empirical evidence therefore rejects proposition (3).

Proposition 4

Contractual governance determines the actual implementation of outcome and behavior control

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As described for proposition (1), the contract specifies SLA content, SLA reporting processes, rewards, penalties, and external and internal governance models. The governance models define communication, escalation, organization, and meeting structures as well as processes, roles, and responsibilities. These specifications determine mechanisms and implementation for the outcome control mode. As noted in Chapter 4.3 Results, forms of behavior control could not be observed. Thus, empirical support is partly provided for proposition (4). It can be affirmed that contractual

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governance determines the actual implementation of outcome control. No statement can be made about contractual determination of behavior control.

Proposition 5

Relational governance determines the implementation of clan and self control

As presented in Chapter 4.3 Results, relational governance plays an important role in the collaboration between HEALTH and PROV. As expected, deviations from expected behavior have been addressed on an informal level (i.e. at the coffee machine or during a cigarette break). Nevertheless, in contrast to predictions, relational governance has also been extensively enforced and executed using formal control mechanisms. If managers or employees from PROV have not behaved or performed as expected, official meetings as well as escalation mechanisms have been utilized to enforce expectations. One prominent example took place at a meeting of the steering committee, the highest level of the meeting structure. At the beginning of this meeting, the CIO of HEALTH confronted the client director of PROV with the following statement: • “Until two years ago, I had a good impression of PROV. Now, I have completely lost confidence that you are able to provide good IT services.” With this statement, the CIO raised the dissatisfaction with the behavior and service provision to an official level using formal control mechanisms. This formalized mitigation of inadequate behavior was done deliberately. • “There are meetings and committees where we address a behavior or a way of acting that is not acceptable from our point of view.”

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In hindsight, this utilization of formal control mechanisms in outsourcing relationships is very reasonable. Social pressure as used in clan control is very effective in intraorganizational relationships as it is executed by the delinquent’s own group. In interorganizational relationships, however, social pressure is executed by an outside organization. Resistance against social pressure from HEALTH is likely to be higher if the employees from PROV are integrated into their own group and culture. The following quote illustrates this resistance and the need for escalation to finally achieve actions. 76

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• “[Actions against inadequate behavior] could only be enforced by the management, mostly at CIO-level. Local BU IT directors achieved only a few and in the end, they escalated it upwards.” To conclude, it can be affirmed that relational governance determines the actual implementation of clan control. No statement can be made about relational determination of self control as no actions have been taken by HEALTH to encourage self control at PROV. Most importantly, formal control mechanisms play an important role in the execution and enforcement of relational governance. Therefore, both formal and informal control modes can be linked to relational governance. Empirical evidence therefore rejects proposition (5).

Proposition 6

Contractual governance fosters the development of shared relational norms

Empirical evidence has been found which suggests that “soft factors” as they are typical for relational norms have been included in the contract to foster the collaboration. For instance, a dedicated article about Duties to Cooperate exists. In this contract clause, a declaration of intent is made to cooperate, to collaborate, and to share information. Thus, empirical support is provided for proposition (6).

Proposition 7

Feedback loops exist to adjust governance components as long as the system state is unfavorable

Examples given in Chapter 4.3 Results illustrate that the contract has been negotiated within a very ambitious time frame and consequently lacks specificity. More than 100 change requests demonstrate that the contract is actively adjusted to achieve workable Copyright © 2012. Diplomica Verlag. All rights reserved.

solutions. The governance model has currently been subject to further development in order to improve communication. Need for revision has already been identified regarding SLAs, although they are not yet in force. The following quotes exemplify the dynamics of governance and control modes: • “Maybe we had too much trust in the beginning. I would assert my demands more rigorously now.”

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• “At the beginning you get to know each other and see how things go. If everything goes well, there is no need for control. But if things repeatedly go wrong, if results are not delivered, then you’ll begin to use the escalation structures. […] PROV surely has ‘earned’ its supervision, which hasn’t been that strong at the beginning.” • “[PROV] assumed a centralistic approach […]. In the meantime they backed away from this assumption. But then went against it with all guns blazing […]. And now, thank god, we are on the right track. We have made this fixed and rigid plan […] more flexible.” Thus, empirical support is provided for proposition (7).

The third research question, covering propositions (8) and (9), is: How do organizations employ these mechanisms?

Proposition 8

Outsourcing organizations purposely rely on contractual and relational governance as equally important and complementary mechanisms

The interviewees considered contract and relationship as complementary and equally important. According to the participants, outsourcing agreements necessarily need to rely on both governance modes. Contracts are believed to be ambiguous and incomplete. Relational governance, i.e. working together, is considered as a complementary mechanism to handle open issues. • “The contractual agreement is the general basis for the cooperation. It is absolutely clear that everybody has to adhere to the agreements. But to fill the contract with life and to bring it to a good end, the human factor plays a very Copyright © 2012. Diplomica Verlag. All rights reserved.

important role.” • “Such a contract is never perfect. In a contract of 700 pages there are certainly ambiguities. We are discussing these and we have to find solutions. Maybe there will never be a contract without ambiguity because you just can’t foresee everything and because there will never be enough time to clarify everything. And then you’ll have to find solutions. You won’t be able to get back to the contract every time.” 78

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• “In my opinion, PROV belabors the term. But it is true. You can only make it work if you enter a real partnership.” • “I have a contract, that’s well and good, but at daily work, the relationship has to be resilient.” Thus, empirical support is provided for proposition (8).

Proposition 9

Organizations deliberately use governance mechanisms to influence the state of relationship

Control and contractual governance mechanisms are deliberately used to influence the state of relationship. As outlined before, a lack of trust is the most dissatisfying issue for HEALTH and formal control mechanisms as well as amendments to the contract have been made to increase transparency. Presumably, a good performance, made visible by a high transparency, will raise trust in the long term. On the other hand, relational governance mechanisms are not used and managed deliberately to influence the relationship. This is somewhat surprising as the interviewees from HEALTH emphasized the importance of the “human factor”. This contradiction raises the question of why norms and collaboration are deemed to be essential but are left totally unmanaged. The answer may be given by two quotes already cited before: • “Who is working with whom on whose relationship? There are so many to consider.” • “I don’t think it is feasible to manage relationships on such a scale. I’m really not having enough fantasy to imagine how one could do that. I’d say we gave up on

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this.” HEALTH has actually thought about this topic and attended a workshop given by external consultants. Nevertheless, they did not find the relationship to be manageable due to the massive amounts of contact points and due to other topics that are considered more urgent or valuable. The consequences of these findings will be further examined in Chapter 5.1 Interpretation of Findings and Implications for Theory and Practice.

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To conclude, mixed empirical evidence is given for proposition (9). Contractual governance and formal control modes are used deliberately, e.g. stricter control is applied to raise transparency and eventually to raise trust. Relational governance, however, is neither used nor managed in a structured and deliberate way. Table 16 gives an overview of examined propositions and their empirical support. Proposition

Supported

Comment

(1) IS outsourcing relationships are governed by contractual and relational rules

Yes

The state of relationship is predominantly influenced by proposed governance modes. All rules found could be classified as either contractual or relational.

(2) These rules are executed and enforced using control mechanisms

Yes

Formal and informal control mechanisms are used to execute and enforce contractual and relational rules.

No

While control modes are used to execute and enforce contractual and relational rules, there is no clear link between each set of rules to different control modes as explained in propositions (4) and (5).

Partly

Empirical evidence is given for the specification of outcome control in the contract. Behavior control has not been observed.

(5) Relational governance determines the implementation of clan and self control

No

Against predictions, formal control mechanisms are widely used in addition to informal control mechanisms to enforce and execute relational governance. Empirical evidence supports a link between relational governance and clan control. Encouragement of self control has not been observed.

(6) Contractual governance fosters the development of shared relational norms

Yes

Contract specifies Duties to Cooperate.

(7) Feedback loops exist to adjust governance components as long as the system state is unfavorable

Yes

Contract and control modes have been adapted continuously due to dissatisfaction with the situation.

Yes

Contractual and relational governance are seen as complements. Interviewees believe contracts to be inherently incomplete. Cooperative behavior is needed to fill the gaps of the contract.

Partly

Contractual governance and formal control modes are used deliberately, e.g. stricter control to raise trust. Relational governance, however, is neither used nor managed in a structured and deliberate way.

(3) Different control modes are used to execute and enforce contractual and relational rules

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(4) Contractual governance determines the actual implementation of outcome and behavior control

(8) Outsourcing organizations purposely rely on contractual and relational governance as equally important and complementary mechanisms (9) Organizations deliberately use governance mechanisms to influence the state of relationship

Table 16 - Overview of empirical support for propositions

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5 Discussion 5.1 Interpretation of Findings and Implications for Theory and Practice In order to assess and discuss the presented findings, the original research questions and objectives will be recapitulated once more. The first two questions will be analyzed collectively along the three governance modes contractual governance, relational governance, and control. Findings for the third research question will be discussed thereafter. The first question asks what mechanisms can be used to govern IS outsourcing relationships. The objective is to identify distinct modes of governance and their respective dimensions. The second question is concerned with how these mechanisms are interrelated. As an objective, causal links should model the interaction of identified governance modes to allow a better understanding of the dynamics of relationship governance. The aim is to provide a conceptual framework in the form of a process model representing governance modes and causal interrelations. The theoretical model proposed three distinct governance modes – contractual governance, relational governance, and control – that have a joint influence on the state of relationship. Within the domain of this study, which will be discussed in Chapter 5.2 Limitations, the proposed research model received strong empirical support. Contractual governance and relational governance were both observed to have a considerable influence on the relationship by defining the conventions of cooperation while control has been used to execute and enforce the rules set by these governance modes.

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Contractual governance specifies the Rules of Conditions using formal and written terms and agreements. Proposed dimensions for contractual governance could be confirmed, revealing a strong reliance on the contract in the observed case study. Empirical findings provide support for the theoretical foundations described in Chapter 2.2.3.1 Contractual Governance. This is particularly true for the limitations of contractbased governance of relationships. Several factors that are expected to restrict the applicability of the contract are present: a lack of specificity due to time and cost restrictions during the negotiation phase; high uncertainty due to limited experiences 81

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with centralized (outsourcing) projects at the service recipient; and high uncertainty about future demand due to the dynamics of the technological and economic environment. The results of these limitations are highly visible in the day-to-day collaboration between service recipient and provider. Two methods are predominantly used to deal with these challenges. First, the contract is continuously adapted and supplemented. Second, solutions to open issues are tried to be jointly found based on relational norms. The appearance of each method conforms to the research model. The former method corresponds to the proposed feedback loop that predicted an adaption of contractual governance, while the latter corresponds to the assumed complementarity of contractual and relational governance. Relational governance determines the Rules of Conduct in the form of relational norms and behavioral expectations. Relational governance was found to be present in the observed organization. The proposed dimensions of cooperation, coordination, integration, conflict resolution, and information sharing have been found to be present and influential on the relationship. Nevertheless, several aspects turned out differently than expected. First, the most visible relational norm has been the expectation of adequate or professional behavior. Important actions, like changes in staffing, have been based on this unspecified and unwritten expectation. However, none of the proposed dimensions is suitable to describe or measure this relational norm. Even when considering the full list of relationship constructs used in the examined prior research as presented in Chapter 2.2.3.2 Relational Governance, Table 7, no appropriate construct can be identified. This indicates the need for a deeper understanding and formalization of this observation as discussed in Chapter 5.3 Further Research.

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Second, the relational governance was expected to be based on group- or even organization-wide norms. Instead, relational norms have only been present on the level of individual interviewees. Two different explanations might be given for this. One possibility is that the organization is not an adequate unit of analysis and relational governance should be examined at the individual level. Koh et al. (2004) and their concept of the “psychological contract” is a rare example of this direction of research. Most articles, however, examine relational norms as an organizational or group concept. The other possibility is that relational norms could only be observed on an individual 82

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level as they have been left completely unmanaged. This raises the question of dynamics in the application of relational norms. Is the individual level an alternative solution if group-wide norms are not present? Are managed group-wide norms more effective than individual ones in the way that formalized mechanisms, such as escalation procedures, have to be used less often? A third unexpected observation is that the service provider has been rather resistant against social pressure as formal escalation was an often-used mechanism to resolve issues. One possible reason is that social pressure, i.e. relational norms, enforced by a single individual is not very convincing. In this case, managed and directed group- or organization-wide norms may be a solution to reestablish the effectiveness of relational governance. Another possible explanation is that a service provider is not very responsive to social pressure per se. The strong effect of relational norms is presumably based on group dynamics and the fear of marginalization, exclusion, and alienation. If the employees from the service provider are well integrated in the groups and culture of the provider itself, the influence of social pressure from the service recipient is reasonably low. However, relational norms function as an important governance mechanism within organizations and are naturally used between organizations as well. Limited applicability to inter-organizational relationships would have considerable impact, so that further research in this area might reveal important insights regarding the effectiveness of relational governance. Control mechanisms have been used to execute and enforce contractual and relational rules. The adapted categorization of control mechanisms in two formal and two informal control modes have been shown to be useful. One important observation was that behavioral control was deliberately not applied in the case study. As indicated by the interviewees, service provisioning in outsourcing agreements is seen as a “black Copyright © 2012. Diplomica Verlag. All rights reserved.

box”. The service recipient expects the provider to take full responsibility for the delivery of the specified output. However, it may be difficult for the provider to be fully accountable for the results as there are circumstances out of his control. Due to the particularities of IS outsourcing agreements behavior control could be expected as an appropriate mechanism. As demand is uncertain and dynamic, outcomes are difficult to specify in the long term. Additionally, the provider cannot always be made fully accountable for results as the recipient’s participation is usually needed to provision the service. In such situations, behavior control is an important instrument within 83

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organizations. However, behavior control may not be available in outsourcing relationships. Processes cannot be described in detail as the provider needs to be able to operate his own processes. Additionally, behavior is not observable as the service is at least partly provisioned remotely and the provider’s employees are not under the authority of the service recipient. Further research could shed some light on the possible restrictions of control modes and the resulting consequences in an IS outsourcing context. Proposed interactions between the governance modes could be partly confirmed. As predicted, formal control implements contractual governance. As described by Choudhury & Sabherwal (2003), specifying and evaluating mechanisms are needed to implement control modes. The contract has been the specifying mechanism by determining the objects to be controlled, expected performance levels, and mechanisms of evaluation. As an example, any SLA can be taken that specifies a service (e.g. a Unix server), the availability (e.g. 99.9%), and the evaluation mechanism (e.g. monthly reporting and subsequent rewards or penalties). Formal control mechanisms like the reports themselves, combined with meetings and escalation mechanisms are then used as evaluating mechanisms to execute and enforce the specifications made in the contract. This view confirms that contractual governance is causative for formal control as it determines how formal control is carried out. As expected, contractual governance also fosters relational governance by including “soft factors” like cooperation or information sharing in the contract. However, the link between relational governance and informal control has been different to what was expected. As predicted, informal control has been used to execute relational governance. Therefore, relational governance is causative for informal

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control. However, one of the key findings of this study may be that formal control mechanisms are used to execute and enforce relational governance as well. Therefore, the underlying argumentation of this finding should be made very clear: It has been observed in the case that the escalation structure has been repeatedly used to change staffing when employees or managers of the service provider did not behave “professionally”. First, taking into account the definition of formal control used in this study (“written, management-initiated mechanisms that influence the probability that 84

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employees or groups will behave in ways that support the stated […] objectives” (Jaworski 1988, p. 26)), the escalation structure clearly is a formal control mechanism. Second, to act professionally cannot be described in written terms. It is therefore neither an outcome nor behavior control as the latter refers to procedural job descriptions (e.g. for call center employees). Additionally, the requests for changes in staffing have been initiated by employees and have not been prescribed by management. To act professionally is thus a relational norm in the form of a behavioral expectation. Third, the request to change staff is a measure that was taken to influence the behavior of the provider and therefore is a control mechanism. That means that formal control mechanisms have been used to enforce relational norms. As described before, this is very reasonable considering that informal control, i.e. clan control, is ineffective as employees from the provider might be resistant against social pressure. However, this finding not only contradicts the assumptions made in this study; it is also inconsistent with prior research. The widely accepted framework for control modes and mechanisms (see Table 8) developed by Kirsch (1996, 1997) and extended by Choudhury & Sabherwal (2003) does not cover what has been observed in the presented case study. It is therefore of great interest, if the interaction between relational governance and formal control is specific to the examined case, to IS outsourcing relationships in general, or even to intra-organizational control. Nevertheless, it can be said that all three governance modes influence the relationship in a joint way. Besides the insight that contractual and relational governance cannot be exclusively linked to formal and informal control respectively, the proposed research model provides some explanatory value. The third research question was about how organizations employ proposed governance

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modes. In the case study, employees of the observed organization saw contractual and relational governance as complements. Further empirical support is therefore provided for the complementary view as described in Chapter 2.2.3 IS Outsourcing Relationship Governance Modes. Although both governance modes were seen as essential, the relational norms have been left completely unmanaged. Further, it has been observed that the relationship is not actively managed by deliberately using governance modes. The relationship in the observed case is presumably strained due to a difficult outset. This raises the question of whether in cases like this, deliberately and actively managing 85

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the relationship can help to overcome the present challenges. Based on the research model of this study, a broader study could be conducted to investigate the relationship between the active management of relationships, the state of the relationship, and overall outsourcing success. The implications for theory and practice are manifold. For theory, several starting points for further research have been identified and summarized in Chapter 5.3 Further Research. In addition, the currently accepted model for control modes and mechanisms might have to be adapted or extended as observed use of formal control to enforce relational norms is not covered by the current model. Although the findings in this study are rather exploratory, relevant implications for practice can be drawn as well. Given that both contract and relational norms are equally important for the state of relationship and ultimately for outsourcing success, it is not only contracts that should be considered during the planning and operation of an outsourcing agreement. The earlier management considers the importance and influence of governance modes, the better the agreement can be governed during implementation and operation. Research about and implementations of contracts are reasonably mature. Using contracts, control, and relational norms not only for legal or financial reasons but also from a relationship perspective offers a whole new spectrum of possibilities to direct complex and difficult outsourcing agreements. While research does not currently provide much advice of how to approach these challenges, the presented research model identifies several possibilities to start from. Practical experiences from other areas like marketing or HR might help to find ways to direct the relationship in a complex many-to-many

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environment.

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5.2 Limitations A major concern in qualitative research is the question of generalizability. As described in Chapter 4.1 Methodology, analytical generalization is applied to abstract findings made in the case study to uncover structural similarities that hold valid for cases outside the one studied. Limitations can result from the applicability of used theory and from the real-world circumstances of the conducted case. Regarding the theoretical perspective, prior literature from several research areas have been considered. The research used for contractual governance has mainly been specific for IS outsourcing relationships. Underlying economic and social theories, research about relational governance, and control theory are mostly applicable to organizations in general. A major theoretical limitation is the exclusion of project-based outsourcing agreements as the management of long-term routine operations has been the focus of the reviewed theory. From a theory point of view, the proposed research model may therefore be applicable to a broad range of relationships. Strong limitations, however, are imposed on the empirical support as only one case study has been conducted. Due to the particularities of the selected case, the findings may be restricted to the healthcare and pharmaceutical industry, to Germany, to global organizations, or to IT infrastructure outsourcing. Furthermore, only a one-sided view on relationships has been considered as only one side has been interviewed. Therefore, the proposed research model can only be a starting point for further research. Stronger empirical support is needed to refine and extend the findings of this study. Drawing on Yin (2009), several further steps are advisable to strengthen the proposed model. First, additional case studies could be conducted to reproduce the findings using literal replication. Second, the proposed research model may be extended so that Copyright © 2012. Diplomica Verlag. All rights reserved.

theoretical replication is possible by predicting circumstances where the theory is not applicable. Third, rival theories might be developed to demonstrate the explanatory value of the proposed model. Last but not least, the perspective of the provider may be included to allow for a more complete picture of the relationship. Despite these limitations, the current study is still believed to contribute to the existing body of knowledge. Three rather disjointed areas of research, namely contracts, relational norms, and control, have been set in a common context. The presented 87

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research model provides a more comprehensive view on what factors influence IS outsourcing relationships and how these relationships can be governed more deliberately and more purposefully than before. In addition, this study may have added a new perspective to existing control literature by presenting an example for the use of formal control modes to enforce relational norms. Several important questions remain unanswered. It has not been examined how exactly the joint effect of relationship governance influences the state of relationship. It has also not been investigated if and how single relationship dimensions influence overall outsourcing success. However, the current study proposes a model that sets all relevant components into relation. Based on this model, the suggested links can now be

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investigated more closely.

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5.3 Further Research Several opportunities for further research have been identified in Chapter 5.1 Interpretation of Findings and Implications for Theory and Practice. These can be categorized into research questions directly related to the proposed research model and research questions that reach beyond what has been examined in this study. Four directly related questions can be derived from the observed findings. First, the proposed dimensions for relational norms did not cover what has been described as expectation of professional behavior. A better understanding of these expectations will be beneficial in both theory and practice. From a theory point of view, a better understanding is necessary to detect and measure these expectations. Practice would benefit by being able to better identify and describe what is expected from the provider ex ante. Second, further research might investigate whether the organization is the appropriate unit to examine relational governance. A detailed discussion of the implications has been given in Chapter 5.1 Interpretation of Findings and Implications for Theory and Practice. A better understanding of the dynamics of relational norms at organizational and individual level will be necessary for the management of relational norms. Third, it has been shown repeatedly that relational and contractual governance are complements. The current study adds to this perspective by demonstrating the influence of relational governance on the state of relationship. Nevertheless, hardly any insights about how to govern relational norms in inter-organizational relationships exist. This will undoubtedly be a difficult task due to different organizational cultures and the sheer complexity because of the multitude of single contact points. However, other research fields may already provide approaches that could be transferred to an interorganizational setting. At least two research fields may come to mind immediately. Marketing has a long tradition in transporting perceptions, values, and even emotions to Copyright © 2012. Diplomica Verlag. All rights reserved.

a vast amount of customers. Human resources also gained decades of experience in aligning and allying sometimes hundreds of thousands employees towards a common culture. Adapting existing knowledge from research outside the IS outsourcing area, valuable insights might be gained for a better understanding of how relational governance can be managed in inter-organizational relationships. Fourth, further research might investigate the consequences of the finding that formal control has been used to enforce relational norms. A revised understanding of the formal and informal 89

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perspectives on control might provide insights outside of the IS outsourcing context as well. Two more areas for further research can be derived that are not directly related to the findings of this study. First, given the proposed model of relationship governance modes, the joint effect on the state of relationship might be of interest. While this study has shown that suggested governance modes do influence the relationship, no prediction is made as to how exactly this influence takes place. Nevertheless, a better understanding of this link is necessary for a directed management of discussed governance modes. In the observed case study, the relationship was rather difficult and relational governance has been left unmanaged. This raises the question of causality. Does coherence between both findings exist? If yes, in which direction? The proposed research model cannot provide answers for these questions but it does reveal possible interconnections that can be examined further. It would be interesting to investigate organizations with different manifestations of suggested governance modes. At first, the state of relationship of four different organizations among the dimensions strong/weak management of contractual/relational governance modes could be investigated. If mostly organizations that actively manage both contractual and relational governance have good relationships, further support for the complementarity of both governance modes is given. Second, additional research is necessary in order to shed more light on the link between the state of relationship and success. If both the link between the state of relationship and success as well as the influence of the joint relationship governance effect on the state of relationship is better understood, the proposed research model can be part of a more comprehensive framework that links concrete managerial activities – i.e. contractual governance, relational governance, and control – with overall

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outsourcing success.

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6 Conclusion This study develops an IS outsourcing relationship framework in the form of a process model that describes the interaction of contracts, control, and relational norms as governance mechanisms in IS outsourcing relationships. Three distinct governance modes – contractual governance, relational governance, and control – have been found to jointly influence the relationship between service recipient and provider. While contractual governance has been observed to specify the Rules of Conditions using formal and written terms and agreements, relational governance has been found to determine the Rules of Conduct in the form of relational norms and behavioral expectations. Control mechanisms have been observed to execute and enforce contractual and relational rules. Feedback loops exist to adjust proposed governance modes as long as the overall system state is unsatisfying. Three important findings have been made in the empirical part of this study. First, relational norms have only been observed at an individual level and not at an organizational one. However, the majority of prior research investigates relational norms at a group or organizational level. Second, formal control modes have been used to execute and enforce relational norms. This finding is not consistent with prior research about formal and informal control modes. Third, while both theory and empirical

evidence

suggest

that

contractual

and

relational

governance

are

complementary and equally important, insights about how to manage relational norms in inter-organizational relationships are lacking. Despite its limitations, the proposed relationship framework is unique in that it clearly differentiates between the relationship in and of itself and governance mechanisms that

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can be actively managed in order to influence the relationship. Further research should be encouraged to deepen the understanding of the effect of proposed governance modes on the relationship between service recipient and service provider.

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Appendix A – Case Study Protocol Below is given an anonymized version of used Case Study Protocol, describing procedures and questions for the interviews. Where possible, questions were based on prior research to increase construct validity. A detailed assignment of questions to their respective sources is presented after the Case Study Protocol.

Case Study Protocol I) Overview of the case study project One selected case study will be conducted in order to provide empirical evidence for the study titled “The Interaction of Contract, Control, and Relational Norms as Governance Mechanisms in IS Outsourcing Relationships”. The purpose of the study is to investigate the interaction of contract, control, and relational norms as governance mechanisms in IS outsourcing relationships. The topic will be approached in two ways. First, a detailed investigation of IS outsourcing relationship dimensions and governance modes is conducted. Second, it is examined how governance modes interact to influence relationship characteristics. Based on this purpose, three research questions will be examined: 1.

What mechanisms can be used to govern IS outsourcing relationships?

2.

How are these mechanisms interrelated?

3.

How do organizations employ these mechanisms?

For a detailed explanation of underlying research model and propositions, reference

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may be made to the study, Chapter 3.2 Research Model.

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II) Data collection procedures Case company XX is an international service provider within the pharmaceutical and healthcare markets, located in XX, Germany. The company is active in XX countries, employs approximately XX people and generated turnover of about XX Euros in 2009. XX has outsourced its IS infrastructure services throughout the organization. The following persons will be interviewed during the case study: Name:

XX

Position:

XX

Role:

XX

Telephone:

XX

E-mail:

XX

Date and time:

XX

Data collection All interviews will be conducted via telephone. A teleconferencing system will be used to record the calls for later transcription. Due to the nationalities and preferences of the contact persons, all interviews will be conducted in German. Data collection takes place in form of semi-structured interviews based on the questions given below. Each interview should not last more than one hour. To ensure a broad coverage of relevant topics, time limits are indicated next to each group of questions. Unless good reason is given, the interview shall advance to the next group of questions Copyright © 2012. Diplomica Verlag. All rights reserved.

in case the time limit has been reached before all questions could have been addressed. Interview partners are encouraged to provide further evidence in form of organizational documents, presentations, correspondence, reports, etc. To make the most efficient use of the interviewer’s time, different roles have been defined based on functional responsibilities and experiences of contact persons. Different compilations of interview questions are mapped to these roles to ensure a

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broad view on general topics as well as profound information on special topics. Defined roles are: Contract Expert (CE): Person who has been involved in contract negotiation and setup or has otherwise gained deep knowledge of the structure and content of the formal outsourcing agreements. Controller (CO): Person who is in charge for the day to day execution and monitoring of contractual agreements. This may include service levels, claims, organizational performance etc. The controller will most probably be organizationally independent from cost accounting or financial accounting based controlling department. Outsourcing Manager (OM): Person with extensive and regular contact to the service provider. This role may be covered by the project/program manager of the outsourcing project or the service/demand manager that functions as an interface between service recipient and service provider. Outsourcing Consultant (OC): Expert from in- or outside the organization that supports the implementation and operation of the outsourcing project.

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Minutes (S/X) Outsourcing Context

10

State of Relationship

15

Success (optional)

10

Relationship Governance Mechanisms

5/15

Contractual Governance

15/40

Relational Governance

5/20

Control

CE

OM

OC

CIO

X X

X

X

X

(X) S X

X

S

X 55

60

(X) X S

X

25

Grand Total Time

CO

S X

60

65

10

S = short version, X = extensive version

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III) Case study questions A) Outsourcing Context (10 min) Organization 1. What are the key figures of the organization (revenue, number of employees, industry)? Scope of agreement 2. What is the scope of the outsourcing contract? 3. What is the yearly volume of the outsourcing agreement (in Euro, planned in contract vs. actual)? Length of relationship 4. Have there been contractual relationships with the provider before? If yes, since when? 5. When did the contract negotiation of current outsourcing agreement start? 6. When did the transition to the service provider start? 7. Have assets and/or employees been transferred to the service provider? 8. Since when is the agreement fully operational? Overall outsourcing experience 9. Have there been IS outsourcing experiences with other service providers? 10. Have managers with outsourcing experience (gained in the organization or at prior

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employers) been involved during the negotiation/transition/operation phases?

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B) State of Relationship (15 min) Current state of relationship 1. How would you assess the overall relationship to the service provider? 2. Providing examples from your past experience, how strongly (3-step scale) would you agree that 2.1. you expect the provider to fulfill its obligations and to behave fairly? 2.2. you expect the provider to be willing to adapt as circumstances change? 2.3. achievement of each parties’ objectives are dependent on each other party? 2.4. you expect the provider to invest effort and resources in order to sustain the relationship? 2.5. your organization and the organization of the provider share the same beliefs and values? 2.6. there is often general agreement between both parties? Dynamics of relationship 3. Have there been changes in the relationship over time?

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4. Can you attribute these changes to key events?

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C) Success (optional) (10 min) 1. Questionnaire as adapted from Cullen et al. (2008)

Please indicate the outcomes achieved to date in section A and, in column B, the primary outcomes initially sought Overall Satisfaction

A. Achieved (1 = very high, 5 = very low)

B. Initially sought (1 = very high, 5 = very low)

N/A

1

2

3

4

5

N/A

1

2

3

4

5

1. Demonstrable value for money

N/A

1

2

3

4

5

N/A

1

2

3

4

5

2. Market price under internal cost

N/A

1

2

3

4

5

N/A

1

2

3

4

5

3. Obtain ongoing cost reduction

N/A

1

2

3

4

5

N/A

1

2

3

4

5

4. Stabilise and predict costs

N/A

1

2

3

4

5

N/A

1

2

3

4

5

5. Means of financing assets

N/A

1

2

3

4

5

N/A

1

2

3

4

5

6. Convert capital to operating expense

N/A

1

2

3

4

5

N/A

1

2

3

4

5

7. Aggregate total demand for economies

N/A

1

2

3

4

5

N/A

1

2

3

4

5

8. Obtain cash for sale of assets

N/A

1

2

3

4

5

N/A

1

2

3

4

5

9. Reduce staff numbers

N/A

1

2

3

4

5

N/A

1

2

3

4

5

10. Rationalize/consolidate assets

N/A

1

2

3

4

5

N/A

1

2

3

4

5

11. Get remedy for poor performance

N/A

1

2

3

4

5

N/A

1

2

3

4

5

12. Standardize technology

N/A

1

2

3

4

5

N/A

1

2

3

4

5

13. Standardize services

N/A

1

2

3

4

5

N/A

1

2

3

4

5

Other_________________________

N/A

1

2

3

4

5

N/A

1

2

3

4

5

14. Improve service

N/A

1

2

3

4

5

N/A

1

2

3

4

5

15. Obtain services not available internally

N/A

1

2

3

4

5

N/A

1

2

3

4

5

16. Improve discipline/ accountability

N/A

1

2

3

4

5

N/A

1

2

3

4

5

17. Obtain better/more expertise

N/A

1

2

3

4

5

N/A

1

2

3

4

5

18. Allow more flexible work practices

N/A

1

2

3

4

5

N/A

1

2

3

4

5

19. Align resource supply to demand/minimize capacity gap

N/A

1

2

3

4

5

N/A

1

2

3

4

5

20. Obtain better/more technology

N/A

1

2

3

4

5

N/A

1

2

3

4

5

Other________________________

N/A

1

2

3

4

5

N/A

1

2

3

4

5

21. Concentrate on core business

N/A

1

2

3

4

5

N/A

1

2

3

4

5

22. Refocus internal IT staff on high value/ more strategic activities

N/A

1

2

3

4

5

N/A

1

2

3

4

5

23. Contribute to business (i.e. joint R&D, joint commercialisation)

N/A

1

2

3

4

5

N/A

1

2

3

4

5

24. Access to best practices, new developments

N/A

1

2

3

4

5

N/A

1

2

3

4

5

25. Industry development

N/A

1

2

3

4

5

N/A

1

2

3

4

5

Other ________________________

N/A

1

2

3

4

5

N/A

1

2

3

4

5

Value for Money

Improved Financial Results

Operational

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Strategic

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

D) Relationship Governance Mechanisms (5/15 min) Assessment of relationship 1. Are there mechanisms or measures in place to actively assess the relationship between your organization and the service provider? 1.1. If yes, how do these measures look like? 1.2. If no, what do you think are the main events, processes or mechanisms whereby an impression of the state of relationship is formed? Influencing the relationship (extensive version) 2. Are there mechanisms or measures in place to actively influence the relationship between your organization and the service provider? If yes: 2.1. Which mechanisms exist and how are they implemented? 2.2. Have they been in place from the beginning on or have they been introduced due to certain events or experiences? 2.3. Who has initiated these measures?

E) Contractual Governance (15/40 min) Content and extensiveness of contract (extensive version) 1. Indicating the degree (none/some/extensive) and commenting on any particularities, does the contract contain statements regarding the following elements? 1.1. Overall objectives, e.g. 1.1.1. Expectations about managerial and organizational structure of

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operational relationship 1.1.2. Expectations about innovation and provider capabilities 1.1.3. Business objectives 1.2. Service level contents, e.g. 1.2.1. Service level / quality targets 1.2.2. Key business measurements 1.2.3. Service description/catalogue 1.3. Process ownership xv

Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

1.3.1. Inventory or business processes directly affected by the outsourcing agreement 1.3.2. Roles and responsibilities of these processes 1.3.3. Processes that are required to manage the agreement 1.4. Future demand management 1.4.1. Processes for scheduling, costing and modifying agreements with new demand 1.4.2. Processes to obtain end-user feedback on the delivery of services that are provisioned to meet new demand 1.4.3. Processes to prioritize changes and modify existing services to match evolving user requirements 1.5. Anticipated change management 1.5.1. Processes to identify technology, business, and industry drivers for change 1.5.2. Definitions for categories of predetermined change (e.g. volume changes, updates) 1.6. Innovation 1.6.1. Processes for innovation, including prioritization and implementation 1.6.2. Processes for business improvement and technology advancements 1.7. Feedback / Satisfaction 1.7.1. Processes for feedback 1.7.2. Prioritization methodology for current tasks and feedbacks 1.8. Communication 1.8.1. Communication policy 1.8.2. Reporting structure 1.8.3. Communication initiatives and initiative owners Copyright © 2012. Diplomica Verlag. All rights reserved.

1.9. Measurement / benchmarking 1.9.1. Measurement methodology 1.9.2. Definition of what is to be measured (price/service/satisfaction) 1.9.3. Processes to periodically measure the defined categories 1.10. Conflict arbitration 1.10.1. Parameters for involving third parties in discussions or disputes 1.10.2. Escalation mechanisms 1.10.3. Practices and conduct rules xvi

Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

1.11. Enforcement 1.11.1. Penalty definitions and formula 1.11.2. Conditions under which termination may occur 1.11.3. Exit responsibilities 2. Are there important additional elements not mentioned before? Application of contract (extensive version) 3. How is the contract implemented, executed and enforced? Reliance on the contract 4. How „present“ is the contract in daily operation… 4.1. in terms of awareness of the content? 4.2. in form of a legally binding agreement (e.g. as a “threat” in case of disagreement)? 5. Do you actively apply and enforce the contract? Or do you avoid coming back to contractual agreements as this would demonstrate a relational resentment? Influence on relationship 6. Do contract-related experiences influence your opinion of and your behavior towards the provider (e.g. provider’s behavior during contract negotiation)? 7. Providing examples from your past experience, would you say that a satisfactory solution to disagreement is found, whether it is based on contractual agreements or not? Link to control and relational norms

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8. Has the design of operational control mechanisms been considered during contract negotiation? 9. Have behavioral expectations been considered during contract negotiation (e.g. establishing a shared understanding about how open information should be exchanged)? 10. Do you think values, beliefs, and behavioral expectations reinforce and influence formal agreements and vice versa?

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

11. If so, are these complementarities actively considered in the design of the control structure (e.g. written statement of intent to act cooperative)? How?

F) Relational Governance (5/20 min) State of relational norms 1. Would you say that the individuals in your organization share certain expectations about how the service provider should behave? What kind of behavior would this address (e.g. cooperation, conflicts)? 2. Providing examples from your past experience, would you say that… 2.1. both parties are willing to help out each other and cooperate well? 2.2. activities between both parties are well coordinated and tasks are effectively synchronized? 2.3. disagreements between both parties are almost always successfully resolved? 2.4. both parties are communicating well with each other and actively share information? 2.5. the relationship between both parties in and of itself is actively and successfully managed using standardized processes and procedures? Reliance on relational norms (extensive version) 3. How „present“ are values, culture, and beliefs in daily operation? 4. Do they actively influence the collaboration? Or is the service provider rather independent of the values and norms of your organization? Influence on relationship (extensive version)

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5. Have the above mentioned examples influenced your expectations and attitude towards the provider? If yes, how? 6. Do you make an effort to develop and maintain shared values and beliefs? If yes, how? Dynamics of relational governance (extensive version) 7. Have relational norms been evolved over time? xviii

Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

8. Have relational norms been actively propagated over time? 9. If so, what have been causing events for this?

G) Control (25 min) Organizational perspective on control 1. Is there a dedicated structure or organization in place to control the service provider? How does it look like? 2. What are predominantly used mechanisms to influence the behavior of the service provider? Applied control modes 3. Are there any outcome oriented control mechanisms in place (implementation dates, budgets, performance levels)? 3.1. How are these mechanisms implemented? 3.2. How and where are the expected outcomes specified? 4. Are there any behavior oriented control mechanisms in place (job description, procedures, instructions)? 4.1. How are these mechanisms implemented? 4.2. How and where are the expected behaviors specified? 5. Are there any social-based control mechanisms in place (expectations of behavior, values)? 5.1. How are these mechanisms implemented? 5.2. Who is the initiator of such mechanisms?

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5.3. How are the underlying norms developed and shared? 6. Are there any self-control mechanisms in place (self-management, self-set goals)? 6.1. How are these mechanisms implemented? 6.2. How are people encouraged to apply these? Purpose of control 7. Is control mainly applied for financial or legal reasons (invoicing, claims)?

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

8. Or is control deliberately used to influence the relationship between both parties (e.g. monitoring performance to build trust)? Link to contract and relational norms 9. Has the design of operational control mechanisms been considered during contract negotiation? 10. Do you think values, beliefs, and behavioral expectations reinforce and influence formal agreements and vice versa? 11. If so, are these complementarities actively considered in the design of the control structure? How? Dynamics of control 12. Have control mechanism been evolved or adjusted over time? 13. If so, what have been causing events to evolve or adjust applied control mechanisms?

As far as possible, used interview questions have been based on prior research. Table 17 provides an overview of questions and their respective sources.

Question (Paragraph)

Question (Number)

Source

A)

All

Self-developed

(1), (3) – (4)

Self-developed

(2)

Goles & Chin (2005)

C)

All

Cullen et al. (2008)

D)

All

Self-developed

(1)

Goo (2010)

(7)

Ferguson et al. (2005)

(2) – (6), (8) – (11)

Self-developed

(1), (3) – (9)

Self-developed

(2)

Goles & Chin (2005)

All

Self-developed

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B)

E)

F) G)

Table 17 - Sources of interview questions

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest

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Autorenprofil

Daniel Kuhlmann, Jahrgang 1980, studierte Betriebswirtschaftslehre mit Schwerpunkt Wirtschaftsinformatik an der Universität Mannheim. Während seiner Studienzeit arbeitete er als freiberuflicher Berater sowie in der Abteilung für IT Strategie und Organisation bei Horváth & Partners an diversen IT-Projekten. Aktuell ist er bei der European Space Agency in Rom im Bereich IT Service Management beschäftigt, wo er

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Partnerschaften mit IT Dienstleistern steuert und betreut.

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Governing IT Outsourcing Relationships: The roles of contract, control, and relational norms : The roles of contract, control, and relational norms, Diplomica Verlag, 2012. ProQuest