Contract performance in offshore systems development: Role of control mechanisms

Abstract

Although control theory has often been invoked to explain the coordination between client and vendor for information systems development (ISD), insights into its moderating effects for explicating ISD contract performance, especially in the offshore context, is rather limited. Such insights would enable better understanding of variables that have complementary or substitutive effects on performance. Further, the control literature talks about different control modes (e.g., formal and informal control modes classified as behavior, outcome, clan, and self-control modes) without adequately distinguishing among the different control mechanisms enacting each of the control modes. In this research, by explicitly classifying the distinctions that exist within each of the control modes, we uncover the key role played by mechanistic governance in outsourced ISD. Grounding our arguments in the information requirement for performance evaluation, the study theorizes the moderating influence of mechanistic governance on the relationships of contract specificity and relational governance with ISD quality and cost performance. We test the theorized model in a field study comprising 160 offshore ISD projects executed by Indian vendors. Our results establish the significant complementary role of mechanistic governance on the relationships of contract specificity with both cost and quality performance variables. Further, mechanistic governance substitutes the impact of relational governance on cost performance. Thus, the study theoretically as well as empirically establishes the need for conceptualizing mechanistic governance as a viable and significant governance mechanism for offshore ISD contracts. The study also teases out the distinctions between the two prime contract types in vogue for managing offshore ISD contracts, namely, fixed price and time and materials contracts. The study thus contributes not only to control theory but also to the stream of literature examining offshore ISD contracts. Further, the study provides insights to managers on having well-specified contracts and acknowledging the role of mechanistic governance for better performance. © 2012 M.E. Sharpe, Inc. All rights reserved.