Contract Performance in Offshore Systems Development: Role of Control Mechanisms

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, 116 SrIVAStAVA AND tEO 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. Key wordS and phraSeS: contract performance, control mechanisms, control modes, control theory, interaction effects, offshoring, outsourcing, project governance, software development. a Central problem faCed by organizationS that outsource systems development pertains to managing the relationship between the client and vendor for better performance. Often such organizations use a variety of control modes for achieving this. Control is defined as a set of systems and procedures designed to motivate performance to attain desired objectives [28, 32]. It is through the exercise of control that clients can motivate vendors to deliver applications that meet the clients’ specific requirements and are of value to them. In recent years, many outsourced systems development projects have failed to deliver their intended benefits [63]. the problem is critical for offshore systems development projects, where about 50 percent of the projects fail outright or do not meet client expectations in the first place [49, 57]. therefore, research that focuses on explaining offshore contract performance is of value to both research and practice. From a control theory perspective, three gaps in information systems development (ISD) control are particularly noteworthy. First, prior research has either focused on factors (e.g., project size, outcome measurability, behavior measurability) explaining the choice of control modes [32, 52] or has examined the specific control modes (e.g., outcome, behavior, clan, and self-control modes) used for a project [8, 28]. relatively few studies have examined the moderating effects of control modes on project perforCONtrACt PErFOrMANCE IN OFFShOrE SyStEMS DEVElOPMENt 117 mance, especially in the context of outsourcing contracts [63, 64]. Increasingly, firms are utilizing vendors (both onshore and offshore) to cater to their systems development needs; hence, contractual ISD requires deeper theoretical understanding from a control perspective. Moreover, prior literature on contract administration has primarily used either transaction cost economics (tCE) or relational exchange perspectives for examining exchanges between the client and vendor [27, 42, 55]. In contrast, this research, although primarily grounded in the control literature, also draws on tCE and relational exchange perspectives to explain offshore ISD contract performance. Second, although the control literature distinguishes among different control modes (e.g., formal and informal control modes—outcome control and behavior control being formal modes; clan control and self-control being informal modes) [28], it does not explicitly describe control mechanisms acting within each of the different control modes. Control mechanisms are the ways in which different control modes are enacted, that is, “what” and “how” control modes operate. Often the description of control modes subsumes the underlying control mechanisms, that is, control modes depict not only “what” is controlled (e.g., what outcomes and behaviors) but also “how” it is controlled (i.e., the processes used to attain the desired outcomes and behaviors). Distinguishing between different control mechanisms (i.e., what and how) within each of the control modes will offer a more nuanced theoretical understanding of the control portfolios in the context of contract administration. third, prior research has shown that clients can choose to exercise either formal or informal modes of control in their relationship with vendors [8]. recent studies have also shown that organizations can choose to use a mix of different modes of control. In fact, in an outsourcing relationship, different modes of control could interact with one another for explaining the systems development ambidexterity [63]. It will be interesting to examine if such relationships also exist for systems development performance. the control literature, similar to tCE and relational exchange perspectives, views formal and informal control modes as substitutes. In contrast, the interfirm adaptation perspective argues them to be complements [7, 63]. recent research grounded in the control literature has shown that the two modes not only function as substitutes but also as complements [63]. this further alludes to the theoretical tension described by Anderson and Dekker [3] calling for deeper examination of complementarities and substitution effects among different control modes [63]. hence, it is theoretically motivating to examine the interactions within different control mechanisms acting across control modes. this should offer a more granular understanding of the outsourced ISD performance. the paper begins the discussion by theorizing for two control mechanisms operating within each of the control modes. Structural control mechanism describes the “what,” or the structure of the control mode. Process control mechanism explains “how,” or the process through which the control mode is enacted. Almost all outsourced client–vendor relationships function under the broad framework of a formally agreed upon contract that describes the structure (expected outcomes or behaviors) of their relationship. Because it is very difficult to specify complete contracts, contracts are generally bounded in terms of their extensiveness and completeness [3, 61]. hence, 118 SrIVAStAVA AND tEO contracts vary in terms of their contract specificity, that is, the explicitness of details specified for coordinating the relationship between the client and vendor [50]. Despite differences in their contract specificities, client and vendor have the option of choosing “how” they wish to govern their relationship. From a purely transactional perspective, they may decide to follow the specified contract very closely, in a mechanistic fashion, by not allowing for any deviations from the prespecified outcomes and procedures. We term this mechanism of contract governance as mechanistic governance mechanism. On the other hand, despite having a prespecified contract, client and vendor can choose to follow the relational perspective. this implies that they rely more on their ongoing relationship and mutual trust for deciding about emergent operational situations, rather than following the contract very closely. We term this mechanism of contract governance as relational governance mechanism. In actual practice, although all client–vendor relationships have a formally specified contract (structural control mechanism), they follow a mix of mechanistic and relational governance (process control mechanisms). Further, although prior studies have examined the role of contracts and relational mechanisms, the explicit conceptualization and role of mechanistic governance needs deeper investigation. In relation to the identified research gaps, this study is guided by the following research questions: RQ1: Does mechanistic governance complement or substitute the benefits of contract specificity in enhancing ISD performance for offshore outsourced projects? RQ2: Does mechanistic governance complement or substitute the effect of relational governance in enhancing ISD performance for offshore outsourced projects? the idea is developed that mechanistic governance, which is a process control mechanism, interacts with the contract specification, which is a structural control mechanism, in affecting ISD contract performance in terms of output quality and cost. Based on the evaluation information required for the two kinds of performance measures, we theorize and develop hypotheses for mechanistic governance as complementing the impact of contract specificity on performance. Similarly, we also theorize and hypothesize for mechanistic governance as substituting the impact of relational governance in affecting ISD performance.