Contracting, incentives and inter-organizational routines in Information Technology outsourcing

Firms often use formal or explicit contracts as governance devices to administer, manage and coordinate market-based transactions such as outsourced information technology (IT) initiatives. While research in economics highlights the need to design contracts effectively to minimize hazards of opportunism and provide mutual incentives for the parties to fulfill their obligations, the role of knowledge exchange and protection in these client-vendor agreements and their implications for incentive alignment are not clear. In this paper, we analyze a sample of IT outsourcing contracts to investigate contract design, specifically the mechanisms adopted by firms to protect key knowledge assets that might be crucial to a firm's capabilities. We further examine how the incentive sharing mechanisms adopted by the client-vendor dyad reflects the knowledge asymmetries and knowledge exchange mechanisms that exist in the clientvendor relationship. Our findings help us test explanations from agency theory and arguments from prior knowledge-based research.