IT Implementation Contract Design: Analytical and Experimental Investigation of IT Value, Learning, and Contract Structure
Speaker
Abstract
| This paper analytically and experimentally investigates how firms can best capture the business value of information technology (IT) investments through IT contract design. Using a small sample of outsourcing contracts in several industries, coupled with a review of contracts used by a major enterprise software maker, we determine the common provisions and structural characteristics of contracts, which we use to develop an analytical model of optimal IT outsourcing contract design with principal–agent techniques. The model captures key characteristics of IT contracts, including a staged, multiperiod project structure, learning, probabilistic binary outcomes, variable fee structures, and implementation risks. We establish theoretical relationships among IT value, learning, and contracting (scope and fee structure), such that firms adopting properly designed IT contracts have greater IT value compared with those that do not; specifically, incentive contracts with a multiperiod structure and the appropriate project scope create greater overall IT value, because they give the implementation team stronger incentives to exert greater effort; they also capture learning benefits and mitigate risks. The results are consistent with prior empirical findings that payoffs from enterprise resource planning implementation are concave with the scope of the project. The model predictions and key assumptions are tested and validated using controlled laboratory experiments. |
| Contact information: |
| Fang (Vivian) Zhong |
