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"Contract Duration and Extensibility: An Empirical Analysis of IT Outsourcing Contracts"

Prasanna Karhade, Ramanath Subramanyam, and Anjana Susarla

 

First Author :

Prasanna Karhade
Business Administration
University of Illinois at Urbana-Champaign
1206 S. Sixth Street
M/C 706
Champaign, IL 61820
USA

karhade@uiuc.edu

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Second Author :

Ramanath Subramanyam
Business Administration
University of Illinois at Urbana-Champaign
1206 S. Sixth Street
Room 350 Wohlers Hall, M/C 706
Champaign, IL 61820
USA

rsubrama@uiuc.edu

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Third Author :

Anjana Susarla
Department of Management Science
University of Washington Business School
Box 353200
Seattle, WA 98195
USA

susarla@u.washington.edu

 
 
Abstract :
 
Firms use formal contracts as governance devices to manage their inter-organizational relationships. We examine 52 such contracts written for Information Technology (IT) services to investigate whether they possess properties as suggested by contract theory. We combine constructs from transaction costs economics and agency theory to understand drivers of contractual properties, specifically contract duration and provisions of contract term extension clauses. Contrary to theoretical predictions, we find that in the domain of IT contracts, technological uncertainty, and not asset specificity, is associated with longer contractual commitments. Further, we find that firms craft extensible contracts for tasks that are highly programmable.
 
 
Keywords :
 
agency issues, asset specificity, contract duration, contract extensibility, IT services contracts, task programmability, technological uncertainty, transactions cost economics
 
 
Footnotes & Acknowledgements :
 
ALL AUTHORS CONTRIBUTED EQUALLY.
 
 
Manuscript Received : 2005
Manuscript Published : May 2005
 
 
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