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Title: Trust-contract dynamics in IT outsourcing: a case study
Authors: Klaassen, LG
Keywords: it
Issue Date: 21-Jun-2008
Publisher: Open Universiteit Nederland
Abstract: The dynamic relation between trust and control in managing alliances is getting a lot of attention in the scientific literature the last couple of decades and although a lot of research has been done in this area, the results are not yet conclusive. In order to contribute to the development of a theory on this dynamic relation I performed a longitudinal case study in which I analyzed how the evolution of (dis)trust between the alliance partners influenced the contents of the renewed contract, when they agreed to continue their relationship. Before performing this explorative, empirical research, I first developed a theoretical perspective in order to put the case study into a proper context for analysis. Considering the objective of my research, especially the theories regarding the design of (alliance)contracts, the development of trust and the relation between contracts and trust are relevant in order to develop a theoretical perspective. Transaction Cost Economics theory and derivatives mainly focus on finding an optimal organizational arrangement to govern a specific type of transaction. Although these theories play a paramount in the scientific literature about the management of alliances, they don’t pay much attention to nature, form and contents of contracts. Anderson and Dekker (2005) however demonstrated that transaction characteristics, like size and asset specificity, and transaction partner characteristics, like competition and power, influence the extensiveness of contracts. In order to assess the development of trust I studied several researches in this area. Based on the results of these researches I decided to distinguish between interpersonal and interorganizational trust on the one hand and between intentional (affection, goodwill) and competence (cognition) trust on the other hand. About the relation between trust and contract there is a lot of debate between scholars, especially with regard to the questions whether trust and contract are complements or substitutes and whether trust precedes contract or vice versa. I studied two recent researches in this area. Coletti, Sedatole and Towry (2005) concluded there is a positive relation between control systems and trust, provided the results of the cooperation are visible for the alliance partners (feedback). Klein Woolthuis, Hillebrand and Nooteboom (2005) however concluded that contracts must be interpreted within their dynamic social context. It’s not only about the mere presence and completeness of contracts, but also about the intentions with which the contract is drawn up and the actual use of the contract. To perform a longitudinal case study I selected an IT outsourcing contract that was signed in 2001 for seven years and that was renewed and extended in 2005 for again seven years. I was given access to a set of Lotus Notes databases that contained all documentation regarding the outsourcing contracts collected by the IT service provider. The total size of these databases was more than 3 gigabytes and they contained about 5,000 Lotus Notes documents. In order to investigate these documents in a scientifically justified way I decided to use content analysis (Krippendorff, 2004) as my main research technique. The objective of content analysis is to make replicable and valid inferences from texts (or other meaningful matter) to the contexts of their use. The context for this research has been provided by the theoretical perspective as described in the previous section. Before inferences can be drawn from the available texts within the defined context, the data must be prepared in a specific way. This data making process consists of four steps: unitizing, sampling, coding and reducing. I decided to use Lotus Notes documents as sampling unit and text fragments as coding unit. Because not all available documents have an equal relevance for answering my research questions, I specifically sampled the documents that seem to contain information about the relationship between the outsourcing organization and the IT service provider (purposive sam- pling). This sampling effort resulted in the selection of 294 documents, which I added to a spreadsheet (rows) in chronological order. In order to code these documents I defined 13 variables (a.k.a. codes or concepts) based on the theoretical perspective and the knowledge I acquired about the contracts and the relationship during the document selection. After adding these variables to the spreadsheet (columns), I searched the sampled documents for relevant text fragments and added these to the appropriate cells in the spreadsheet. This effort resulted in 208 selected text fragments from 41 different Lotus Notes documents. Because the number of selected text fragments is too low to apply statistical reduction techniques, I decided to omit this step from the data making process. The outsourcing organization and the IT service provider in this case study started negotiating about an outsourcing contract in 2001 based on a proposal from the IT service provider. After a joint verification project both organizations decided to sign the contract at the end of 2001. The seven-year contract had a total contract value of about 73M€. As could be expected from the contract design theories I have studied, the contract was very extensive. Because the IT service provider had much more experience in this area, the provider led the negotiations and the signed contract was much more targeted to the competencies of the provider than to the needs of the outsourcing organization. After the contract was signed, the transition phase started. During this phase the execution of the IT operations of the outsourcing organization was done under the responsibility of the IT service provider. After half a year the service provider started working according to the agreed service levels. Besides this business-as-usual, several projects were executed by the IT service provider and several contract amendments were agreed. The execution of the contract is however troublesome and the outsourcing organization is dissatisfied about the performance of the IT service provider, especially with regard to the procedural side. After signing the con- tract, the outsourcing organization trusted the competence of the IT service provider and had a few doubts about the intentions of the provider. During the execution of the contract however, the trust of the outsourcing organization in the competence of the IT service provider is decreasing and this exacerbated the doubts about the provider’s trustworthiness. The provider does several attempts to turn the tide by planning and executing improvement programs, but despite these efforts, the provider wasn’t able to regain trust. Eventually the outsourcing organization and the IT service provider decided early 2005 to start negotiating about a renewed contract to break out of this downward spiral of trust. These negotiations were successful and in May 2005 a new outsourcing contract for seven years was signed with a total contract value of about 56,5M€. This new contract was as extensive as the first one and in the structure of the contract there weren’t many differences. From a customer satisfaction review held in December 2005 it appeared however that the outsourcing organization was satisfied about the performance of the IT service provider and expected further improvements in the years to come. Looking at the development of trust of the outsourcing organization in the IT service provider from the theoretical perspective, it can be concluded that both organizations have different views regarding the use of the contract. The IT service provider mainly considers the outsourcing contract as a technical aid to manage the relationship. The outsourcing organization however is threatened by the extensiveness of the contract and considers this as a sign of distrust. Although I agree with Klein Woolthuis et al. that the intentions with which the contract is drawn up and the actual use of the contract are relevant, I would like to add an extra dimension to this. Not the actual intentions and use of the contract of an alliance partner are decisive for the development of trust, but how the other alliance partner perceives these intentions and use of the contract. In this case study the IT service provider even used the contract itself in trying to change the perception of the outsourcing organization about his intentions. Apparently, the IT service provider was successful in this attempt, because a new outsourcing contract was signed and the trust of the outsourcing organization in the competence and intentions of the IT service provider seemed to have restored. Although in this case the development of trust during the execution of the first outsourcing contract didn’t have much impact on the ‘letter’ of the new contract, it did impact the ‘spirit’ of the contract. This conclusion points to some interesting options for further research. First, it might be investigated which factors influence the subjective belief regarding the intentions of the alliance partner. Once these factors are identified, I would suggest investigating how an alliance partner can appropriately influence the subjective belief of the alliance partner in its intensions with the usage of the contract.
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