Predictors of Formal Control Usage in IT Outsourcing Partnerships

Abstract

Client control over the vendor has been identified as a critical factor in successfully managing information technology outsourcing relationships. Though prior studies have suggested that “how much” control is exercised has significant ramifications for individuals and firms, relatively few studies have operationalized and studied this important concept. In this study, we define the amount of formal control as the variety of mechanisms used by a client to exercise control over a vendor and the extent to which the mechanisms are used. We use literature on transaction cost economics and organizational control to build a model of the antecedents of the amount of formal control. The study uses data from 138 client-vendor matched pairs working in eight large, long-term, ongoing outsourcing arrangements to test specific hypotheses. The results suggest that clients who have technical or relationship management knowledge, or have high levels of trust in their vendors, use formal control mechanisms to a lesser extent. On the other hand, task uncertainty was found to be positively associated with the amount of formal control, and the degree of core competency involved in the outsourced activity was not found to be related to the amount of formal control. These results are discussed, and implications for research and practice are drawn.