IT Implementation Contract Design: Analytical and Experimental Investigation of IT Value, Learning, and Contract Structure

D. J. Wu (), Min Ding () and Lorin M. Hitt ()
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D. J. Wu: Scheller College of Business, Georgia Institute of Technology, Atlanta, Georgia 30332
Min Ding: Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802; and School of Management, Fudan University, Shanghai, P. R. China, 200433
Lorin M. Hitt: The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104

Information Systems Research, 2013, vol. 24, issue 3, 787-801

Abstract: This article 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 for enterprise information technology (EIT) projects in several industries—coupled with reviews of contracts used by a major enterprise software maker—the authors determine the common provisions and structural characteristics of EIT contracts. The authors use these characteristics to develop an analytical model of optimal contract design with principal–agent techniques. The model captures a set of key characteristics of EIT contracts, including a staged, multiperiod project structure; learning; probabilistic binary outcomes; variable fee structures; possibly risk-averse agents; and implementation risks. The model characterizes conditions under which multistage contracts enable clients to create and capture greater project value than single-stage projects, and how project staging enables firms to reduce project risks, capture learning benefits, and increase development effort. Finally, the authors use controlled laboratory experiments to complement their analytical approaches and demonstrate robustness of their key findings.

Keywords: analytical modeling; enterprise systems; economics of IS; management of IS projects; laboratory experiments; business value of IT (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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