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

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.