The Alignment of Partnering Strategy, Governance and Management in R&D Projects: The Role of Contract Choice

Firms increasingly look outside their organizational boundaries to identify partners that can improve the effectiveness of R&D projects. The strategy for using partners, however, varies significantly across projects. In some, partners are used primarily to lower development costs and/or supplement development capacity; in others they are used to improve the quality of the final product. How should these variations in partnering strategy impact the governance and management choices made within projects? We examine this question, using data on 172 R&D projects from six different industries. We test hypotheses that examine first, how a firm’s choice of contract—whether fixed price, time & materials, or performance-based—is shaped by its partnering strategy; and second, how this choice subsequently affects the levels of partner integration and partner performance observed in a project. Our results indicate that the choice of contract is a function of a firm’s partnering strategy, more flexible contracts being preferred in projects that seek long-run capability-based benefits, and where partnering relationships are broader in scope. These choices, in turn, impact the benefits associated with partner integration. In particular, higher levels of partner integration are always associated with higher project costs, but are associated with higher product quality only in projects using more flexible contract types. Furthermore, major deviations from the “optimal” choice of contract increase the costs and decrease the benefits associated with partner integration. We end by discussing the implications of our findings, and suggest new directions for future research.