Capabilities, Contractual Hazards, and Governance: Integrating Resource-Based and Transaction Cost Perspectives

TLDR

The study investigates how contractual hazards and technological capabilities jointly shape governance, suggesting that robust capabilities enable outsourcing even amid hazards. The authors examined 405 service contracts from a single IT firm to evaluate the impact of contractual hazards on transaction governance. Findings indicate that weak capabilities increase subcontracting, strong capabilities influence outcomes only when hazards exist, and firms with similar hazard levels adopt different transaction structures.

Abstract

We address independent and joint effects of contractual hazards and technological capabilities on governance, arguing that strong technological capabilities improve a firm's ability to govern transactions, making outsourcing feasible despite certain contractual hazards. Examining a random sample of 405 service contracts from a single information technology firm, we found that contractual hazards encouraged internalizing transactions. Weak technological capabilities increased the likelihood of subcontracting, but strong technological capabilities had no independent effect. The latter had impact only in the presence of certain contractual hazards. These results illuminate why firms facing similar levels of contracting hazards organize their transactions differently.