The mediating role of psychological contract breach in IS outsourcing: inter-firm governance perspective

Abstract

A substantial body of previous research on the client–vendor relationship has identified inter-organizational partnerships and formal contracts as important governance mechanisms for outsourcing performance. Successful IS development through outsourcing, however, may be more dependent on the people who execute the project in the field than on inter-firm relationships and agreed-upon formalities. Among individual-level variables, the special importance of psychological contracts has recently been noted in IS literature. This study investigates the mediating role of psychological contract breach between these two firm-level governance factors and outsourcing performance. By analyzing matched responses from project managers, vendor participants, and system users, we found that the effects of explicit legal contracts and partnership quality on outsourcing outcome are fully mediated by the client's perception of breach by the vendor. This study offers an extended theoretical perspective on the governance of firm-level collaboration, especially revealing that the benefits of formal contracts and inter-organizational partnerships eventually translate into satisfactory outsourcing outcomes for system users through each party's perception of breach on the individual level. Moreover, discrepancy was observed in this study between the client and vendor regarding the impact of legal contracts on individuals’ psychological contract while that of partnership was prominent in both sides.

Keywords:

• governance
• IS outsourcing
• legal contract
• partnership
• psychological contract breach
• outsourcing performance

Acknowledgements

The first author thanks the Ministry of Education (MOE) of Singapore (Grant No.: MOE2009-T2-1-062) for its financial support.

Notes

1 The interview outcome was consistent with our results. In the main survey, participants were asked to indicate the extent to which they believed that each obligation was the responsibility of the other party. For client obligations, averages ranged from 5.8 to 6.1 (out of 7), and for vendor obligations, averages ranged from 5.5 to 5.9.

2 The f ² statistic was computed using the following formula: (R² of the partial mediation model−R2 of the full mediation model)/(1−R² of the partial mediation model). The formula for computing the F statistic is f ^2*(n−k−1) when the two degrees of freedom are 1, (n−k) where n is the sample size and k is the number of constructs in the model (Chin et al, 2003).

3 An approximation for the standard error of the mediated path is computed using the formula , where p₁ is the path coefficient of the path from IV → M, p₂ is the path coefficient from M → DV, and s₁ and s₂ are the corresponding standard deviations (Hoyle & Kenny, 1999).

4 We are very thankful to an anonymous reviewer for this suggestion.

5 We thank an anonymous reviewer for this comment.

Additional information

Notes on contributors

Hyung Jin Kim

About the authors

Hyung Jin Kim is a Research Fellow at the Department of Information Systems at National University of Singapore. He holds a Ph.D. in Information Systems from Yonsei University in Seoul, Korea. His research interest includes electronic commerce, IS outsourcing, and IT usage behavior.

Bongsik Shin

Bongsik Shin is a Professor of Management Information Systems at San Diego State University. He earned a Ph.D. from the University of Arizona and has taught decision support/business intelligence, computer networking and security, electronic commerce, IT management/strategy, and statistics. His research interests include IT capability assessment, electronic and mobile commerce, and research methodology.

Hogeun Lee

Hogeun Lee is a Professor of the School of Business at Yonsei University in Seoul, Korea. He received his Ph.D. in management information systems from the University of Texas at Austin in 1993. His research area includes inter-organizational systems, electronic commerce, ubiquitous networks, and IT productivity.