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Furthermore, adaptation costs have a direct impact on the choice, whereas the anticipated coordination costs do not have a significant direct impact on contract choice. The results show that maturity is negatively associated with anticipated adaptation costs, while modularity and IT detachability are negatively related to anticipated coordination costs. Hypotheses were tested using ordered probit model. Data from 153 US companies are collected using a structured questionnaire on senior executives of functional areas of marketing, IT and finance. The research setting is the BPO for a focal firm, involving a contractor. Specifically, this research categorizes contracts types (fixed-price, time and materials and hybrid contracts) based on levels of contract design comprehensiveness and flexibility to change. Drawing on transaction cost economics, this study aims to examine how anticipated coordination and adaptation costs in a BPO relationship affect the choice of contract types.

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How to determine the appropriate contractual structure for an outsourcing relationship has been a major theme in the business process outsourcing (BPO) literature. The results provide good support for the main hypotheses of the study and yield interesting insights about contractual governance of ITO arrangements. Furthermore, we examine how these associations vary under conditions of fixed price and time and materials pricing structures. Drawing on transaction cost, agency, and relational exchange theories, we hypothesize the effects of transaction and relational characteristics on the specific contractual provisions, as well as on overall contract extensiveness. We then develop an empirical data set describing the contract structures across these distinct dimensions, using a sample of 112 ITO contracts from the Securities and Exchange Commission (SEC) database from 1993 to 2003. Based on insights from prior literature, from practicing legal experts, and through in-depth content analysis of actual contracts, we develop a comprehensive coding scheme to capture contract provisions across four major dimensions: monitoring, dispute resolution, property rights protection, and contingency provisions. Examining contract structures yields important insights into how the contracting parties structure the governance provisions and the factors or transaction risks that influence them. However, considerably less attention has been paid to actual contract structures used in IT outsourcing (ITO). Outsourcing of information technology (IT) services has received much attention in the information systems (IS) literature.