Do contracts matter?

Ousourcing contracts are largely viewed as control mechanisms that allocate (outsourced) process risk between the client and vendor. This allocation of risks and rights establishes cooperative intent between the firms and precludes each firm acting in its own self-interest. So, (hypothetically), if the client firm was to trust the vendor implictly (reiterate, hypothetically), does it imply that the relationship would still need a contract?

My analyses over the last few days scream an emphatic yes. This is because contracts don't address issues of incentive conflict alone in the outsourcing relationship; they also address issues of cognitive conflict. Cognitive conflict refers to the fact that although the client and the vendor might share cooperative intent, they might not have a shared understanding of process workings or the responses required to enact such intent and adapt effectively to process contingencies. Cognitve conflict in the outsourcing relationship is largely addressed by sharing of information, not risks, rights and rewards.

And how does the contract help in this regard? Well, the contractual specification of task and reward interdependence influences patterns of interactions and therefore, strength of ties between the firms. For example, outsourcing initiatives where the user firm and the service provider jointly own the outsourced process often formally specify modes of integration such as steering committees, executive dashboards and cross-functional teams that meet regularly to resolve process issues and discuss project updates and progress, thereby, creating norms for collaboration that are conducive to joint action and information sharing and dissemination, all of which help mitigate cognitive conflict. So, as some researchers are pointing out, the codification of knowledge and information sharing routines in the contract helps build relational capital and collaboration capabilities. A knowledge repository, if you will, for effective coordination between the firms.

Funny, we've made it all about trust so far. The lower the trust levels between the firms, the more complex will be the contract. Not any more.

But again, here's how my discussion of this post with an outsourced process owner went earlier this week:
Me: "Assume you trust your provider completely..."
He: "Deepa, there's no such thing as trust in business..."

My research's moot.

Inspired!

A loyal (and considerate, might I add) reader pointed me to this article in Business 2.0 earlier today. Fred Wilson, Managing Partner of Union Square Ventures writes about how blogging has become a critical piece of businesses:

"Blogs need to be real and personal. Reading it should be like hanging out with you. I play music for my readers. I show them videos I like. I tell them what I did over the weekend. And I tell them what is happening in the technology, Internet, and VC markets.

And it works. About 50,000 people come to my blog every month. The site brings in about $30,000 a year now in ad revenue, and I donate it all to charity. Most important, I'm getting to know entrepreneurs of all kinds - in India, Australia, England, China, and Silicon Valley. They read my blog, correct me when I'm wrong, pound the table when they agree with me. I get to know them, and they get to know me. When it comes time for them to raise money, they know who to ask. And for me, the blog acts as an amplifier and a filter. I see many more opportunities, but they are also way more relevant. It makes me a better investor."

I think blogs play an equally important role in research as much as they do in practice. I was recently reading an article in the Academy of Management journal (a leading academic journal in strategy) that the relational foundation of research, i.e. the set of interaction partners whom one encounters during the course of doing research, is an oft unappreciated dimension. Truth. The quality of relational interactions is key to developing and sustaining interesting research. I speak from my own blogging experience. My research on outsourcing has benefited a lot in the recent past from opinions, insights and feedback from my blog readers.

And it is my objective to increase the frequency of my posts and overall commitment levels to BPO Journal. Inspired by Wilson. After all, the blog does make me a better researcher.

My DNA Report

Considerate Creator

You too can get yours here. Cool stuff!