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Matthew K.O. Lee: Associate Professor, City University of Hong Kong, Hong Kong
Introduction
Information technology (IT) outsourcing is the subcontracting of a part or all of the IT function of a company to an external outsourcing vendor[1]. The degree of subcontracting involved varies across the whole spectrum ranging from just one part of the IT function (such as equipment maintenance) to the wholesale outsourcing of an entire IT department[2]. Attracted by the desire to cut cost and improve performance continuously, IT outsourcing has gained tremendous momentum in the past few years. Corporations in North America have led the way so far, with the largest IT outsourcing market in the world worth tens of billions of dollars. Meanwhile, leading US outsourcing vendors are entering the European market in strength, with EDS's bold takeover of SD/Scicon in Europe during 1991[3] marking a major milestone in that direction. The trend is expected to spread to the economically booming Asia-Pacific region soon. In 1991 alone, the average value of an IT outsourcing contract was in the region of US$500 million, while a couple of contracts exceeded the US$2 billion mark[3]. The significance of IT outsourcing cannot be over-estimated. Indeed, IT outsourcing has been identified by Clark[4] as one of the six most important strategic management issues confronting organizations in their management of corporate systems.
Contrary to popular belief that IT outsourcing is in the nature of partnership and strategic alliances[5], Lacity and Hirschheim[6] have exposed this as an outsourcing "myth". Outsourcing vendors do not share the same profit motives as their outsourcing customers. A tight contract is the only mechanism to ensure that expectations of the outsourcing customer are met. Outsourcing customers researched by Lacity and Hirschheim[6] all agreed that the contract was the number one key issue to a successful outsourcing relationship. Research on IT outsourcing contractual issues tends to be mostly theoretical and very limited in scope. For example, Whang[7] analysed software development contracts using a game-theoretic model incorporating information and incentive issues but conceded that the model, though mathematically neat, would have very limited practical applicability. Richmond and Seidman[8] also analysed software development contracts but used a transaction cost modelling framework instead. There is relatively little literature available on the systematic and practical treatment of issues...