When Penalty Fails: Modeling Contractual Misincentives With Evidence From Portugal ITO Agreements

Abstract

A misincentive is characterized as an incentive producing the opposite effect of motivating or preventing some specific action. In some circumstances, contract penalties such as sanctions and fines on late delivery or low-quality software encourage the irregularities instead of preventing them from occurring. The present study models misincentive behaviors in Information Technology Outsourcing (ITO) transactions as a Principal-Agent problem. Considering the non-linear relationship in software vendors’ cost structure and the client’s sensitivity to the product/service quality and delivery time, we offer theoretical modeling elucidating the best responses on agreements under incomplete and asymmetric information. Some empirical evidence of contractual misincentives is reported in outsourcing arrangements between private institutions and public administrations in Portugal. The contracts were divided into three categories: pure contracts with no incentive clauses, contracts with no explicit monetary penalties, and contracts under explicit sanctions. The results suggest that the knowledge of the penalty reduces the Agent’s uncertainty about the Principal’s cost structure and might lead them to intentionally delay the delivery of the technology.

Relational governance in the ITO: the role of self-determination theory and the mediating effect of control perceived

“…This is also in line with Nepomuceno et al. (2018, 2020, 2022) misincentive perspective by stating that increasing service costs depend on the expected returns from past low-performance agreements.…”

“…However, when relationships fail, the hiring company increases IT service costs by more than 50% compared to successful relationships (Akkermans et al, 2021). This is also in line with Nepomuceno et al (2018Nepomuceno et al ( , 2020Nepomuceno et al ( , 2022 misincentive perspective by stating that increasing service costs depend on the expected returns from past low-performance agreements.…”

“…, 2022). Thus, allowing the understanding of the supplier's behavior for decisions related to the maintenance or design of outsourcing contracts/relationships (Nepomuceno et al ., 2018, 2022). Already in cases where this relationship is in the process of maturation and consolidation it is necessary to emphasize the satisfaction of the competence and autonomy of this manager (Rigby and Ryan, 2018).…”

“…In this case, upper management needs to promote, the necessary conditions, for the management of intrinsically motivated behavior. To achieve this end, public institutions can cultivate a good relationship between customers and IT suppliers through efficient agreements and communication, which allow modeling negotiation strategies and personalities focusing on the satisfaction of the basic psychological variables of SDT, being pertinent to avoid the turnover of these servers in cases where the relationship with the IT supplier is well established (Nepomuceno et al, 2022). Thus, allowing the understanding of the supplier's behavior for decisions related to the maintenance or design of outsourcing contracts/ relationships (Nepomuceno et al, 2018(Nepomuceno et al, , 2022.…”

“…To achieve this end, public institutions can cultivate a good relationship between customers and IT suppliers through efficient agreements and communication, which allow modeling negotiation strategies and personalities focusing on the satisfaction of the basic psychological variables of SDT, being pertinent to avoid the turnover of these servers in cases where the relationship with the IT supplier is well established (Nepomuceno et al, 2022). Thus, allowing the understanding of the supplier's behavior for decisions related to the maintenance or design of outsourcing contracts/ relationships (Nepomuceno et al, 2018(Nepomuceno et al, , 2022. Already in cases where this relationship is in the process of maturation and consolidation it is necessary to emphasize the satisfaction of the competence and autonomy of this manager (Rigby and Ryan, 2018).…”