Measuring Risks of Organizational Failure in Contract Exchange Structures

Abstract

Governmental agencies increasingly contract out service delivery, but have little understand- ing of the systemic risk associated with dependence on contractors in service delivery networks. In this study, affiliation network concepts are used to develop a structural index of government dependence on actors in service delivery networks without joint service delivery. Networks in- clude direct links to government funders and indirect links among contracted programs based on shared parent organizations. Understanding the structure of governance arrangements has practical implications for governance, in terms of understanding government dependence on a particular contractor and the risk associated with organizational failure of those contractors. Governance structures may also influence individual incentives to perform. This study makes two contributions to the governance literature. First, the study offers conceptualization of con- tracted programs as networked structures of exchange even where joint production does not oc- cur. Second, an index is proposed to capture the position of individual organizations in complex networks of exchange with government. This index can be used to determine the dependence of government on a specific actor in the service delivery network along with the risk to the network should a particular organization fail. This index can also be incorporated into statistical models of contract performance.