The Role of Service Level Agreements in Relational Management of Information Technology Outsourcing: An Empirical Study

Abstract

This study extends the view that formal contracts and relational governance function as complements rather than as substitutes. We investigate how specific characteristics of service level agreements (SLAs) impact relational governance in information technology outsourcing relationships. Eleven contractual elements (categorized into three SLA characteristics: foundation, change, and governance characteristics) are hypothesized to act as complements of three relational governance attributes: relational norms, harmonious conflict resolution, and mutual dependence. Data for the study were collected through a survey of South Korean IT executives. Results of the study support the fundamental proposition of complementarity between formal contracts and relational governance, and indicate that well-structured SLAs have significant positive influence on the various aspects of relational governance in IT outsourcing relationships. However, the study also reveals that change characteristics of SLAs may act as a substitute for relational governance as these characteristics were found to dampen the level of trust and commitment through moderation effects. Overall, the findings support the proposition that well-developed SLAs not only provide a way to measure the service provider's performance, but also enable effective management of outsourcing engagements through the development of partnership-style relationships with high levels of trust and commitment.