I was reading an interesting article from Olivier E Williamson, who won the 2009 Nobel prize for economics....Just curious if it was due to Obamanomics (the obama factor you see...the guy who won Noble peace prize for 2009 for just being what he will be (did)/should be (do) than what he is)....He has viewed the entire transaction cost economics from the contract lens...there are few powerful insights that he shared and it reverberated with my current thinking and challenges that I'm facing at work on day-day basis...
1. Contract refrative index theory (This term is copyrighted, dont steal or quote this term ;-): Contracts tries to capture ideal transaction cost, but often the real/hidden transaction costs are visible when it is actually implemented.
How is it relevant to IT outsourcing Industry: Simple you may present great solution and contract it with client, but if you do not have the experience/acumen to see through the real/hiddent transcation costs that may emerge during implementation, you will end up losing the game. maybe not in short-term but long-term.
2. Hostage Theory: All contracts are made for mutual gains and at the same time it should also capture/share losses if the other party terminates.
How is it relevant to IT Outsourcing: Simple no matter how you structure a deal, if either party are not willing to share losses as equally as gains it will be an unsustainable deal (meaning we cant execute the deal without heartburns and with degree of fairness that will leave the client and supplier happy).
3. Incomplete contracts: No contract out there is completely complet in the realm of bounded rationality. In reality there are so many factors to be considered, that it is impractical to nail it down on contracts
How does it apply to IT outsourcing contracts: Common guys (I mean lawyers) just wake up, dont think you have protected your client (i mean in terms of lawyer, the cupplier and the client) from every feasible uncertainity. We are all humans and our rationality is bounded in utopian world but predictably irrational in real world.
So what does it make my position on lawyers/contracts and analysis of why Indian Pure play firms are more successfull in some areas that large outsourcing vendors who have presence in India...I still stick to my view that lawyers overcomplicate things and loose focus that business transactions sometimes have to be based on trust and good intentions....An optimist view not a pessimist view....Have an open mind for the predictably irrational!
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