Cost escalation in information technology outsourcing: A moderated mediation study

Although the issue of cost escalation has often been mentioned in the literature on information technology outsourcing (ITO), the mechanisms by which cost escalation occurs in the ex-post stage of contracting has received little attention. Evidence suggests that cost escalation is common in ITO engagements. Drawing on transaction cost economics (TCE), this study examines the determinants of cost escalation in ITO. We propose and test a research model by positing that transaction attributes or characteristics (relation-specific investments, bargaining power and, measurement difficulties) do not affect cost escalation directly, but rather through the mediation of the holdup problem and disputes between the contracting parties. Furthermore, we examine how the multi-sourcing strategy and clan mechanisms, as a soft contracting mode, moderate this mediation. Data from a survey of 132 ITO decisions were analyzed. The results provide good support for the main hypotheses of the study and yield interesting insights about the determinants of cost escalation in ITO arrangements. Both research and practical implications of the results are discussed.