The role of formal and relational governance in information technology outsourcing: A study in aviation industry

There are many benefits for organizations to use information technology outsourcing such as, lowering the IT product/ service costs, accessing modern technologies very fast, solving technical problems without increasing the number of staff, being able to focus on the main duties of the business; however it also contains certain risks like, increasing dependence on the sub-contractor, losing the know-how on IT, existence of hidden cost of ownership and the possibility of an opportunist behaviour of the sub-contractor. Therefore, it is essential for managers to choose the appropriate way of governance when managing the relations with the IT sub-contractors. There are two main types of governance mechanisms namely; formal (contract) and relational (relations norms) in the management of inter-organizational relations. Formal governance is a kind of legal protection mechanism since it indicates in writing the expected results and behaviours regarding the relation whereas associational governance enables more flexible reactions due to unforeseen situations regarding the relations. This study conducted in the aviation sector where information technologies are intensely used, has two main goals which are to explain how the businesses operating in the aviation sector govern their relations with the IT sub-contractors and to test the effect of governance mechanisms in explaining the success of IT outsourcing. This study which is planned as a mix design research, uses qualitative methods to answer the first research question and quantitative methods to answer the second one. The results of the qualitative research conducted strongly emphasize that the existence of social mechanisms such as; trust, restrain on the power, sharing knowledge, flexibility are just as important as formal contracts for managers when governing a relation. The results of the quantitative research indicate that the success of IT outsourcing can be statistically explained seperately by both formal contracts and relational norms meaningfully. In addition to that, the result is that the two governance mechanisms are complementary mechanisms, not substitution. Keywords: IT outsourcing, Formal governance, Relational governance,Transaction cost theory, Relational exchange theory, Aviation industry