Codifiability, relationship-specific IT investment, and optimal contracting

Abstract

The last few years have seen on one hand an explosion in the number of e-marketplaces, including a variety of electronic exchanges in the B2B arena, and on the other hand the closing of or near collapse of several prominent exchanges (e.g., Chemdex/Ventro). The question addressed in this paper is what are the underlying factors that affect which transactions are likely to be supportable by e-exchanges. In particular, we identify and study three factors: supplier management; idiosyncratic investments in information systems; and codifiability (i.e., digitalizability) of product and order-fulfillment specifications underlying transactions. We show that transaction codifiability plays a fundamental role in influencing the nature of sustainable contracting and IT investments in e-markets. In addition, the framework we developed integrates several perspectives, often in tension, concerning the nature of forward and options contracts as mutually supporting elements of an optimal portfolio of long-term sourcing in B2B markets with less than perfect codifiability.