Strategic innovation in IT outsourcing: Exploring the differential and interaction effects of contractual and relational governance mechanisms

Innovation in IT outsourcing, in which client and vendor aim at co-creating strategic innovation, is becoming a key ingredient of contemporary sourcing arrangements. However, innovation in ITO is regarded as being a paradox as innovation’s dynamic nature conflicts with established guidelines for successful ITO governance. To date, knowledge about how to accommodate innovation in ITO governance is embryonic. Particularly unclear are the differential and interaction effects of contractual and relational governance mechanisms on relationship learning and joint innovation. To investigate these effects, we propose and validate a research model through survey data from 344 senior-level IT employees of firms that collaborate with a vendor on strategic innovation. Results indicate that while contractual mechanisms primarily determine joint innovation performance, relational mechanisms are central to relationship learning. Results show an inverted U-shaped relationship between governance mechanisms and joint innovation and an additive complementary relationship between governance mechanisms and relationship learning.