Abstract:
We analytically and experimentally investigate how firms can best capture the business value of information technology (IT) investments through IT contract design. Using a small sample of outsourcing contracts for enterprise information technology (EIT) projects in several industries, coupled with reviews of contracts used by a major enterprise software maker, we determine the common provisions and structural characteristics of EIT contracts, which we use to develop an analytical model of optimal contract design with principal–agent techniques. The model captures key characteristics of EIT contracts, including a staged, multiperiod project structure, learning, probabilistic binary outcomes, variable fee structures, possibly risk-averse agents, and implementation risks. The model shows that incentive contracts with a multiperiod structure, combined with the appropriate project scope, create greater overall value, because they prompt the implementation team to exert greater effort while also capturing learning benefits and reducing risk. The results are consistent with prior empirical findings that payoffs from enterprise resource planning implementation are concave with the scope of the project. To test and validate the model predictions and key assumptions, we use controlled laboratory experiments.
Key words: enterprise information technology; enterprise systems; IT contracting; principal-agent; multi-period
This is joint work with Min Ding, Smeal College of Business, Pennsylvania State University, University Park and Lorin M. Hitt, The Wharton School, University of Pennsylvania
 
Speaker Bio:
Dr. Dongjun (D.J.) Wu is Thomas R. Williams Wachovia Associate Professor in Information Technology Management, College of Management, Georgia Institute of Technology, USA. Dr. Wu's research interests focus on electronic markets and procurement auctions, economics of enterprise software investment and enterprise IT, and formal modeling of electronic commerce. Dr. Wu has published numerous articles in academic journals such as Management Science, Journal of Management Information Systems, European Journal of Operational Research, Decision Support Systems, among others. Dr. Wu won the “Best Paper in Valuing IT Opportunities” award and the “Best Paper in Web-based Information Systems and Applications” award, at the 27th International Conference on Information Systems, Milwaukee, Wisconsin, USA, 2006. 
Dr. Wu serves on the editorial board of Management Science as an Associate Editor, and Production and Operations Management Journal as a Senior Editor.
Dr. Wu obtained his MA and Ph.D. from the Wharton School, University of Pennsylvania, USA; his B.E. in Computer Science and B.E. in Management Engineering, both from Tsinghua University, Beijing, China.