Global technology spending was over US$5 trillion (A$7.05 trillion) in 2025, of which about US$630 billion ($A890 billion) was attributed to IT outsourcing. Unfortunately, the scale of that investment masks a dark reality: many outsourcing contracts fail. Contracts are cancelled before completion, allowed to expire without renewal, or renegotiated under pressure. These outcomes carry significant financial and operational consequences for clients and vendors alike.

The roots of many of those failures lie in decisions made before the work even begins. The contracting phase, the point at which a client organisation selects a vendor and locks in the terms of the arrangement, is where much of the risk is baked in. Unlike the execution phase of a project, where managers can intervene and adjust course, the contracting phase is largely a one-shot decision. Get the mix of contract terms wrong at the outset, and the consequences play out for the life of the deal.

A new study asks a question that has a significant impact on technology outsourcing success but is often ignored by most executives: Does the technology paradigm shape technology outsourcing success? The answer, it turns out, is yes, and in ways that carry direct implications for anyone who signs, manages, or oversees an outsourcing arrangement today.

How technology paradigms impact outsourcing outcomes

“Research in the past three decades has focused on technology outsourcing arrangements to identify factors such as pricing structures, contract length, or vendor selection methods that drive outsourcing success or failure,” said Sunil Mithas, a Visiting Professorial Fellow at UNSW Business School and Professor at University of South Florida's Muma College of Business.

“However, no study ever asked whether the technology paradigm itself matters for outsourcing success or failure. For example, the same contract features that reduce contracting risk in one technology era can amplify it in another, and therefore understanding how the technology landscape affects the salience of contracting risks is important.”

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A new study published in the Journal of Operations Management examined 144 IT outsourcing contracts signed by US-based organisations between 1991 and 2009, analyses through the lens of four technology eras: the pre-Internet period (1991-1996), the pre-dotcom period (1997-2000), the post-dotcom period (2001-2005), and the cloud computing period (2006-2009).

The research, How Do Technology Paradigms Influence Configurations of Contract Characteristics for Success of Inter-Organisational Outsourcing Projects, 1991–2009?, was conducted by Onkar S. Malgonde of North Carolina State University, Moez Farokhnia Hamedani of the University of North Carolina at Greensboro, Kaushal Chari of the University of Wisconsin-Milwaukee, and the University of South Florida’s Manish Agrawal and Sunil Mithas.

How technology eras reshape the rules of outsourcing

Researchers used a novel method called qualitative comparative analysis, which focuses on configurations or combinations of factors, rather than individual factors alone, to examine five contract features: whether a contract was new or an existing (extension, expansion, or renegotiation) one, whether a prior relationship existed between client and vendor, how long (in years) the contract ran, whether it used the pricing mechanism of fixed price, and whether the vendor was selected through competitive bidding.

The research found there is no single contract formula that works across all technology eras. Contract configurations that were successful in one technology era were not necessarily successful in another. Rather, the technology landscape itself reshapes what good contracting looks like.

"A competitive bidding process paired with the wrong contract duration, or a trusted vendor relationship undermined by misaligned pricing, could produce failure just as easily as success"

SUNIL MITHAS

“This key finding challenges conventional wisdom,” said Prof. Mithas. “Many organisations approach outsourcing with a checklist mentality – competitive bidding keeps costs down, fixed pricing holds vendors accountable, and new contracts offer an opportunity to shape key project details.”

However, none of these features, on their own, is a reliable predictor of success in any technology era. “What determined outcomes was the combination,” he added. “A competitive bidding process paired with the wrong contract duration, or a trusted vendor relationship undermined by misaligned pricing, could produce failure just as easily as success.”

Actionable insights for outsourcing arrangements in practice

For executives and procurement managers who oversee outsourcing relationships today, the findings offer new insights. First, context shapes contract design. A contract structure that worked well for one project a decade ago may no longer be the right fit. The technology landscape of AI-enabled services, cloud ecosystems, and platform dependencies introduces contracting risks distinct from those of earlier eras. The research suggests that organisations need to assess their current technology environment, not just their budget, when designing contract terms.

Second, relationships reduce risk in ways that contract clauses cannot always replicate. Where an existing vendor relationship is available, leveraging it tends to reduce both adverse selection and moral hazard risks, particularly for complex projects. The depth and duration of the prior relationship matter: the more contracting history a client and vendor share, the more that informal knowledge (about how each party operates, what they prioritise, and how they handle problems) can substitute for explicit contractual protections.

Finally, no single contract feature is sufficient on its own. The research finds that no single feature (such as fixed pricing, competitive bidding, or relationship history) was a necessary condition for success in any of the periods studied. What matters is the combination or configuration. Practitioners who focus on optimising a single dimension of their contracts, such as driving down price through competitive tender, while neglecting others, may find they have created risk elsewhere.

Implications for technology contracts in the AI-age

The pace of AI-driven change makes contract design more urgent. The researchers note that the fast pace of technological change, turbocharged by artificial intelligence, alters the vendor landscape in ways that require active contract management. As incumbent vendors' capabilities are overtaken by competitors, as organisations reconfigure outsourced processes with AI tools, and as new application possibilities emerge, the contracting decisions made today need to reflect a technology environment that continues to shift.

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Prof. Mithas said the AI is ushering in a new technology era that demands new ways of thinking from all business and technology leaders, what he calls the era of artificial and digital intelligence. The changes unleashed by AI are so significant that he is now rewriting his book on digital intelligence, which argued for a systematic approach to strategy, governance, and execution issues related to technology.

The AI era is posing new questions about the future of work, what must be done in-house, and what can be automated or outsourced. “The AI-era also shows entry of new AI-first vendors whose capabilities are harder to evaluate and may be overtaken in a short period by other competing vendors. This study offers timely guidance on the concurrent consideration of multiple contract features to manage contracting risks,” he concluded.