IT Contract Flexibility and Negotiator Incentives

Information Technology outsourcing contracts are plagued by inflexibility. We develop an economic model to explain how the contract negotiator's incentives influence contract flexibility. We show that neither wage nor one-time commission type pay gives any preference for flexibility. However, a promotion incentive, where the bonus is an ongoing bonus, does give the negotiator a preference for less flexible contracts. The preference for less flexible contracts increases as the discount rate increases. The preference for less flexible contracts increases as the number of competitors for the promotion increases.