Maisa Mendonça Silva, DSc (Federal University of Pernambuco-Brazil)

Ana Paula Cabral Seixas Costa, DSc (Federal University ofPernambuco- Brazil)

Some Considerations on Contracts:

ERP Buyer-Seller perspective

Outline

• Introduction

• Research Questions and Motivation

• Theoretical Background: Contracts

• Model/Approach proposal: Principal-Agent

• Conclusions

• Future Directions

“ERP projects are complex undertakings for business enterprises: risk factors include myriad technological, managerial, psychologicaland sociological aspects” (Aloini et al, 2012)

Introduction

• PROBLEM: ERP Contracts’ Design

• INPUT CONSIDERATIONS• The importance (and complexity!!!) of the adoption of ERP systems is widely known:

they allow real time monitoring of business functions, the analysis of crucial issues, …

• In the beginning of 2000’s, the literature showed great interest on six topics:implementation of ERP, optimization of ERP, management through ERP, the ERPsoftware, ERP for supply chain management and case studies.

• In spite of the fact that there is a growing interest on the implementation and post-implementation phases, in general, therefore, it can be said that most of the works haveneglected the issues involved in the contractual relationship between a companythat acquires such a system, and another company that provides it.

• Moreover, the environment is often characterized by difficulty in managing theserelations

Research Questions

Is it possible to

diagnose the

decisions of

companies regarding

ERP contracts? (by

means of relational

factors such such as

trust, communication,

commitment and

payoffs)

1 2

How successfully

can

we be by promoting

incentives for

cooperation

given the diagnosis

at the earlier stage?

3

How effectively can

we manipulate the

model by means of a

quantitative efficient

tool (a contract) to

reach cooperation

and productivity?

DONE!

Motivation

Diagnosis Incentives

ERP as A Decision Process

Theoretical Background:Contracts

•Details: refers to the amount and level of detail of the terms present in the outsourcingcontract, which comprises loss, service level, penalties for poor performance, among others.

• Types: includes the different forms of contract (i.e: tailor-made, fixed payment, paymentfor the service based on the degree of partnership, etc.).

• Duration: defines the length of the contract: short (less than 3 years) or long-termcontracts (more than 3 years).

• Size: refers to the volume of service outsourced. The greater the volume of servicesoutsourced, the greater the investment that must be made and the more suppliers aremotivated to allocate resources to their best clients with large contracts.

Sample

- Total: 36 enterprises

- Country: Brazil

- Type: probabilistic

- Application: Email or personally

- Sectors: Commerce, industry and service companies

- Respondents: 28 IT Managers

• The second phase identified 28 (twenty-eight) organizational measures (Price, 1997) that would be potentials candidates in influencing the cooperation.

• These are: absenteeism, administrative intensity, commitment, communication, conflict regulation, co-ordination, departmentalization, effectiveness, environment, formalization, training, ideology, innovation, internal labour market, involvement, justice, pay stratification, affectivity, power, prestige, productivity, satisfaction, size, social support or trust, stress, technology, turnover.

• The choice of the four constructs that were considered in analysis was based on the substantial presence in similar studies, these are: trust, commitment, communication and payoff division.

• In addition, two time variables were tested: Length of contract and length of time of the relationship.

Constructs

• TRUST: “Trust reduces the probability of end of relationship and provides the key to cooperative relationships” (MORGAN AND HUNT, 1994; MARCHELEK, REBELATO AND RODRIGUES, 2007)

• COMMITMENT: “Commitment is the desire to maintain a lasting relationship of exchange” (MOORMAN AND DESHPANDE ZALTMAN, 1992)

• COMMUNICATION: “Communication creates mutual cooperation” (TE’ENI, 2001)

• PAYOFF DIVISION: “As relationships developed, the risks and rewards are shared jointly between the parties on a "win-win" way” (KOLLOCK, 1998)

Constructs

Relational Factors and Time Variables

Communication Trust

Commitment Payoffs

Cooperation

*All the hypotheses with respect to temporal variables were rejected. Thus, there is no

justification for the inclusion of temporal variables in the cooperation model.*For a significance level of 5%, the results are: there is a significant association between trust-

commitment-communication- division of payoffs and cooperation.

Contract Design

With Regulation

Without Regulation

Communication Trust

Commitment Payoffs

Communication Trust

PayoffsCommitment

Payoff Manipulation

Communication

Commitment

Trust

Contract Designi= ERP buyer company

j= ERP provider company

U= Utility function

U’=Reservation utility

x= efforts

y= gains

R= Slump transfer

Principal Agent Model

Principal Agent

Litigant Lawyer

Shareholder CEO

Manager Employee

Buyer Seller/Provider

Principal Agent Model

• A general description of the elements and the most common sequence of moves of a principal-agent game are shown below:

• Players: a principal (ERP buyer company)) and an agent (ERP supplier company)

• Order of moves:The principal offers the agent a payment w;The agent decides whether to accept or reject the contract;If the agent accepts, he exerts effort e;An output is generated q: q (e).

• Payoffs:If the agent refuses the contract, his reward is his reservation utility (U’) and the principal gets a payoff of zero.If the agent accepts the contract, his payoff is U (e, w) and the principal reward is V (qw).

Principal Agent model

ERP Buyer Company

Offers a payment (w) to the agent, by means

of a contract

Accepts the contract and undertakes an effort (e)

An output level q is produced, in function of the effort e

Rejects the contractERP provider

Conclusions

• The study reached the intended goals, which are, it has proposed atheoretical mathematical procedure based on principal-agent model,which aims to diagnose and help the companies regarding ERPcontracts.

• The exclusion of time variables and the inclusion of relational factors in the cooperation management model reinforces the idea that the relationship has a high social nature.

• This study is an initial work – part of a major project – which aims to analyse and understand the contractual relationship on ERP decision process.

Future Directions• The application in Brazilian companies will be carried out to illustrate

the model. However it does not mean that is true in other realities.Thus, it is suggested to be applied in such other contexts.

• We are already working on the moral hazard and adverse selectionconcepts on this context.

• The results presented rejected the possibility of including timevariables in the model and contradicted what is expected in gametheory. However, they can join so many others, especially in the field ofexperimental economics, which will meet the expected results. Thedivergence of the results indicates that there is much to do with thetopic and already is, in itself, a justification for carrying out otherspapers in this direction.

• Finally, the authors would like to thank all the reviewers of Confenis forthe suggestions proposed during the review process.

Corresponding Author: Maisa Silva

maisa.ufpe@yahoo.com.br