The mediating role of psychological contract breach in IS outsourcing: inter-firm governance perspective

A substantial body of previous research on the client–vendor relationship has identified inter-organizational partnerships and formal contracts as important governance mechanisms for outsourcing performance. Successful IS development through outsourcing, however, may be more dependent on the people who execute the project in the field than on inter-firm relationships and agreed-upon formalities. Among individual-level variables, the special importance of psychological contracts has recently been noted in IS literature. This study investigates the mediating role of psychological contract breach between these two firm-level governance factors and outsourcing performance. By analyzing matched responses from project managers, vendor participants, and system users, we found that the effects of explicit legal contracts and partnership quality on outsourcing outcome are fully mediated by the client's perception of breach by the vendor. This study offers an extended theoretical perspective on the governance of firm-level collaboration, especially revealing that the benefits of formal contracts and inter-organizational partnerships eventually translate into satisfactory outsourcing outcomes for system users through each party's perception of breach on the individual level. Moreover, discrepancy was observed in this study between the client and vendor regarding the impact of legal contracts on individuals’ psychological contract while that of partnership was prominent in both sides.