Some Considerations on Contracts: ERP Buyer-Seller perspectiveMaisa Mendonça Silva, DSc (Federal University of Pernambuco-Brazil)Ana Paula Cabral Seixas Costa, DSc (Federal University ofPernambuco- Brazil)
“ERP projects are complex undertakings forbusiness enterprises: risk factors include myriadtechnological, managerial, psychological and 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 ERP software, 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 have neglected the issues involved in the contractual relationship between a company that acquires such a system, and another company that provides it. • Moreover, the environment is often characterized by difficulty in managing these relations
Research Questions 1 2 3 Is it possible to How successfully How effectively can diagnose the can we manipulate the decisions of we be by promoting model by means of a companies regarding incentives for quantitative efficient ERP contracts? (by cooperation tool (a contract) to means of relational given the diagnosis reach cooperation factors such such as at the earlier stage? and productivity?trust, communication, commitment and payoffs) DONE!
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
Constructs • 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)
Relational Factors and Time Variables Communication Trust Cooperation Commitment Payoffs *All the hypotheses with respect to temporal variables were rejected. Thus, there is nojustification 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 Communication Trust With Regulation Commitment Payoffs Communication TrustWithout Regulation Commitment Payoffs
Contract Design i= 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 Rejects the contract ERP provider Accepts the contract and undertakes an effort (e) An output level q is produced, in function of the effort e
Conclusions • The study reached the intended goals, which are, it has proposed a theoretical mathematical procedure based on principal-agent model, which aims to diagnose and help the companies regarding ERP contracts. • 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 selection concepts on this context. • The results presented rejected the possibility of including time variables in the model and contradicted what is expected in game theory. However, they can join so many others, especially in the field of experimental economics, which will meet the expected results. The divergence of the results indicates that there is much to do with the topic and already is, in itself, a justification for carrying out others papers in this direction. • Finally, the authors would like to thank all the reviewers of Confenis for the suggestions proposed during the review process.