The Role of Vendor Legitimacy in IT Outsourcing Performance: : Theory and Evidence

Information technology outsourcing (ITO) relationships today are facing increasingly turbulent environments. This research examines ITO performance by focusing on client firms’ perceived legitimacy of vendors, termed “vendor legitimacy,” consisting of pragmatic, cognitive, and moral dimensions. Based on our surveys with executives and managers at 200 ITO client firms, the study’s findings present the imperative to actively manage vendor legitimacy for achieving and sustaining ITO performance. Specifically, at the strategic level, clients’ perception of vendors as mutually aligned, long-term-oriented, tightly integrated partners is critical. At the operational level, clients should collaborate with vendors to design and establish interorganizational routines that undergird vendor legitimacy. At the managerial level, clients’ relational governance plays a pivotal role in attaining procedural justice, ethical standards, and fairness in the interorganizational collaboration. In sum, our study suggests that creating a dedicated corporate function or unit for continually overseeing and assessing a portfolio of vendors and swiftly identifying and responding to potential issues and crises related to vendor legitimacy would be a worthwhile investment.

Information technology (IT) outsourcing relationships today are facing increasingly turbulent environments. With rapid changes in technological, commercial, societal, and regulatory landscapes, client firms have to closely and continually assess the desirability and appropriateness, or legitimacy, of their vendors in such dynamic settings. In this research, the focus is on client firms’ perceived legitimacy of vendors, termed “vendor legitimacy.” Specifically, building on institutional theory, vendor legitimacy is conceptualized as consisting of three dimensions—pragmatic, moral, and cognitive—and is examined through their respective impacts on IT outsourcing performance. The role of key governance strategies for managing vendor legitimacy, namely, contractual governance and relational governance, are likewise explored. Results from a multiple-sourced, matched-pair, cross-industry sample of executives and managers of 185 client firms reveal that these various governance strategies exert differential impacts on the aforementioned dimensions of vendor legitimacy, which, in turn, drive performance.