Strategic Contracting in Public IT Operations Service Contracts

Tobias Lund Rasmussen & Mathias Immerdal Kaastrup

Student thesis: Master thesis

Abstract

As a consequence of governmental institutions’ increasing demand for outsourcing of IT operations services, the Danish Digitalization Agency published their new standard IT operations contract “K04” in August 2020. On the surface K04 is a very detailed and modern contract, but K04 has received quite a bit of criticism, especially due to the fact that it largely favors the client, which must be considered a feature related to a conventional approach to contracting. This thesis examines the criticism of K04 from the perspective of strategic contracting, which unveils certain contractual hazards related to the misaligned incentives of the parties to undertake relationshipspecific investments and to incorporate unforeseen contingencies ex post, due to the rent seeking behavior of the parties and the deficient gap-filling rules under the Danish law of obligations. Thisthesis thus undertakes a normative approach to the contractual basis of K04 to ensure the alignment of incentives through amendments of specific contractual provisions, based on the characteristics of the outsourced IT operations services and the contractual partnership. The normative analysis, which is based on the principles of strategic contracting, examines whether the use of proactive provisions and contractual safeguards can remedy the abovementioned contractual hazards. Consequently, the analysis studies the application of hardship and gain provisions as proactive provisions, as well as long-term contracts and contract extension options as hold-up safeguards. Moreover, the analysis studies how reciprocal relationship-specific investments and knowledge sharing routines can act as a signal of credible commitment to the partnership and a utilization of the parties’ complementary resources. This analysis conclusively finds significant evidence of a positive correlation between the abovementioned proactive provisions as well as contractual safeguards and long-term value-creation in the form of relational rents. The proposed contractual amendments are found to foster incentive compatibility between the parties, to a great extent, by protecting the parties’ relationship-specific investments against rent seeking and proactively improving the conditions of the strategic co-operation in the K04 partnership, with regards to knowledge exchange and the incorporation of unforeseen contingencies. The result of this thesis emphasizes the importance of taking a strategic approach to contracting, with implications for future practical use of K04, regardless of the fact that this approach will invoke certain transactional costs ex ante and ex post.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2021
Number of pages128
SupervisorsKim Østergaard & Bent Petersen