Maisa Silva, Ana Paula Costa, Some Considerations on Contracts: ERP Buyer-Seller perspective

1. Some Considerations on Contracts:
ERP Buyer-Seller perspective
Maisa Mendonça Silva, DSc (Federal University of Pernambuco-
Brazil)
Ana Paula Cabral Seixas Costa, DSc (Federal University of
Pernambuco- Brazil)

2. Outline
• Introduction
• Research Questions and Motivation
• Theoretical Background: Contracts
• Model/Approach proposal: Principal-Agent
• Conclusions
• Future Directions

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

4. 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

5. 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!

6. Motivation
Diagnosis Incentives

7. ERP as A Decision Process

8. Theoretical Background:Contracts
•Details: refers to the amount and level of detail of the terms present in the outsourcing
contract, which comprises loss, service level, penalties for poor performance, among others.
• Types: includes the different forms of contract (i.e: tailor-made, fixed payment, payment
for the service based on the degree of partnership, etc.).
• Duration: defines the length of the contract: short (less than 3 years) or long-term
contracts (more than 3 years).
• Size: refers to the volume of service outsourced. The greater the volume of services
outsourced, the greater the investment that must be made and the more suppliers are
motivated to allocate resources to their best clients with large contracts.

9. Sample
- Total: 36 enterprises
- Country: Brazil
- Type: probabilistic
- Application: Email or personally
- Sectors: Commerce, industry and service companies
- Respondents: 28 IT Managers

10. 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.

11. 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)

12. Relational Factors and Time Variables
Communication Trust
Cooperation
Commitment Payoffs
*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.

13. Contract Design
Communication Trust
With Regulation
Commitment Payoffs
Communication Trust
Without Regulation
Commitment Payoffs

14. Payoff Manipulation
Communication Trust
Commitment

15. Contract Design
i= ERP buyer company
j= ERP provider company
U= Utility function
U’=Reservation utility
x= efforts
y= gains
R= Slump transfer

16. Principal Agent Model
Principal Agent
Litigant Lawyer
Shareholder CEO
Manager Employee
Buyer Seller/Provider

17. 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).

18. 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

19. 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.

20. 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.

21. Corresponding Author: Maisa Silva
maisa.ufpe@yahoo.com.br