Formal and relational governance in IT outsourcing: substitution, complementarity and the role of the psychological contract

This study aims to contribute to the literature on IT outsourcing governance by advancing our understanding of mechanisms of substitution and complementarity between formal and relational governance. Our study illustrates certain conditions under which substitution and complementarity can occur and depicts a two-way causal relationship between them. Our examination further provides a more in-depth assessment of relational governance by using the concept of the psychological contract. Our results demonstrate that the psychologically binding nature of the psychological contract makes it a particularly forceful substitute to formal governance, while its associations with other relationship aspects make it a forceful complement.