Contract Design Choices and the Balance of Ex-Ante and Ex-Post Transaction Costs in Software Development Outsourcing

This paper examines multiple contract design choices in the context of transaction and relational attributes and consequent ex ante and ex post transaction costs. It focuses on two understudied themes in the IT outsourcing literature. First, while the literature is predominantly concerned with opportunism and consequent ex post hazard costs that contracts can safeguard against, parties to a contract also economize on ex ante transaction costs by their choice of contract type and contract extensiveness. Second, the literature studies the aggregate extensiveness of contracts rather than of distinct contract functions: safeguarding, coordination, and adaptability. Against this backdrop, our research model portrays a nuanced picture that is anchored in the following theoretical interpretation: transaction and relational attributes have implications on specific ex ante and ex post transaction costs, and these implications can be balanced by respective choices in both contract type and the extensiveness of specific contract functions. These two contract design choices complement and substitute for each other in their ability to economize on specific transaction costs. Our analysis of 210 software development outsourcing contracts finds that explanatory power increases when analyzing the extensiveness of individual contract functions rather than the aggregate contract extensiveness, highlighting subtle competing influences that are otherwise masked by an aggregate measure. Our analysis also shows that a preference for time-and-material contracts counteracts the effect of certain transaction attributes on contract extensiveness, and even cancels it out in the case of transaction uncertainty

Why project size matters for contract choice in software development outsourcing

The contractual mechanism of software development outsourcing, typically either fixed-price (FP) or time-and-materials (T&M), determines the nature of incentives, risk sharing, and coordination between client and vendor. While software engineering considers project size as crucial for project planning and success, neither economic nor organizational theory considers size per se among the determinants of contract choice. In this paper, we address the gap between the centrality of project size in the software engineering literature and the attention it receives in software contracting research by modeling and testing the association between project size and contract choice. Existing empirical evidence indicates that FP contracts are appropriate for small development efforts whereas T&M contracts are suitable for larger projects, based on the reasoning that cost and schedule are difficult to estimate in larger projects. This prediction that size is directly associated with contract choice is the basis upon which two models are developed. The first model draws on the contracting efficiency approach to hypothesize that the effect of project size on contract choice is mediated by project detail. The second model draws on the contingency approach to software development risk management to hypothesize that the effect of project size on contract choice is moderated by project detail and vendor familiarity. We test these models using a large portfolio of software development contracts entered into by a leading European bank, and the results confirm that both mediation and moderation are at play

Research Agenda for Studying Open Source II: View Through the Lens of Referent Discipline Theories

In a companion paper [Niederman et al., 2006] we presented a multi-level research agenda for studying information systems using open source software. This paper examines open source in terms of MIS and referent discipline theories that are the base needed for rigorous study of the research agenda

Explaining Multisourcing Decisions in Application Outsourcing

Multisourcing—the delegation of interdependent tasks to multiple vendors—is receiving increasing attention in practice and in research. Yet, we know little about the circumstances under which organizations choose multisourcing. In this paper, we draw on incomplete contracting theory and the knowledge-based view to explain multisourcing decisions in application projects. We test our model using a comprehensive dataset of 1093 sourcing decisions made by Swiss public organizations. The results provide strong support for the model. We find that clients choose multisourcing more frequently when (1) the project is large, (2) the software is client-specific and the project is large enough, (3) client and vendor lack joint experience, (4) the client seeks knowledge, (5) the technology is not proprietary, and (6) the client is experienced in outsourcing. While these findings support common views that clients choose multisourcing in response to opportunistic threats and to knowledge needs, the findings also shed light on prerequisites for multisourcing

Impact of IT Multisourcing on vendor opportunistic behaviour - A research framework

IT Multisourcing (ITM), the provision of IT services by multiple interdependent vendors to a single client, is widely prevalent now. ITM, in principle, is believed to mitigate both strategic and operational risks of IT outsourcing for client organizations. Yet an in-depth inquiry into the association of ITM with these risks is largely missing in literature. There is limited research which systematically investigates the effects of ITM on different forms of risk. This paper develops a theoretical framework to understand the implications of ITM for the specific risk of vendor opportunistic behaviour, also termed ‘strategic risks’ of outsourcing. The fundamental attributes of ITM are identified and mechanisms through which they influence vendor opportunistic behaviour are explained. The advantages and limitations of the framework are discussed and future research directions are laid out

Managing Flexibility in Outsourcing

In recent years, outsourcing has gained considerable management attention. However, the benefits of outsourcing are not without concessions. One major risk is losing the flexibility to change the extent, nature, or scope of the outsourced business services, and such flexibility is strategically imperative in today\u27s dynamic business environment. This paper seeks to clarify the multi-dimensional notion of flexibility in outsourcing by examining robustness, modifiability, new capability, and ease of exit. Adapting from Evans (1991), we also develop a framework to classify existing practices in managing outsourcing flexibility. We go beyond contractual provision to surface a portfolio of pre-emptive, protective, exploitive, and corrective maneuvers. These strategic maneuvers map well to traditional notions in coordination theory, both in advanced structuring through loose coupling and dependency diversification, and in dynamic adjustment through proactive sensing and reactive adapting. We put forward a set of propositions hypothesizing the relationships between the various strategic maneuvers and the different dimensions of outsourcing flexibility, and discuss the moderating impact of such maneuvers on outsourcing success. We hope the greater conceptual clarity will not only contribute to the effectiveness of outsourcing management but also spawn a new research agenda on outsourcing flexibility

Bidding for Complex Projects: Evidence From the Acquisitions of IT Services

Competitive bidding (as auctions) is commonly used to procure goods and services. Public buyers are often mandated by law to adopt competitive procedures to ensure transparency and promote full competition. Recent theoretical literature, however, suggests that open competition can perform poorly in allocating complex projects. In exploring the determinants of suppliers’ bidding behavior in procurement auctions for complex IT services, we find results that are consistent with theory. We find that price and quality do not exhibit the classical tradeoff one would expect: quite surprisingly, high quality is associated to low prices. Furthermore, while quality is mainly driven by suppliers’ experience, price is affected more by the scoring rule and by the level of expected competition. These results might suggest that (scoring) auctions fail to appropriately incorporate buyers’ complex price/quality preferences in the tender design.Procurement Auctions, Scoring Rules, IT Contracts, Price/Quality Ratio