Leveraging Offshore IT Outsourcing by SMEs through Online Marketplaces

Following their larger counterparts, an increasing number of small firms outsource their IT tasks to lower cost offshore destinations. For small firms, however, offshore outsourcing is a difficult undertaking as it involves high transaction costs. Online marketplaces for IT services, which have recently become available to small firms, make offshore IT outsourcing more accessible and manageable, although differences in the marketplace design result in varying outcomes across the marketplaces. This has consequences for SME’s decision as to which online marketplace to use, because different markets may have different types of benefits and costs. This paper sets to analyze some of the similarities and differences between online marketplaces for IT services and their effects for small firms. First, we analyze if and how online marketplaces reduce small firms’ transaction costs in offshore IT outsourcing. Second, we examine the effects of market entry barriers on outcomes of online marketplaces and their implications for small firms. The results indicate that online marketplaces for IT services do reduce transaction costs for small firms in offshore outsourcing across ten specific market processes. More surprising, however, is the finding that the lower market entry barriers for suppliers result in lower prices for buyers without compromising other aspects of market performance.Offshore IT Outsourcing;Online Market;Process-Stakeholder Analysis;Reverse Auction

Buyer Commitment and Opportunism in the Online Market for IT Services

Companies increasingly outsource IT-related tasks using reverse auction mechanisms embedded into online marketplaces. However, a considerable proportion of auctions at these marketplaces do not result in a contract between buyer and supplier. Extant literature mostly refers to costly bidding and bid evaluation to explain this phenomenon. Another possible explanation is that because of the low entry barriers, buyers with a low commitment to exchange can use the marketplace solely for information gath-ering purposes such as price benchmarking and obtaining free consultations, having little or no intention to contract a supplier. We test this explanation by looking at how different types of costs incurred by the buyer during the sourcing process, are related to the outcome of reverse auctions in terms of contract award. We argue that higher levels of search, preparation and negotiation costs are associated with higher commitment to exchange and find that opportunistic behaviour does indeed play a part in the non-contracted projects, while committed buyers are more likely to enter into a contract with a supplier. The hypotheses are tested on a sample of 2,574 reverse auctions at a leading online marketplace for IT services and further verified across projects of different value and different levels of buyer experience. On the practical side, we recommend setting up entry barriers for buyers with a low level of commitment.IT Outsourcing;Online Markets;Opportunism;Reverse Auctions;Transaction Costs

Choosing between Auctions and Negotiations in Online B2B Markets for IT Services: The Effect of Prior Relationships and Performance

The choice of contract allocation mechanism in procurement affects such aspects of transactions as information exchange between buyer and supplier, supplier competition, pricing and, eventually, performance. In this study we investigate the buyer’s choice between reverse auctions and bilateral negotiations as an allocation mechanism for IT services contracts. Prior studies into allocation mechanism choice focused on factors pertaining to discrete exchange situation, such as con-tract complexity or availability of suppliers. We broaden the research by focusing on buyers’ past exchange relationships with vendors. Based on the literature on the economics of contracting and agency theory, we hypothesize that prior re-peat interaction with vendors favors the use of negotiations over auctions in the next transaction, while the need to explore the marketplace due to buyer’s inexperience or dissatisfaction with vendor’s performance in the most recent project leads to the use of auctions instead of negotiations. We find support for these hypotheses in a longitudinal dataset of 2,081 IT projects realized by 91 repeat buyers at a leading online services marketplace over a period of eight years. Taken together, the results show that analyzing B2B auctions and negotiations should move beyond analyzing discrete instances and instead analyze them in the context of the individual firm’s history and supplier strategy.outsourcing;IT services;online marketplace;reverse auctions

Portfolios of Exchange Relationships: An Empirical Investigation of an Online Marketplace for IT Services

Small firms face distinct problems and opportunities when procuring IT resources. Whereas previous work focused at the level of firm or buyer-supplier dyad, we address portfolios of buyer-supplier relationships at an online marketplace for IT services. Using the portfolio approach, we develop a buyers taxonomy and analyze properties of resulting clusters.Our investigation reveals four clusters of buyers with distinct mixes of long-term and short-term supplier relationships. Although reverse auctions are found to be associated with short-term relationships and negotiations support long-term relationships, buyers in different clusters use the two mechanisms in combination to a different extent.Performance;Buyer-supplier relationships;IT services;Online markets;Outsourcing;Reverse auctions

Predictive Analytics in Information Systems Research

This research essay highlights the need to integrate predictive analytics into information systems research and shows several concrete ways in which this goal can be accomplished. Predictive analytics include empirical methods (statistical and other) that generate data predictions as well as methods for assessing predictive power. Predictive analytics not only assist in creating practically useful models, they also play an important role alongside explanatory modeling in theory building and theory testing. We describe six roles for predictive analytics: new theory generation, measurement development, comparison of competing theories, improvement of existing models, relevance assessment, and assessment of the predictability of empirical phenomena. Despite the importance of predictive analytics, we find that they are rare in the empirical IS literature. Extant IS literature relies nearly exclusively on explanatory statistical modeling, where statistical inference is used to test and evaluate the explanatory power of underlying causal models, and predictive power is assumed to follow automatically from the explanatory model. However, explanatory power does not imply predictive power and thus predictive analytics are necessary for assessing predictive power and for building empirical models that predict well. To show that predictive analytics and explanatory statistical modeling are fundamentally disparate, we show that they are different in each step of the modeling process. These differences translate into different final models, so that a pure explanatory statistical model is best tuned for testing causal hypotheses and a pure predictive model is best in terms of predictive power. We convert a well-known explanatory paper on TAM to a predictive context to illustrate these differences and show how predictive analytics can add theoretical and practical value to IS research

Information Architecture and Electronic Market Performance

Electronic markets are one of the most prominent business applications of the Internet, so determining the factors that drive their performance is of great value. This thesis shows that an important driver of electronic market performance is the information architecture of the market, which describes what type of information is available to whom during the market process. Two studies of electronic market initiatives at a large Dutch flower auction highlight how information and communication technology (ICT) affects the information architecture of the market and the consequences for market behavior. ICT not only affects existing markets, but also offers opportunities to design innovative new market mechanisms. One of these is a multidimensional auction, in which bidders bid not only on price, but also on dimensions such as quality and delivery time. The effects of different information architectures of multidimensional auctions are explored in laboratory experiments. The findings of the three studies are synthesized into a theory of electronic markets that has important implications for market designers, traders and researchers.Otto Koppius studied Applied Mathematics at the University of Twente in the Netherlands, with a major in graph theory. During his studies, he spent several months at the University of South Australia, working on a project involving the optimal layout of mineshafts. In June 1997, he received his M.Sc. degree for a thesis on the novel graph-theoretic problem of finding degree-preserving spanning trees, which arose from an application in water distribution networks. In September 1997, he took up a position as Ph.D. student at the department of Decision and Information Sciences at the Rotterdam School of Management, Erasmus University. In 1998, he was one of the recipients of a grant from the Carnegie Bosch Institute at Carnegie-Mellon University, for a project on electronic sourcing strategy. The same year, his dissertation proposal on electronic multidimensional auctions was runner-up in the contest for "Best E-Commerce Thesis Proposal", organized by IBM Research's Institute for Advanced Commerce. The following year, he spent three months as a visiting researcher at the University of Michigan, as well as three months at the IBM T.J. Watson Research Center. He was invited to the doctoral consortia of the International Conference on Information Systems in 1999 and the Academy of Management in 2000 and he has presented his work at various other conferences, including INFORMS, the Workshop on Information Systems and Economics, the Hawaii International Conference on Systems Sciences, the European Conference on Information Systems, the Sunbelt Social Network Analysis conference and the Strategic Management Society. He is currently an assistant professor at the department of Decision and Information Sciences at the Rotterdam School of Management, Erasmus University. As a result of his research on electronic markets, his research interests branch out into areas within strategic management, entrepreneurship, behavioral decision theory and social network analysis

The Role Of Product Quality Information, Market State Information And Transaction Costs In Electronic Auctions

Electronic auctions have rapidly increased in popularity, but the consequences of switching to an electronic auction are unclear. In part this is because multiple changes occur at the same time so one can only observe the combined effect of these changes and not the effect of each separate change. For instance, electronic bidders face lower transaction costs, but also have less information about product quality and about the state of the market such as the number of bidders. In this paper, we report a study of bidding behavior at a large Dutch flower auction in which we are able to separate some of these effects. We compare electronic bidders with traditional bidders and when correcting for quality differences and seasonal effects, we find that they to bid lower on average than traditional buyers, as predicted by Bakos (1991, 1997). The electronic bidders were divided in two subgroups, internal bidders and external bidders. The external bidders had less product quality information and market state information than the internal bidders. This led the external bidders to not only bid significantly higher than the internal bidders, but in fact as high as the traditional bidders. Both these effects run counter to theoretical predictions and some possible alternative explanations are offered. In general, it highlights the importance of focusing the information flows that occur in a market

On and off the beaten path: How individuals broker knowledge through formal and informal networks

Although informal networks are often emphasized as facilitating knowledge transfer, we use network data obtained from a multi-unit high-tech firm to show that the formal network also significantly contributes to inter-unit knowledge transfer. Individuals centrally placed in a network are, in addition, more involved in knowledge transfer, especially, the evidence suggests, in the case of the formal network. Focusing on the brokerage roles that individual fulfill, we find that knowledge transfer between units is more likely to occur through externally oriented brokers than internally oriented brokers in the formal network, but not in the informal network. Overall, the results show that there is more than one path to transfer knowledge

Coping with Costly Bid Evaluation in Online Reverse Auctions for IT Services

Online markets have dramatically decreased costs of search and communication for buyers. By contrast, costs of evaluating purchasing alternatives have become critical due to an overwhelming range of available options. When high, evaluation costs can offset potential gains from transactions and cause inefficiencies, e.g. by forcing buyers to abandon transactions without allocating contracts. While most previous studies treat evaluation costs as an exoge-nous factor, this study considers them endogenous. We identify several tactics (search, request for proposal preparation, budget announcement, bid filtering, and negotiation) that buyers at online markets can use to reduce their evaluation costs and hence influence project allocation. Using data from nearly 10 thousand transactions at a leading online marketplace for IT services, we show that buyers who use these tactics are more likely to allocate their project to a winner than buyers not using these tactics. Buyer experience also has a positive effect on allocation and, in addition, moderates the effectiveness of some of the tactics. As experience grows, budget announcement be-comes more effective in coping with evaluation costs and increases the likelihood of allocation, while the effectiveness of request for proposal preparation decreases. Together, these results shed more light on the buyer side of online reverse auctions, which leads to guidelines for improving the efficiency of online marketplaces

Portfolios of Exchange Relationships: An Empirical Investigation of an Online Marketplace for IT Services

Small firms face distinct problems and opportunities when procuring IT resources. Whereas previous work focused at the level of firm or buyer-supplier dyad, we address portfolios of buyer-supplier relationships at an online marketplace for IT services. Using the portfolio approach, we develop a buyers taxonomy and analyze properties of resulting clusters. Our investigation reveals four clusters of buyers with distinct mixes of long-term and short-term supplier relationships. Although reverse auctions are found to be associated with short-term relationships and negotiations support long-term relationships, buyers in different clusters use the two mechanisms in combination to a different extent