Aligning flexibility with uncertainty in software development arrangements through a contractual typology

Abstract

Purpose The purpose of this study is to identify a typology of procurement contracts in the context of software development projects that allows firms to align design flexibility with design uncertainty at the project level. The theoretical lenses of contract theory and software engineering are used to explain why the five archetypes in the proposed typology provide gradually increasing levels of design flexibility and to develop hypotheses about the associations between design flexibility and a set of project cost dimensions. Design/methodology/approach The hypotheses are tested with objective contractual data from 270 software development contracts entered into by a leading international bank over a period of three years. Findings Data analysis confirms the existence of the proposed typology and shows that design flexibility is negatively associated with control and positively associated with coordination, trust, duration and price. Research limitations/implications Although the findings are based on the contracting practices of a single, albeit sophisticated, organization, they shed light on the ability of firms to align flexibility with uncertainty at the onset of new projects by taking advantage of nuanced contractual mechanisms to produce a broader set of contractual archetypes. Originality/value This paper is the first in the outsourcing literature to analyze a nuanced contractual typology in software development projects through the perspectives of both contract theory and software engineering.