The contract-type choice for short-term software development outsourcing: The role of behaviour-based formal control

Abstract

With this article, we contribute to the recent debate regarding the role of transaction cost economics in IT outsourcing and software development outsourcing research. Our focus is on the contract-type choice for short-term software development outsourcing. For this purpose, we critically examine transaction cost economics and the extant IT outsourcing/software development outsourcing literature and propose a framework which classifies software development outsourcing transactions according to transaction frequency and transaction investment characteristics. The framework identifies short-term software development outsourcing as an occasional, idiosyncratic transaction. Based on this groundwork, we clarify the concept of short-term contract and put forward that such a transaction is governed by a short-term contract. Following transaction cost economics and control theory, our resulting theoretical considerations infer that for short-term software development outsourcing, the vendor’s high human asset specificity and the resulting behaviour-based outcome control, the monitoring of the developer staff, are the triggers for contract-type decisions. Accordingly, staff monitoring by the client should result in Time & Material contracts, whereas staff monitoring by the vendor should result in Fixed Price contracts. We develop corresponding hypotheses which we test with 468 specific contract records for short-term software development outsourcing. The results confirm the transaction cost economics–based recommendations for contract-type choice. We therefore conclude that the advice of the transaction cost economics to use certain governance structures according to transaction attributes is also applicable to IT outsourcing/software development outsourcing transactions. We suggest further exploration of specific contract records to substantiate our results.