Principal agent theory and its application to analyze outsourcing of software development

Keil, Patrick

doi:10.1145/1083091.1083094

Cited by 11 publications

(9 citation statements)

References 3 publications

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“…At the time of supplier selection, supplier-related uncertainty reflects a client's lack of knowledge about a supplier's intentions and competencies (e.g., [33]). A high level of supplierrelated uncertainty could lead to an adverse selection problem, such that the client must select a supplier based on incomplete information (e.g., [3]), which increases the risks of supplier opportunism and raises the potential for poor task performance (e.g., [59]).…”

Section: Ex Ante Uncertaintymentioning

confidence: 99%

Choice of Geographical Location as Governance Strategy in Outsourcing Contracts: Localized Outsourcing, Global Outsourcing, and Onshore Outsourcing

Chakravarty

Grewal

Sarker

et al. 2014

Cust. Need. and Solut.

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Outsourcing, which involves business-to-business arm's-length exchanges with suppliers to supplement in-house activities, has grown internationally in scope with the advent of offshore outsourcing in which firms outsource business processes to be executed by suppliers in other countries. In spite of the dramatic growth in outsourcing, managerial governance concerns about controlling and coordinating suppliers' activities are prevalent. We propose that the geographic location (i.e., localized outsourcing, global outsourcing, and onshore outsourcing) from where the outsourced task is performed by the supplier should influence the degree of relational governance achievable, i.e., degree to which informal relationships and implicit norms of behavior are established among clients and suppliers. We apply transaction cost economics to suggest that depending on the degree of relational governance required for an outsourced task, firms might benefit by outsourcing the task to specific geographic locations. We use an event study to investigate shareholder perceptions of the mode of 185 outsourcing announcements of Fortune 500 multinational corporations during 1996-2004. The results from a model that accounts for the endogeneity of the choice of geographic locations show that for most outsourced ventures global outsourcing is a more effective relational governance strategy than onshore outsourcing or localized outsourcing.Keywords Event study . Fortune 500 . Geographic location . Governance strategy . Multinational corporations . Offshoring . Outsourcing . Transaction cost economicsOutsourcing of peripheral services comprises business to business (B to B) relationships and involves transferring organizational support functions to third-party suppliers through arm'slength contracts (e.g., [60]). The phenomenon of outsourcing has evolved to an extent that firms employ outside suppliers to fulfill almost all administrative and technical support functions ranging from customer support, accounting, and even taxbased services [34]. As an industry, outsourcing is estimated to garner up to $126.2 billion of revenues by 2015 [55]. The B to B relationships involved in outsourcing are distinct from most B to B relationships studied in the marketing literature because outsourcing relationships involve a locational component such that outside suppliers may serve their clients from multiple international locations that require extensive crossborder interactions and coordination [4,15]. Moreover, outsourcing B to B relationships involve arm's-length contracts (e.g., [34,38]) rather than ownership-based contracts such as joint ventures or full ownership that are studied in the marketing literature (e.g., [1,30,31]).The predominance of arm's-length contracts creates cost efficiencies but involves enormous governance hurdles [36] because the outsourcing firm can neither govern by fiat [25] nor closely monitor the supplier's behavior [56]. Even though Electronic supplementary material The online version of this article

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Section: Ex Ante Uncertaintymentioning

confidence: 99%

Choice of Geographical Location as Governance Strategy in Outsourcing Contracts: Localized Outsourcing, Global Outsourcing, and Onshore Outsourcing

Chakravarty

Grewal

Sarker

et al. 2014

Cust. Need. and Solut.

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“…Revelation protects the principal against uncertainties about agent's capabilities (1). Authority protects the principal against uncertainties about agent's fairness (2).…”

Section: The Principal Agent Situation Regarding Incomplete Specificamentioning

confidence: 99%

“…Research on the contractual structure of software development projects, namely on outsourcing projects, has shown, that the relationship between the customer and the supplier can be described in terms of the economic principal agent theory [1,2,3]. The aim of these works is to use the findings of the economic theory for describing the contract structure of a software project in terms of the theory by understanding the behavior of the customer and the supplier as rational actors, and to make predictions for risk and success of a project with respect to the contractual situation.…”

Section: Introductionmentioning

confidence: 99%

Contract Design and Uncertainty in Software Development Projects

Gaebert¹

2014

Lecture Notes in Business Information Processing

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Abstract. Recent research has described software development projects in terms of the economic principal agent theory. These models mostly describe the customer as the principal, whereas the supplier is the agent. Our study shows, that regarding gaps in software requirement specifications, the supplier is in a principal situation, and the customer plays the role of an agent. Specifications are incomplete due to systematical reasons. Therefore, the customer must work on closing the gaps during the design and development phase of the project. From this, behavioral uncertainties arise. An empirical study supports our theoretical argument. We discuss consequences from these findings and derive suggestions for practitioners in software development projects.

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“…Previous application of IT-outsourcing-decision theories is mostly concentrated on Transaction Cost Theory [4] ,Resource-based Theory [5] , Resource-dependency Theory [6] , Agency Cost Theory [7] and etc. The theoretical framework of this paper consists of two parts: core competence and IT intensity.…”

Section: Theoretical Frameworkmentioning

confidence: 99%

Investigation of the impact of corporate IT outsourcing decision on corporate core competence from the perspective of corporate IT intensity

2013

2013 IEEE 14th International Symposium on Computational Intelligence and Informatics (CINTI)

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As information technology (IT) is getting more and more widely applied to corporate operation and management, it has become a critical problem how to make IT application more effective in corporate management and decision-making processes. Recently, the rapid development of IT outsourcing practice has provided multiple choices for enterprises. However, as for companies themselves, it remains quite a tough problem to what extent they should outsource the IT products and services they need. This paper is aimed at exploiting the impact of IT outsourcing on corporate competence from the perspective of the corporate IT intensity so as to make right choices on IT outsourcing.

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Principal agent theory and its application to analyze outsourcing of software development

Cited by 11 publications

References 3 publications

Choice of Geographical Location as Governance Strategy in Outsourcing Contracts: Localized Outsourcing, Global Outsourcing, and Onshore Outsourcing

Choice of Geographical Location as Governance Strategy in Outsourcing Contracts: Localized Outsourcing, Global Outsourcing, and Onshore Outsourcing

Contract Design and Uncertainty in Software Development Projects

Investigation of the impact of corporate IT outsourcing decision on corporate core competence from the perspective of corporate IT intensity

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