article

Business familiarity as risk mitigation in software development outsourcing contracts

Authors:

Yossi LichtensteinAuthors Info & Claims

MIS Quarterly, Volume 32, Issue 3

Pages 531 - 551

Published: 01 September 2008 Publication History

Abstract

This study examines the role of business familiarity in determining how software development outsourcing projects are managed and priced to address risks. Increased business familiarity suggests both more prior knowledge, and hence reduced adverse selection risk, and increased implied trust about future behavior, and hence implied reduced moral hazard risk. Preferring high business familiarity partners may also alleviate concerns about incomplete contracts. By reducing these risks, higher business familiarity is hypothesized to be associated with higher priced projects, reduced penalties, and an increased tendency to contract on a time and materials rather than a fixed price basis. These hypotheses were examined with objective contractual legal data from contracts made by a leading international bank. Integrating trust theory into agency theory and into incomplete contract theory and examining unique contract data, the contribution of the study is to show that the premium on business familiarity and the trust it implies is not in directly affecting price, but, rather, in changing how the relationship is managed toward a tendency to sign time and materials contracts. Implications about integrating trust into agency theory and incomplete contract theory, as well as implications regarding trust premiums and software development outsourcing, are discussed.

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cover image MIS Quarterly

MIS Quarterly Volume 32, Issue 3

September 2008

230 pages

ISSN:0276-7783

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Society for Information Management and The Management Information Systems Research Center

United States

Publication History

Published: 01 September 2008

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https://dl.acm.org/doi/10.1287/isre.2021.1059
Huang HHu MKauffman RXu H(2021)The Power of Renegotiation and Monitoring in Software OutsourcingInformation Systems Research10.1287/isre.2021.102632:4(1236-1261)Online publication date: 1-Dec-2021
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