The Power of Renegotiation and Monitoring in Software Outsourcing: Substitutes or Complements?

He Huang (), Minhui Hu (), Robert J. Kauffman () and Hongyan Xu ()
Additional contact information
He Huang: School of Economics and Business Administration, Chongqing University, Chongqing 400044, China
Minhui Hu: School of Economics and Business Administration, Chongqing University, Chongqing 400044, China
Robert J. Kauffman: Department of Digitalization, Copenhagen School of Business, Frederiksberg 2000, Denmark; School of Computing and Information Systems, Singapore Management University, Singapore 188065, Singapore
Hongyan Xu: School of Economics and Business Administration, Chongqing University, Chongqing 400044, China

Information Systems Research, 2021, vol. 32, issue 4, 1236-1261

Abstract: Monitoring and contract renegotiation are two common solutions for addressing information asymmetry and uncertainty between a client and a vendor of software outsourcing services. Monitoring is mostly applied in time-and-materials contracts, as a basis for inspecting and reimbursing the vendor’s efforts in system development. Renegotiation, by contrast, is deployed in fixed-price and time-and-materials contracts to mitigate the loss of surplus from uncertainty after system development. We investigate the interaction between monitoring and renegotiation and examine the corresponding contract choice problem. We find that the client benefits from renegotiation based on two effects: an uncertainty-resolution effect and a post-development incentive effect , which incentivizes the vendor to exert additional effort in system development. Monitoring does not resolve uncertainty, although it does encourage the vendor to exert additional effort, a pre-development incentive effect . Our analysis shows that the choice of renegotiation or monitoring depends on the interactions of the above effects, which are moderated by the renegotiation cost, monitoring cost, and bargaining power in renegotiation. When renegotiation cost is low: if the client has high bargaining power and low monitoring cost, monitoring and renegotiation are complements and both are selected; otherwise, the two instruments are substitutes and contract renegotiation is preferred. When renegotiation cost is high: monitoring substitutes for renegotiation and the client only chooses monitoring if the cost to do it is low; or else neither is used. Overall, this research shows that four appropriate contract strategies should be used under somewhat different circumstances. We further analyze the impacts of some other key aspects of software outsourcing and extend the base model to address two alternative situations to show the robustness of our findings. The results apply to a range of software reliability growth models , including when machine learning or cloud computing are used.

Keywords: software outsourcing; software reliability; monitoring; renegotiation; incentives; incomplete contract (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/isre.2021.1026 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:orisre:v:32:y:2021:i:4:p:1236-1261

Access Statistics for this article

More articles in Information Systems Research from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().