Contract Choice in Software Development Outsourcing: a Multidimensional View of Project Attributes

Recently, there is a growing interest in the contractual mechanisms that govern software development outsourcing (SDO). Studies on SDO frequently draw their predictive power from the identification of project attributes that explain why firms choose either fixed-price (FP) or time-and-materials (T&M) contracts. However, studies seem to adopt a unidimensional view, in the sense that they examine how contract choice is associated with isolated attributes. The present study contributes to the literature by adopting a multidimensional view of contract choice. The main benefit of such a view is its ability to serve as a platform for exploring the interrelationships among project attributes. The literature suggests that both transaction cost economics (TCE) attributes (uncertainty, specificity and complexity, and frequency) and software engineering (SE) attributes of project size (duration and price) explain contract choice. However, while the theoretical reasoning underlying the effect of TCE attributes on contract choice draws on three decades of research, the theoretical reasoning for the effect of SE attributes on contract choice is practically nonexistent. In this study, we offer an explanation for the results related to both TCE and SE. We show that TCE attributes mediate the effect of SE attributes on contract choice. We assert that researchers and practitioners regard SE attributes as important for contract choice as a result of their being predictive of TCE attributes, and that a multidimensional view should be able to uncover this effect. The research model is empirically tested using a dataset of 237 contracts entered into by a leading international bank over a period of three years.