Software Application Outsourcing Contracts: An Agency Theory Perspective

Scholars have proposed agency, game, resource-dependency, and transaction cost theories as a means to study outsourcing. Although risks faced by outsourcing firms and developers (i.e., vendors) and corresponding agency costs have been identified, key agency constructs (e.g., firm competence, risk-neutrality of the developer) and their linkage to outsourcing practice (e.g., monitoring, screening) have not been extensively studied. In this research, we extend the classical agency theory by examining the impact of risk orientation of the outsourcing parties, application features, multi-period attributes and environmental factors on monitoring, bonding, compensation, screening, and signaling. By developing the agency framework, we set the stage for future empirical testing of key outsourcing constructs and their linkages.