Incomplete contracting issues in information systems development outsourcing

Outsourcing is the subcontracting of some or all the information systems functions by one firm to another. An incomplete contracting framework is used to examine the relative merits of outsourcing certain information systems development tasks. The focus is on investigating the effects of information asymmetry and different profit sharing rules on the decision of whether to outsource or to use an internal development team. The modeling indicates that the value generated from outsourcing the development effort comes primarily from the specific investments made by the external group, and that outsourcing dominates internal development when this investment is relatively more important than investments by the internal user group. This provides one economic explanation for the coexistence of both internal development teams and of various outsourcing services.