With this article, we contribute to the recent debate regarding the role of transaction cost economics in IT outsourcing and software development outsourcing research. Our focus is on the contract-type choice for short-term software development outsourcing. For this purpose, we critically examine transaction cost economics and the extant IT outsourcing/software development outsourcing literature and propose a framework which classifies software development outsourcing transactions according to transaction frequency and transaction investment characteristics. The framework identifies short-term software development outsourcing as an occasional, idiosyncratic transaction. Based on this groundwork, we clarify the concept of short-term contract and put forward that such a transaction is governed by a short-term contract. Following transaction cost economics and control theory, our resulting theoretical considerations infer that for short-term software development outsourcing, the vendor’s high human asset specificity and the resulting behaviour-based outcome control, the monitoring of the developer staff, are the triggers for contract-type decisions. Accordingly, staff monitoring by the client should result in Time & Material contracts, whereas staff monitoring by the vendor should result in Fixed Price contracts. We develop corresponding hypotheses which we test with 468 specific contract records for short-term software development outsourcing. The results confirm the transaction cost economics–based recommendations for contract-type choice. We therefore conclude that the advice of the transaction cost economics to use certain governance structures according to transaction attributes is also applicable to IT outsourcing/software development outsourcing transactions. We suggest further exploration of specific contract records to substantiate our results.
The role of Transaction Cost Economics in Information Technology Outsourcing research: A meta-analysis of the choice of contract type