Lichtenstein, McDonnell Pricing Software Development Services Pricing Software Development.pdfVIP

Lichtenstein, McDonnell Pricing Software Development Services Pricing Software Development Services Yossi Lichtenstein Department of Management Information Systems University College Dublin, Dublin 4 +353-1-7164715 Ireland Yossi.Lichtenstein@ucd.ie Alan McDonnell Department of Management Information Systems University College Dublin, Dublin 4 +353-1-7164715 Ireland Abstract This paper studies the pricing of software development outsourcing. Two pricing techniques – time and material and fixed price – are described and the economic conditions for selecting between them are discussed. Using agency theory and transaction cost economics, it is predicted that risky and specific systems will be priced on time and material basis while other projects will be fixed price. An additional prediction is that confidence in the vendor’s auditing of resources is essential for time and material contracts. The predictions are tested on fourteen external software development projects in two large corporations. Quantitative measures of risk, specificity and confidence are utilised, but the data-set does not support the theoretical predictions. In order to explain this result, interviews with senior managers at the two corporations have been conducted. Both disagree with the theoretical prescriptions: one contracts