Outsourcing strategy for multi-period IS development

Abstract

IS outsourcing is getting more attention as a measure to cope with rising cost of IS. Research in IS outsourcing have suggested solutions as incentive compatible contract borrowed from the standard incomplete contracting theories to deal with possible principal-agent problem. However in reality, the suggested solutions are hardly implemented due to impossibility of measuring value of the system. We suggest an alternative solution that is using competition. Firm may hire only one vendor to design system or let many vendors to compete in quality. Results show that competition cannot make vendors to invest more in quality than monopoly. However in some conditions, firm can expect higher quality by using competition because of having an option to choose the best quality among competitors. We suggest when to use competition strategy and when to use monopoly strategy to get a higher quality, according to the condition of investment level. We also considers about uncertainty level and coordination cost to investigate how firm strategy changes.