Sustaining Dynamic Capabilities in Contracting for Software Development Research in Progress, January 2009

Transcription

1 Sustaining Dynamic Capabilities in Contracting for Software Development Research in Progress, January 2009 Lior Fink, Ben-Gurion University of the Negev Yossi Lichtenstein, The College of Management Simon Wyss, University College Dublin

2 Background: Business Strategy Top management s plans to attain outcomes consistent with the organization s missions and goals Strategy may be A Plan a direction, a course of action into the future A Pattern consistency in behavior over time A Position locating particular products in particular markets A Perspective the organization s way of doing things A Ploy a specific maneuver intended to outwit an opponent 2

3 Background: Resource Based View A theoretical framework for understanding how competitive advantage within firms is achieved and how that advantage might be sustained over time When firms have resources that are valuable, rare, inimitable and nonsubstitutable they can achieve sustainable competitive advantage by implementing strategies that cannot be easily duplicated Complements the traditional emphasis on industry structure and positioning within that structure as the determinants of competitive advantage 3

4 Background: Dynamic Capabilities The resource based view of the firm has not adequately explained how firms have competitive advantage in situations of rapid and unpredictable change Dynamic capabilities are the organizational routines by which firms achieve new resource configurations as markets change Examples Strategic decision making Product development Copy, transfer and recombine resources within the firm Internal collaboration to create new resources Alliances Acquisition routines that bring new resources into the firm 4

5 Research Question A question that has rarely been addressed in the dynamic capabilities research is how can firms sustain their flexibility when acquiring external resources? The theoretical perspective Resources are either available or unavailable If resources are non-available, they are acquired An implicit assumption is that the firm cannot shape them in accordance with changing circumstances Contrary to the theoretical perspective, firm resources are frequently acquired through a lengthy process managed outside organizational boundaries during which the business environment may change 5

6 Research Site A major international bank The IT department is responsible for the acquisition, maintenance and operation of the bank's software systems 3,000 permanent staff 2,000 consultants are contracted on a regular basis 100 local and international vendors for system development The bank s Software Development Contracts repository from January 2000 contains 424 contracts we accessed it during June 2003 analyzed the then most recent 270 contracts 6

7 Software Development Contracts Low Flexibility Specification Price Strict Fixed Price detailed spec; no changes allowed by the formal contract fixed Fixed Price with a change procedure detailed spec; a change procedure is provided in the contract fixed; in addition, the cost of changes is negotiated when necessary Mixed some system functionality or tasks are well defined, others are open combination of Fixed Price and Time & Material Time & Material with a price cap rough spec vendor paid for time and material, not exceeding a predefined cap High Flexibility Open Time & Material rough spec vendor paid for time and material; no cap is defined 7

8 Hypothesis Development Software engineering Contract Theory Dynamic Capabilities Strict Fixed Price Good cost estimation Risk mainly on vendor Short duration to prevent environmental changes Fixed Price with a change procedure... Mixed Time & Material with a price cap... Open Time & Material Risk of project escalation is significant High coordination is needed Risk mainly on client Familiarity and trust needed Inter-organizational relationships source of competitive advantage 8

9 Hypotheses 1. Flexibility is positively associated with project duration across the Software Development Contract archetypes 2. Flexibility is positively associated with contract price across the archetypes 3. Flexibility is negatively associated with project controls across the archetypes 4. Flexibility is positively associated with vendor trust across the archetypes 9

10 Method Project duration calculated from the start date and estimated end date Contract price either fixed price or T&M estimates Project controls number of milestones, tied to payments Vendor trust accumulated size of all contracts by the same vendor, as appear in the 424 contracts in the repository 10

11 11 Data LnDuration LnPrice

12 Early Results: H1 & H2 N Min Max Mean Stdev Duration (days) ANOVA F=3.590 p=7 Strict FP FP Mixed T&M w/cap Open T&M Total Price (K$) ANOVA F=4.983 p=1 Strict FP FP Mixed T&M w/cap Open T&M Total

13 Early Results: H3 & H4 N Min Max Mean Stdev Control (milestones/ price) Strict FP FP ANOVA F=7.845 p=0 Mixed T&M w/cap Open T&M Total Trust (K$) ANOVA F= p=0 Strict FP FP Mixed T&M w/cap Open T&M Total

14 Contributions The dynamic capabilities literature addressing the dynamism in the acquisition of resources is new there are relatively few empirical studies of actual processes that are dynamic capabilities; this study describes such a process The management information systems literature the typology gives a more nuanced picture of external software development than is currently available new evidence to the importance and cost of flexibility in software 14

15 References 1. Bajari, P. and S. Tadelis (2001) "Incentives Versus Transactions Costs: A Theory of Procurement Contracts," RAND Journal of Economics (32) 3, pp Banerjee, A. V. and E. Duflo (2000) "Reputation Effects and the Limits of Contracting: A Study of the Indian Software Industry," Quarterly Journal of Economics (115) 3, pp Barki H., Rivard S., Talbot J. (1993) "Toward an Assessment of Software Development Risk", Journal of Management Information Systems, (10) 2, pp Eisenhardt, K. M. and J. A. Martin (2000) "Dynamic Capabilities: What are They?," Strategic Management Journal (21) 10, pp Gefen D., Wyss S., Lichtenstein Y. (2008) "Business Familiarity as Risk Mitigation in Software Development Outsourcing Contracts" MIS Quarterly, 32( 3), pp Gopal, A., K. Sivaramakrishnan, M. S. Krishnan, and T. Mukhopadhyay (2003) "Contracts in Offshore Software Development: An Empirical Analysis," Management Science (49) 12, pp Jones C. (1996) "Strategies for Managing Requirements Creep", IEEE Computer, (29) 6, pp Mintzberg, H., B. Ahlstrand and J. Lampel, Strategy Safari, Prentice Hall, Nadkarni, S. and V. K. Narayanan (2007) "Strategic Schemas, Strategic Flexibility, and Firm Performance: The Moderating Role of Industry Clockspeed," Strategic Management Journal (28) 3, pp Rustagi A., B. King, and L. Kirsch (2008) "Predictors of Formal Control Usage in IT Outsourcing Partnerships" Information Systems Research (19) 2, pp Teece, D. J., G. Pisano, and A. Shuen (1997) "Dynamic Capabilities and Strategic Management," Strategic Management Journal (18) 7, pp