Academic journal article JITTA : Journal of Information Technology Theory and Application

The Impact of Pricing and Opportunistic Behavior on Information Systems Development

Academic journal article JITTA : Journal of Information Technology Theory and Application

The Impact of Pricing and Opportunistic Behavior on Information Systems Development

Article excerpt

Abstract:

Information systems development (ISD) takes place within an economical context. However, the economical conditions that shape ISD practice have hardly been researched. In this paper we study how pricing affects ISD in practice. Based on data collected in the Danish IT industry, we used a grounded theory approach to develop a model of the impact of pricing on ISD. The model was refined through the use of principal-agent theory and economic game theory in the form of the prisoner's dilemma. The model describes pricing structure, risk distribution, opportunistic behavior and their relationships as the elements that influence ISD practice. On this basis we argue for the uptake of new development approaches, such as agile software development (ASD), to improve ISD practice and its outcomes.

Keywords: Information systems development, pricing, principal-agent theory, prisoner's dilemma, pricing structure, risk distribution, opportunistic behavior, agile software development.

INTRODUCTION

Information systems development (ISD) takes place within an economical context. Cost overruns are frequently reported, and the delivery of quality information systems within appropriate time and cost limits has even been given as one justification for the utilization of ISD methodologies (Avison and Fitzgerald 1995). However, the economical conditions that shape ISD practice are-beyond studies of IT service outsourcing (for an overview see, e.g., Lacity and Hirschheim 1993; Dibbern et al. 2004)-rarely researched by the information systems and the software engineering communities.

In the software engineering community, the term software economics has been coined (Boehm and Sullivan 2000). However, it mostly concentrates on questions related to effort estimation (see, e.g., Boehm 1981; Boehm et al. 1995; Jørgensen and Carelius 2004; Jørgensen et al. 2004; Jørgensen and Grimstad 2005).

In the information systems community, Ciborra (1996) takes a contractual view of ISD and based on transaction cost theory discusses concepts of market, bureaucracy and hierarchy, and clan with their differing levels of trust and task uncertainty as a basis for different forms of ISD approaches. A number of other IS-related studies (see, e.g., Banker and Kemerer 1992; Richmond et al. 1992; Whang 1992; Ang and Beath 1993; Richmond and Seidmann 1993; Wang et al. 1997; Banerjee and Duflo 2000) describe features of contracts, contract types, and pricing structures and investigate their economical role, but do not relate them to actual ISD practice.

Lichtenstein and McDonnell (2003) and Lichtenstein (2004) are exceptions and provide two such studies. They consider software development as outsourcing, and, based on an economical perspective, they formulate a number of hypotheses about the relationship among the frequency of milestones, project risk, uncertainty, and price structure as determined in ISD contracts, but they do not obtain any clear results.

Sabherwal (1999) and Bjerknes and Mathiassen (2000) discuss the antithetic relation between trust and control with regard to supplier-customer interactions and contracts. Based on this work, a case study carried out by Madsen and Kautz (2002) found that information systems development encounters difficulties when performed in an iterative way acknowledging uncertainty, but according to a fixed price contract. Against this background we formulated the following research question: How does pricing impact on information systems development in practice?

Based on data collected in the Danish IT industry, we used a grounded theory approach to develop a model of the impact of pricing on ISD. The model was refined through the use of principal-agent theory and economic game theory in the form of the prisoner's dilemma. The model describes the pricing structure, risk distribution, opportunistic behavior, and their relationships as the elements that influence ISD practice. …

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