Small Firms and Offshore Software Outsourcing : High Transaction Costs and Their Mitigation

Identifies the transaction costs facing small firms engagedin offshore software outsourcing and considers the strategies that small firmsadopt in order to mitigate transaction costs and manage the process of offshoresoftware development. First, a theoretical framework derived from transaction cost economics (TCE)is outlined, along with the argument that small and large firms engaged inoffshore sourcing incur different levels of transaction costs at the threestages of contact, contract, and control. Next, data from interviews of keypersonnel from 25 small firms in the United States and the United Kingdom areused to address the research questions. Conducted between 2000 and 2003, the interviews uncover nine transactioncost mitigation strategies, six of which are for vendors and the rest of whichare for client firms. These strategies allow client firms to gain experience,overcome opportunism, and facilitate knowledge flows. The strategies forsuppliers include establishing an onshore presence, reducing contact costs,simplifying contracting, providing control channels, standardizing services,and employing expertise intermediaries. (SAA)