In my dissertation I am refining Transaction Cost Theory to gain insights into software procurement decisions. This topic is sparked by my interest in open source software and the question of how software procurement decisions within a firm change with the emergence of high-quality and business-ready open source software.
I presented a first version of these ideas at ICIS in 2005. In this paper I utilize TCE to compare transaction and productions costs along a continuum of variable asset specificity in order to explain and predict the circumstances in which the open source “community” is the appropriate governance structure for specific make-or-buy decisions.
I came to realize that Transaction Cost Theory needs to be expanded to accurately apply to software make-or-buy decisions. In particular, I am proposing that when a software application is embedded in a technical architecture and organizational environment, the costs of failure include a readjustment cost that is in fact an important type of asset specificity not included in the original TCE framework. In the software procurement domain, the possibility of readjustment costs affects transaction costs even in absence of other asset specificity dimensions such as human or physical asset specificity. My work refines Transaction Cost Theory for software procurement in general and explains the factors affecting the most efficient choice between buying, building, or using open source software.
I am conducting a qualitative study to test and refine the findings from my conceptual work. I am currently interviewing decision makers from various companies to gain more insight into the main constructs of my work and learn more about the actual decision processes in organizations.
Theoretical implications are that the way software is linked to other software makes readjustment costs the “big locomotive” of TCE applied to software decisions as opposed to opportunism in more traditional applications of TCE. It is reasonable to think that this refinement will apply to other organizational situations, not just software procurement. The topic is important to practitioners as well since IS managers need to make an informed decision for each software procurement choice.
My next goal is to expand my dissertation research by conducting a quantitative study to measure the constructs and test the hypotheses that emerge from my dissertation and the interviews with company decision makers I conducted. In the future, I plan to continue to apply economic and organizational theories to important IS issues.
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