The Effect of Bargaining Power on Fixed Price IT Outsourcing Decisions

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Executive Summary

Successful IT outsourcing is usually for the benefit of both parties: the outsourcing client and the service provider. With a fixed price contract, the client tries to lower project risks and costs by transferring parts of a project to the service provider at a previously negotiated price. In this paper, the authors elaborate a model from the client's perspective to identify a project's optimal degree of outsourcing, considering both, costs and risks of software development. They then study the effect of bargaining power on this decision. Against the expectation that a powerful service provider demanding a higher price will cause a lower degree of outsourcing, the model shows that bargaining power has no effect on the decision.

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