Determinants of Price in Custom Software: A Hedonic Analysis of Offshore Development Projects

37 Pages Posted: 27 Jul 2004

See all articles by Sendil K. Ethiraj

Sendil K. Ethiraj

University of Michigan - Stephen M. Ross School of Business

Prashant Kale

University of Michigan at Ann Arbor

Mayuram S. Krishnan

University of Michigan, Stephen M. Ross School of Business

Jitendra Singh

University of Pennsylvania - Management Department

Date Written: June 2004

Abstract

The starting point for this paper is the general paucity of research on the demand-side of custom software development. As an initial step, we derive and estimate a Hedonic Pricing model using a sample of 160 projects executed by a large software solutions vendor based in India. Our results indicate that there are powerful economic incentives spurring the increasing trend toward offshoring of custom software projects. We estimate that the average annual decline in quality adjusted price amounted to about 14 percent. Second, we also estimate the contribution of quality and human capital to price premia in software projects which helps us pinpoint the targets of vendor effort allocation that will help boost client value functions. This leads us to speculate that the efficiency of custom software development can perhaps be improved by the allocation (or reallocation) of vendor resources designed to increase quality and delivery performance. We discuss the implications of our results for the research and practice of software development.

Keywords: Outsourcing, custom software, offshore development, hedonic Price

JEL Classification: D21, L11, L86

Suggested Citation

Ethiraj, Sendil K. and Kale, Prashant and Krishnan, Mayuram S. and Singh, Jitendra, Determinants of Price in Custom Software: A Hedonic Analysis of Offshore Development Projects (June 2004). Available at SSRN: https://ssrn.com/abstract=569875 or http://dx.doi.org/10.2139/ssrn.569875

Sendil K. Ethiraj (Contact Author)

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
R4442
Ann Arbor, MI 48109
United States
734-764-1230 (Phone)

Prashant Kale

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States
(734) 764-2305 (Phone)

Mayuram S. Krishnan

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-6749 (Phone)

Jitendra Singh

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

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