Managing Software Outsourcing Relationships in Emerging Economies: An Empirical Study of the Chinese Small- and Medium-Sized Enterprises

Small- and medium-sized enterprises (SMEs) are facing great challenges in their information systems (IS) outsourcing relationship management, especially with customized software outsourcing under conditions of technological uncertainty and transaction-specific investments. The problem may be even critical for Chinese SMEs in emerging economies characterized by institutional instability. This article draws on multiple theories to examine antecedents and consequences of the effectiveness of three important interorganizational governance mechanisms, namely, contractual-based and relational-based governance and vendor-specific investments. The results of a survey on 83 software outsourcing projects indicate some interesting patterns that Chinese SMEs use to manage their outsourcing relationships. We found that contractual governance is found to be the only effective mechanism when the outsourcing firm (client) perceives technological uncertainty. On the other hand, with the transaction-specific investments, relational governance, and reciprocal-specific investments by IS vendor would be preferred as effective mechanisms by the outsourcing firm. Our analyses also show that Chinese SMEs in emerging economies would rely on multiple governance mechanisms to enhance outsourcing success. Overall, the findings are in line with the studies stressing the importance of building partnership-style relationships and seeking reciprocal actions in sourcing exchanges.