Knowledge Management and Quality Control in Software Outsourcing Projects

This article describes how entrepreneurs face critical risks in terms of quality control and knowledge management while outsourcing software development to independent service providers. First, it is recommended that lump-sum payment contracts should be avoided since software development project involves uncertainty. Instead, a variable payment contingent on observed quality can induce the service provider to exert optimal effort on the project. Second, entrepreneurs must not overlook the importance of providing economic incentives. They can protect their intellectual property by withholding critical knowledge and paying information rents in terms of higher than market wages to the service providers. Third, a startling result is that a low wage nation is not necessarily the optimal location to outsource software development projects. Thus, high wage-strong IPR nations might be chosen instead of low wage-weak IPR nations. Finally, the article explains the apparent paradox that software projects are often outsourced to locations that are characterized by weak intellectual property rights regime and high propensity of imitation.