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RESEARCH ARTICLE

AN EMPIRICAL ANALYSIS OF INTELLECTUAL


PROPERTY RIGHTS SHARING IN SOFTWARE
DEVELOPMENT OUTSOURCING1
Yuanyuan Chen
Department of Information Systems, National University of Singapore,
Singapore 117417, REPUBLIC OF SINGAPORE {discy@nus.edu.sg}

Anandhi Bharadwaj
Goizueta Business School, Emory University, Atlanta, GA 30322 U.S.A. {abharad@emory.edu}

Khim-Yong Goh
Department of Information Systems, National University of Singapore,
Singapore 117417, REPUBLIC OF SINGAPORE {gohky@comp.nus.edu.sg}

Software development outsourcing (SDO) contracts are plagued with ex post opportunism and underinvestment
problems. Property rights theory (PRT) argues that appropriate property rights allocation between vendors
and clients can reduce opportunism and incentivize relation-specific investments. We conduct an in-depth
content analysis of 171 real SDO contracts and empirically examine how project attributes and contract
parties bargaining power affect the allocation of intellectual property rights (IPR). We find that clients
retained more IPR when software development was modularized whereas they shared more IPR with vendors
in contracts that incorporated greater use of a vendors proprietary software. Greater levels of task complexity
were associated with more IPR sharing with vendors. We also find that the responsiveness of IPR to project
attributes varied across the different types of intellectual assets. For example, vendors were more likely to
obtain redeployment rights of know-how if they were contracted for novel software development projects.
However, clients were less likely to cede ownership of data and confidential information embedded in software
customization projects. We control for a variety of firm and transaction characteristics and the results we
obtain here are robust to concerns of endogeneity bias.

Keywords: Software development, outsourcing, contract design, intellectual property rights allocation,
property rights theory, incomplete contracts

Introduction1 cations, business process designs, technology and data archi-


tectural plans, algorithms, and source code (Gefen et al. 2008;
Software development outsourcing (SDO) is a knowledge- Walden 2005). These intellectual assets are created for the
intensive process where the contracting parties create a bundle core purposes of the clients business activities and in
of intellectual assets such as functional requirement specifi- accordance with specific instructions by the client. They
often embody the clients confidential information such as
business practices and pricing analytics. The intellectual
1
Ravi Bapna was the accepting senior editor for this paper. Yulin Fang assets generated in the SDO process are generally protected
served as the associate editor. as intellectual property (IP) (de Laat 2005; Harison 2008).

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IP laws grant asset owners a bundle of IP rights (IPR) in- The limited empirical research on how IPR is allocated to
cluding ownership and usage rights to exploit the intellectual reduce ex post opportunism has either focus on a specific type
properties. In SDO, it is generally the case that clients hire of IPR (Anand and Khanna 2000; Elfenbein and Lerner 2003;
vendor firms under the work-made-for-hire principle, where Susarla 2012) or has treated IPR as a monolithic and
the default norm is for clients to retain all of the new IP indivisible bundle of rights (Whang 1992). Given that the
created in the project. However in practice, it is striking to responsiveness of contract parties investment efforts to the
observe that clients are often willing to share or cede some of allocation of IPR may depend on the value and the degree of
the ownership and usage rights to the vendors. For example, appropriability of individual IPR (Lerner and Merges 1998;
Carson and John (2013) reported that clients share at least Walden 2005), the allocation of individual IPR or combina-
some IPR with vendors when they outsource their research tions of IPR subsets may fulfill different contractual govern-
development and engineering projects. This is also observed ance functions. Therefore, previous research focusing on a
in SDO contracts when clients grant vendors the right to use specific dimension or lump sum effects of IPR has not been
or produce derivative software products for future use able to differentiate their value and effects clearly and has led
(Susarla et al. 2010; Walden 2005). However, in the case of to some ambiguous results (Adegbesan and Higgins 2011).
software contracts, there is no comprehensive understanding
of (1) the intellectual assets generated in SDO and the related The only prior studies that have analyzed IPR framework and
IPR involved and (2) the contingency factors that determine allocations in contracts are Lerner and Merges (1998),
when vendors are more likely to obtain IPR from clients. Adegbesan and Higgins (2011) and Carson and John (2013),
Understanding the first question is essential to securing the but these studies have not examined SDO contracts. The first
value generated in SDO as the means to create and exploit two papers examined IPR allocation in a biotechnology devel-
such value can vary considerably depending on the strategic opment alliance and focused on the impacts of biotechnology
and complementary use of different types of intellectual companies bargaining power (measured as the firms finan-
assets. We do not know enough about the appropriate ap- cial status) on the allocation of patent ownership. Carson and
proaches to protect different types of IPR in software and the John studied the role of IPR allocation as a dependence-
ways to exploit created values. Studying the determinants of balancing mechanism to change ex post bargaining power of
the allocation of IPR is a central issue in the negotiation of contract parties in R&D engineering outsourcing. Their
SDO contracts. IPR allocation matters because it can help findings may not be fully generalizable to the SDO context
reduce ex post opportunism and ensure that the contracting for the following two reasons. First, the primary exchange
parties are incentivized to invest relation-specific efforts hazard in software development outsourcing not only arises
(Grossman and Hart 1986; Hart and Moore 1990; Milgrom from contract parties bargaining power but also asset-
and Roberts 1992). specificity and uncertainty in software development projects.
Software development often intertwines with other operation
The purpose of this paper is to analyze the types of intel- and production activities within the client company (Gefen et
lectual properties generated in the SDO process and the al. 2008; Tiwana 2008a, 2008b). The linkage between differ-
determinants of IPR allocation. Although IPR in software ent functional activities and the interaction between client and
development has been studied in the IS literature, the focus vendors make the software development process complicated
has centered largely on the relative efficacy of various IP and difficult for parties to foresee and articulate contingencies
protection mechanisms such as copyrights and patents to in contracts, thereby increasing the hazard of ex post oppor-
protect against unauthorized use (Arora 1996; Leiponen 2008; tunism such as hold-up. Second, the contract partys response
Simon 1996). The literature on risks in software and IT out- to the incentive opportunity of IPR varies across industries
sourcing has focused on the typical project management risks and sectors. In industries where lead time or secrecy is
dealing with cost, quality, and schedule of the projects, with crucial, such as the case in the software industry, the incentive
the concomitant approaches to better planning, monitoring, effect of property rights allocation could be different from that
and control (Gefen et al. 2008; Keil et al. 2000; Krishnan et in biotechnology and engineering R&D contracts. In addi-
al. 2000; Tiwana 2008b, 2010; Tiwana and Keil 2009), but tion, the above three studies all focus on the allocation of
has remained largely silent on IP risks. Despite limited theo- patent ownership. Patent rights are not so prominent in SDO
retical work on allocation of IP rights in SDO (Walden 2005), contracts because software can be protected not only under
the software contract design literature has mainly focused on patent law but also under copyright and trade secret law. The
compensation mechanisms such as pricing structure and value and the appropriability of copyright or trade secret are
monetary incentives (Dey et al. 2010; Gopal et al. 2003; quite different from patent ownership given that these IPR are
Lichtenthaler and Ernst 2012) but has ignored the incentive governed by different rules. Against this backdrop and to the
opportunities from IP rights. best of our knowledge, our study represents the first attempt

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at categorizing different types of IPR that are specified in IPR might be better measured by observing explicit
SDO contracts and the determinants of these IPR allocations contractual clauses rather than by questionnaire
using actual contracts signed between vendors and clients. scales. This approach might also allow better empi-
rical (and theoretical) discrimination between the
We begin by examining what IPR are generated in the SDO various aspects of IPR and their functioning
process. We refer to law textbooks (Bainbridge 2007) and the (p.1082).
literature in economics (Milgrom and Roberts 1992) and
software engineering (Kurbel 2008; Larman 2004; Pressman Subsequent related research can use our coding scheme and
2005) to identify key intellectual assets generated in the SDO content analysis methods to collect and analyze data from
process. We then conduct a comprehensive literature review explicit contractual clauses. Collectively, these contributions
of research in IPR to identify different types of ownership and extend and deepen our understanding of the research on IPR
usage rights that have been examined in the prior literature. allocation in SDO contracts in a novel and distinctive way.
Combining these streams of literature, we derive eight types
of IPR that are critical for SDO contracts. Next, we build a The remainder of the paper is organized as follows. The
coding scheme to analyze the content in contract provisions following section discusses prior work on software develop-
in terms of how these IP rights were distributed between ment and IPR allocation; we then move on to develop our
contract parties. Drawing on prior theoretical and empirical hypotheses on the determinants of IPR sharing. Next, we
work on property rights and transaction cost economics, we describe our data, data analysis methods, and variables, which
then develop specific hypotheses to show how the relative are followed by the results, discussion, and conclusion.
vulnerability of the contracting parties to ex post opportunism
drives the need for IPR sharing in SDO contracts. The con-
tent analysis data coded from 171 actual SDO contracts are
used to test the hypotheses. Software Development and
Intellectual Property Rights
This study makes three significant contributions to the litera-
ture on SDO and contract design. First, we conduct a com- Intellectual Assets Involved in Software
prehensive analysis of IPR in SDO and develop a framework Development Processes
that specifies ownership rights of five valuable intellectual
assets (namely, preparatory materials, computer programs, Different intellectual assets are created in the different
databases, derivatives, and other works) and the usage rights software development stages. A typical software develop-
of these assets. This allows us to examine the value and ment process comprises several generic phases: requirements
characteristics of different types of intellectual assets and how gathering and analysis, design, construction, testing, debug-
the property rights of these assets are negotiated and allocated ging, and deployment (Kurbel 2008; Larman 2004; Pressman
independently or as a bundle. Second, our research con- 2005). Figure 1 depicts the stages of software development
tributes to the literature on contract design by empirically and the types of intellectual assets generated in each stage.
examining how IPR allocations serve as a governance Software development often starts with requirements
mechanism. SDO contracts are unique because software gathering and analysis which identify a programs functions
development requires relation-specific investments from and business investment requirements. The developer will
vendors and the outputs are mostly customer-specific. We then design software internal structures such as subroutines,
develop specific hypotheses that link the antecedent factors flow charts, task divisions of modules, and definition of data-
based on the indispensability of the contracting parties and the base structure. The requirement and the design stages often
degree of uncertainty in the contracting context to the require the most up-front time and investment in creating
propensity of the clients to share or cede specific IPR. Our preparatory materials. Once the program design is complete,
analysis and findings enable us to advance the literatures in the developer starts transposing the programs structural blue-
both incomplete contract design and software outsourcing risk print into the source code. The construction stage often
management while providing strategic implications for soft- requires the developer to be creative in conveying the blue-
ware outsourcing risk management. Finally, we develop a print into source code. The source code is subsequently
coding scheme that can be used to codify contract clauses in translated or compiled into machine-readable object code.
other IT service or technology development outsourcing When the coding is completed, the developer will use the
contracts. Contract design research is restricted by the avail- clients business data to test the program in order to find and
ability of contracting data. Most prior studies are either based correct any logical and syntactical errors. The testing and
on analytical modeling or survey data. As Carson and John debugging process generates multiple testing plans and
suggest in their paper, reports, as well as release documentation. After the success-

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Figure 1. Decision Process and Intellectual Property Creation in SDO Project Time Line (adapted from
Gefen et al. 2008; Kurbel 2008)

ful completion of testing and debugging, the program is Types of IP Rights in SDO
deployed. The developer is expected to deliver the computer
program which consists of the source code, object code, The input and output works created in the SDO process are
compilation of the programs, and final product documen- subject to the protection of IP rights which are the exclusive
tation. rights granted by law over the use of creations of the minds
for a certain period of time.2 IP owners have exclusive
Conventional IP law suggests that the intellectual assets control over a collection of individual rights inherent within
generated in the SDO process can be classified into five types the property (Klein and Robinson 2011), including control
of properties: preparatory materials, databases, derivatives, over the use of a property as well as its returns (Milgrom and
other works, and software programs (Bainbridge 2007; Kep- Roberts 1992), the right to grant others use of the property, as
linger et al. 1984). The classification of these five types of well as the right to exclude anyone else from using the
works is based, first, on their roles in the inputoutput property without consent (Bainbridge 2007). Furthermore, IP
sequence of software development and, second, on the value owners are deemed to have the control of residual rights that
of each type of intellectual assets which is different due to are not explicitly specified in contracts (Grossman and Hart
their embedded knowledge, efforts spent, criticality, and 1986; Hart 1988; Hart and Moore 1990; Milgrom and Roberts
appropriability level. Preparatory materials refer to the 1992). For instance, under the IP laws of most countries, the
inputs for software development, including requirement client is the default property owner of the work-in-progress
specifications, algorithms, input/output formats, reports, and software based on the work-made-for-hire principle. Property
protocols, whereas derivative works are the works based on owners can keep the entire ownership for themselves or
one or more preexisting software program in which a work transfer it wholly to another party (sole ownership). Alter-
may be transformed, adapted, extended or modified (Bain- natively, they can share the IP ownership (joint ownership) or
bridge 2007) to facilitate development of the final product. selectively grant IP usage rights to others (Bainbridge 2007;
For example, translating an English version of a work to a Carson and John 2013).3 A few IS studies have examined
Japanese version is counted as making a derivative of the IPR in IT contracts. Elfenbein and Lerner (2003) studied
work. The derivative is also a protected intellectual asset.
Databases comprise clients business data for software 2
http://www.wto.org/english/tratop_e/trips_e/intel1_e.htm.
testing, database structure, data contents, and database
displays, etc. Other works such as logos and images are often 3
The differences between joint ownership and sole ownership are mainly
produced in software development processes. Source code, about restrictions of exploitation rights. Generally, a party of joint ownership
object code, compilation of programs, screen display, and shall get consent from the other co-owner in order to pledge, assign, sell or
alpha and beta release documentation are in the software otherwise dispose of its interest in the asset to third parties. The right to
program category which is the final output of the SDO license an IP to third parties is also restricted for joint ownership unless there
is a written agreement that specifies distribution of license costs and income
process.
between the co-owners (Bainbridge 2007; Keplinger et al. 1984).

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ownership of servers, customer data, and URL in e-commerce appropriability play a key role (Arora and Merges 2004;
website development contracts. Leiponen (2008) examined Teece 1986). Individual IPR may be granted and shared
ownership of service outputs such as design, process plan, and depending on the transactional environment and context
technology in consulting service agreements. (Carson and John 2013). Hence, it is necessary to understand
the IPR system holistically. Our study focuses on the
Usage rights are economic rights consisting of reproduction ownership of five types of intellectual assets and three usage
and distribution of intellectual property (Bainbridge 2007). IP rights that are economically important in SDO relationships
owners can authorize others to use, reproduce, or distribute a and that have been examined in prior literature, namely
part or the entirety of an intellectual asset and share the
proceeds from the IP usage. The usage rights can be granted (1) Right to use the developed software and source code for
in a limited way, for a limited time, and in a limited geo- a specific purpose after the contract ends, but not modify,
graphical scope or purpose of use. Prior IS research has reproduce, or sell the software. This right does not allow
examined several types of usage right in IT contracts. For the party to use the developed software, to sell, or to dis-
example, Anand and Khanna (2000) studied the license to use tribute the software program to the public.
in licensing agreements and Susarla (2012) investigated the
redeployment right of know-how and intellectual assets in IT (2) Right to redeploy the residual knowledge asset such as
outsourcing contracts. In the Carson and John (2013) study, information relating to ideas, concepts and techniques
distribution right was included as an important usage right for which are gained in the SDO process into projects for
R&D outsourcing relationships. These usage rights are also other parties. Different from the right to use which
valuable for software developers since they can use these grants the right to use the output of the SDO project, the
intellectual assets and know-how for other clients or use them redeployment right allows the rights holder to use the
to further develop their proprietary technologies. know-how and information gained in the SDO process,
and the residual intellectual assets that may not have
Prior contracting studies (in IS and non-IS) often consider IPR been clearly specified in SDO contracts.
as a subset of control rights to govern contractual
relationships (Elfenbein and Lerner 2003; Lerner and Merges (3) Right to sell the developed software to third parties in
1998). As summarized in Table 1, in addition to IPR, certain geographical regions and industries.
previous research has also examined the right to terminate the
contract at will (Lerner and Malmendier 2010; Ryall and
Sampson 2009; Susarla 2012), source code escrow (Susarla
Theory and Hypotheses
2012), non-compete clauses restricting vendors from com-
peting with clients ex post (Leiponen 2008; Mayer and
Intellectual Property Rights Allocation
Salomon 2006), and business restrictions on clients or
vendors (Elfenbein and Lerner 2003; Leiponen 2008). These
SDO contracts are inevitably incomplete because contracting
control rights are distinct from IPR since control rights are
parties are usually unable to exactly prescribe the system
allocated for control over the development and relationship
requirements, architecture, prototype designs, and deliver-
management processes whereas property rights are granted for
ables ex ante (Boehm 1989; Zmud 1980). Such contract
the outputs of software development (Lerner and Merges
incompleteness is exacerbated by unobservability and unveri-
1998). Empirical research also suggests that the allocation of
fiability of vendors actions and output quality in software
IPR and control rights respond to different contractual risks
development projects (Boehm 1989; Dey et al. 2010; Mayer
and criteria (Elfenbein and Lerner 2003). As our paper
and Salomon 2006). Given each partys fear of hold-up at the
focuses on IPR as a form of incentive to ensure the commit-
renegotiation stage, SDO contracts are often plagued with
ment to tasks, studying other forms of control rights are
severe underinvestments (Klein et al. 1978; Susarla 2012).
outside the scope of this research.4
The prior literature on contract design for software and IT
outsourcing has drawn heavily on incomplete contracting
The value of the intellectual properties may differ across firms
based on transaction cost economics (TCE) and the property
and contracting contexts in which knowledge, innovation, and
rights theory (PRT). These theories assume that due to
bounded rationality, contract parties cannot foresee all
4
possible future states of the world, thereby failing to specify
We also examined the distributions of these control rights for SDO contracts
a complete contract at the time of signing the contract
in our data sample. Less than 10% of SDO contracts in the sample specified
any of these control rights, indicating that the control rights are not
(Grossman and Hart 1986; Hart 1988; Hart and Moore 1990;
necessarily important in SDO contexts. In the interest of results generaliza- Williamson 1979, 1985). Contract parties who are strategic
bility, we did not include these control rights in our empirical analysis. and self-interest seeking will behave opportunistically to

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Table 1. Types of Property Rights and Other Rights Studied in Prior Literature
Right Definition Related Studies
Ownership
Core technology Ownership of copyright, patent, or trade mark of core Lerner and Malmendier (2010)
technology in the development Lerner and Merger (1998)
Assets Ownership of servers, customer data, and URL Carson and John (2013)
Elfenbein and Lerner (2003)
Lerner and Malmendier (2010)
Service output Ownership of service outputs (e.g., design, process plan Leiponen (2008)
and technology)
IP Usage Rights
Right to use Right to use developed technology and embedded Adegbesan and Higgins (2011)
technologies on expiration Anand and Khanna (2000)
Carson and John (2013)
Redeployment right Redeployment right of know-how and residual information Susarla (2012)
Right to sell Right to manufacture and sell final product Adegbesan and Higgins (2011)
Carson and John (2013)
Control Rights
Right to terminate Right to terminate the contract at convenience Lerner and Malmendier (2010)
contract Ryall and Sampson (2006)
Susarla (2012)
Source code escrow Vendors shall deposit a copy of source code to the escrow Susarla (2012)
agent
Non-compete Restricting vendors from competing with clients after the Leiponen (2008)
restriction end of contracts Mayer and Soloman (2006)
Business restriction on Exclusivity restricting client to outsource development Leiponen (2008)
clients projects to other vendors during the contract period
Business restriction on Restricting service firms/vendors from providing services to Elfenbein and Lerner (2003)
vendors clients competitors Leiponen (2008)
Financial right Vendors have right to receive royalty payments from client Carson and John (2013)
Kaplan and Strmberg (2004)

further their own interests to the detriment of the counterparty approach to the study of information assets and examined the
when a non-contracted occasion occurs (Williamson 1985). conditions under which ownership of information assets and
The contract party that invests more relation-specific assets in complementary physical assets should be transferred or
the production process is therefore likely to encounter oppor- owned by the party investing in non-contractible assets. The
tunistic behaviors from the other party (i.e., hold-up). The IT outsourcing literature has used the PRT approach to
investing party, anticipating this ex post hazard of oppor- address the primary concerns of underinvestment and hold-up
tunism, will therefore refrain from investments in relation- (Walden 2005). The literature has examined the monetary
specific assets, leading to less optimal contracting perfor- aspect of contractual governance (i.e., the pricing structure)
mance. To counter the opportunism and under-investment (Banerjee and Duflo 2000), and the optimal allocation of ex
problems, the PRT literature proposes that assigning property post contractual planning and decision making (Susarla 2012;
rights to the investing parties can induce incentives to invest Susarla et al. 2010).
critical resources in the relationship (Grossman and Hart
1986; Hart 1988; Hart and Moore 1990). Property rights PRT posits that when both contract parties expend relation-
owners have ownership of the intellectual assets and also the specific investments, property rights of both relation-specific
control rights to determine how the assets are to be used in assets invested in the production process and the output assets
circumstances not specified by contracts or laws (i.e., residual must be assigned to the party whose relation-specific invest-
control rights) (Grossman and Hart 1986; Milgrom and ment has relatively higher marginal effects on contract
Roberts 1992). Brynjolfsson (1994) extended the PRT performance (Grossman and Hart 1986; Hart and Moore

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1990). Property rights to development output and inter- assets at stake that could be appropriated by the contract
mediate assets in SDO are prescribed to clients because they partner for other uses in the relationship. The greater the
provide the investment needed to fund the development magnitude of such concerns, the greater the extent to which
efforts. However, developers effort and investment on pro- the parties will retain IPR to protect the assets involved
jects are critical and oftentimes indispensable for the success (Oxley 1997; Teece 1986).
of the software development project. This is particularly true
when the clients source for a vendors specific expertise or Although contracting hazards play a key role in IPR
for the vendors proprietary technologies. To reduce hold-up allocation, there are additional factors that can influence IPR
opportunism and overcome underinvestment problems, the distribution between contract parties. Aghion and Tirole
PRT literature proposes that clients should cede some IPR to (1994) extend the PRT approach to study IPR allocation in a
vendors to induce behavior that optimizes project returns situation of resource restriction. They suggest that resource
(Carson and John 2013; Leiponen 2008; Susarla 2012; indispensibility and relative bargaining power, in addition to
Walden 2005). Since software development creates a bundle opportunism and underinvestment, also play a role in the
of intellectual properties, clients can choose to share the allocation of property rights. Resourse indispensibility refers
whole or a part of the bundle of properties with vendors (i.e., to the degree of substituability of rival products. In the
ownership sharing) or retain property ownership for them- absense of alternative resources, contract parties who control
selves while granting individual usage right to vendors (i.e., the indispensible assets will have relatively stronger bar-
usage right sharing) (Arora 1996; Arora and Merges 2004; gaining power. Therefore, it is reasonable to assume that they
Walden 2005). In this study, we refer to these types of IPR will use their dominant positions to negotiate for as many
ownership and usage distribution choices collectively as IPR rights as possible for themselves.
sharing.
The TCE and PRT theoretical propositions are supported by
Deciding the extent of IPR sharing is crucial in contract prior empirical literature which finds that allocation of pro-
design literature. Prior literature on contract design combines perty rights are subject to the contract partys indispensability
transaction cost theory with the PRT approach and identifies and bargaining power (Carson and John 2013; Elfenbein and
factors that influence the degree of opportunism and thereby Lerner 2003, 2012; Kaplan and Strmberg 2004; Leiponen
increase the pressure for IPR sharing. Ex post opportunism is 2008; Lerner and Malmendier 2010; Lerner and Merges 1998;
exacerbated by the degree of uncertainty in the contract Ryall and Sampson 2009). For example, Elfenbein and
(Williamson 1985), the extent of asset specificity in the Lerner (2003, 2012) found that the ownership of three impor-
relationship (Hart 1988; Williamson 1979), and the degree of tant assetsservers, URL, and customer datawas assigned
appropriability of IPR (Oxley 1997; Teece 1986). Uncer- to alliance partners whose contributions to Internet portal
tainty is defined as a lack of knowledge of future contin- development were relatively more indispensable. Kaplan and
gencies (Arrow 1974). A high level of environmental and Strmberg (2004) and Lerner and Merges (1998) tested the
task uncertainty as well as the contract parties behavioral bargaining power due to financial strength and found that
uncertainties can make it impossible to prescribe contin- contract parties with more financial resources retained more
gencies that may occur in the future, thereby increasing the residual control rights. Leiponen (2008) studied another
hazard of opportunism. Asset specificity refers to the degree source of indespensibility and bargaining powerservice
to which an asset can be redeployed to alternative uses and by providers innovation capabilitiesand found that more
alternative users without sacrifice of productive value innovative service providers retained more control over
(Williamson 1989, p. 142). Relationship-specific investments intellectual assets. Walden (2005) formulated five types of
have low values outside of the contractual relationship. When intellectual property ownership structures and posited that
a transaction requires specific investments in the production three factorsusefulness of software, resale value of the
process, an ex post quasi-rent is generated amounting to the software, and relative importance of specific investments
differences in values between the intended use of the specific affect the design of ownership structures in SDO contracts,
investment and the next best use of it. The firm that does not while Carson and John (2013) found that vendors had more
invest the specific assets may request a larger share of the IPR when there were greater environmental uncertainty and
quasi-rent from the investing party that has expended the asset specificity in the projects.
specific investments by threatening termination of the rela-
tionship (Klein et al. 1978). Anticipating this hold-up threat, In summary, a comprehensive review of the theoretical and
the investing party would bargain for a large share of quasi- empirical literature based on TCE and PRT shows that
rents in ex ante contract negotiations to secure their stake. contract parties asset indispensability and bargaining power,
Appropriability concerns also affect the extent of contractual along with the degree of uncertainty inherent in incomplete
safeguards in place, especially when parties have proprietary contracting, drive the need for IPR sharing as a useful govern-

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ance mechanism (beyond simply relying on the pricing mech- projects with regard to communication requirements between
anism to align parties interests). Dependence on a vendors the clients and the vendors employees (Liao et al. 2010).
proprietary technology and the degree of modularity in However, for modification of existing systems, it is relatively
software design have served as useful mechanisms to examine easier for the clients to perform the requirements analysis and
the level of asset indispensability and contract parties develop precise systems specifications. In such cases, the
bargaining power respectively (Baldwin and Henkel 2014; vendors investment on relation-specific development is
Bush et al. 2010; Dourish and Edwards 2000; Pressman relatively smaller compared to that of totally new systems.
2005). To get to the question of project-related uncertainty,
we turn to the software engineering literature which has care- Once vendors begin the requirements analysis phase, their
fully examined software project characteristics and associated relation-specific assets are subject to the risk of hold-up by
risks (Boehm 1989; Cataldo and Herbsleb 2013; Na et al. clients (Susarla et al. 2010). Clients may try to renegotiate to
2004; Nidumolu 1995; Pressman 2005). Specifically, the derive more value from the project or they may even renege
degree of project complexity has been widely identified as a on the contracts if they discover the development project to be
key amplifier of project uncertainty and thereby tends to drive infeasible. For instance, the client can abandon the project
up project-specific risks (Gopal and Koka 2010; Gopal and completely or take the requirements specifications to contract
Sivaramakrishnan 2008; Mooi and Ghosh 2010; Susarla et al. with a new partner. Anticipating this, vendors are likely to be
2010; Tiwana 2010). Additionally, when clients require reluctant to invest upfront efforts. Based on PRT (Grossman
software customization and newness in the project, vendors and Hart 1986; Hart 1988; Hart and Moore 1990), such hold-
have to make relationship-specific commitments and this in up problems can be mitigated by allocating IPR to the vendor
turn induces hold-up and misappropriation opportunities, so as to generate the best possible incentives for motivating
consequently driving up the overall risks associated with the the vendor to expend maximum efforts in developing the new
project (Haines 2009; Hasan and Lokan 2013; Kurbel 2008; software system. Therefore, from an incentive perspective,
Wang 2002). Taken together, the above five factors deter- we hypothesize that
mine the degree of relative vulnerability of the contracting
parties to ex post opportunism and therefore we argue that H1: Vendors that are contracted for new software
these factors are explicitly considered by the client in deter- development projects are more likely to be assigned
mining the IPR sharing and allocation mechanisms. For individual IPR or gain more IPR in SDO contracts.
expositional clarity, we take the clients perspective and
develop hypotheses relating these five factors to IPR sharing
between clients and vendors. Task Complexity

A complex task consists of multiple and possibly unknown


Project Newness dimensions that are associated with project and performance
uncertainties (Nidumolu 1995). In a complex software
In SDO, vendors are commonly hired to develop new soft- project, not only are the functionalities and specifications of
ware systems for the client, which could mean either devel- the final output difficult to define, but development costs and
oping a program from scratch or adding new functionalities to delivery dates are difficult to estimate at the contracting stage
an existing program. New software projects often pose addi- (Kalnins and Mayer 2004; Susarla et al. 2010; Wang 2002).
tional challenges to vendors, stemming from a lack of under- Moreover, complex software development often requires
standing about the project requirements as well as the needs frequent changes on the agreed-upon requirements and archi-
of potential end users (Humphrey 1995; Nidumolu 1995; tectural design (Holmstrom and Milgrom 1991; Prendergast
Pressman 2005). Hence, new software development projects 2002). Such project uncertainties raise the difficulty and costs
demand a high level of relation-specific investments from of contracting (Holmstrom and Milgrom 1991; Prendergast
vendors. Requirements analysis is the most important stage 2002). For example, in a study of IT contracts, Anderson and
in the software development process, especially for applica- Dekker (2005) found that the complexity of IT products and
tions that are novel and involve unstructured tasks (Zmud ex ante uncertainties about the quality and performance speci-
1980). Vendors have to develop a deep understanding of the fications of the IT transaction were associated with hold-up
clients business processes, and spend hours interviewing end problems and higher contracting costs.
users to elicit their requirements for information display.
Vendors are also required to invest upfront efforts in trans- Task complexity also increases performance uncertainty. In
lating these requirements into detailed design specifications complex development projects, the outcome of the project is
before the coding phase can begin (Kurbel 2008). These are difficult to estimate and measure regardless of the estimation
among the most time-consuming and challenging outsourcing techniques used (Kurbel 2008; Nidumolu 1995). Frequent

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Chen et al./IPR Sharing in Software Development Outsourcing

adaptation of requirements analysis in the software develop- When clients choose to have customized software developed,
ment process makes it impossible to predict SDO performance it is an effective signal of the uniqueness of the firms IT and
outcomes such as actual costs, completion time, system business context. Customized software embodies firm-
benefits, the softwares compatibility with the clients existing specific knowledge that clients normally would not want their
systems, and the softwares technical performance such as competitors to access. However in SDO, the clients will have
functional errors and bugs (Gefen et al. 2008; Kalnins and to share with vendors their specific business requirements,
Mayer 2004; Nidumolu 1995). Such performance uncertain- practices, and trade secrets that might be significant sources
ties give contractors an incentive to shirk and cut corners on of competitive advantage to them (Dittrich et al. 2009; Haines
a project. In addition, incomplete requirements specification 2009; Hasan and Lokan 2013; Walter 2003). The knowledge
and ambiguous design inevitably result in higher coordination assets created and exchanged during the SDO processes repre-
costs. For these reasons, the rate of failure is higher for com- sent valuable IP and are subject to potential expropriation
plex software projects. Complex projects, therefore, require (Arora and Merges 2004; Oxley 1997). In transactions where
higher relation-specific investments from the vendor, such as appropriation problems are greater, explicit provision for
greater investments in communication and closer coordination property rights are used to protect vulnerable parties (Teece
with the client (Clemons and Hitt 2004). When these projects 1986; Williamson 1991). Client firms are therefore more
fail or when the clients end the contracts prematurely, the likely to be motivated to retain the full IPR to the final
relation-specific investments will become sunk costs for ven- product as well as to all the intermediate knowledge assets if
dors. Vendors may thus have a lower incentive to commit they feel appropriation issues are critical.
effort to the project, especially when their efforts are non-
contractible. Viewed from the vendors perspective, developing custom
software is labor intensive (Dibbern et al. 2004) and vendors
To mitigate the risk of underinvestment, PRT holds that when often need to acquire unique skills and business knowledge in
contracts are incomplete, the party that owns or controls an order to complete the particular customization (Wang 2002).
asset will collect the residual returns on its own non- Such investments are highly client-specific and not readily
contractible investment and will therefore be motivated to transferable to alternative uses without losing substantial
make these investments (Hart and Moore 1990). Thus, by value, thereby reducing the vendors bargaining position in ex
granting certain ownership or usage rights to the vendor, the post renegotiations. Moreover, vendors often need to coor-
client firm is likely to induce higher motivation on the dinate closely with clients personnel in order to complete
vendors part to put in the requisite efforts, leading to our next custom development tasks. The interdependencies between
hypothesis: clients and vendors create a potential hold-up problem for
vendors because vendors are responsible for completing
H2: Vendors that are contracted in software projects within time-bound deadlines, but in cases of inter-
development projects with a higher level of task dependence, the vendor has to rely on the clients personnel
complexity are more likely to be assigned individual to make progress on the necessary tasks (Mayer 2006; Mayer
IPR or gain more IPR in SDO contracts. and Salomon 2006). The vendor anticipating this vulner-
ability could potentially under invest unless sufficient safe-
guards are provided. A call to PRT would suggest that
Customization vendors should be allocated IPR as a safeguard against
potential opportunistic behaviors.
Customization is the tailoring of software for a specific user
(organization or business unit) and differs from the develop- The above discussion suggests that clients are likely to be
ment of generic software (off-the-shelf software packages) pulled in both directions, toward greater sharing of IPR to
that is designed for the mass market (Dittrich et al. 2009; motivate vendors against underinvestment of efforts, and
Haines 2009; Hasan and Lokan 2013). Customized software toward little or no sharing of IPR to protect their own IP
typically incorporates knowledge components and business assets. However, to balance the dependence on vendors in
rules that are specialized to the end users. Such personaliza- customized software projects, substitutive incentives such as
tion has been shown to improve both usage and productivity time and materials pricing and other monetary incentives
of computer systems and research suggests that it even (e.g., bonus payments for vendor performance) could be used
increases the sense of end-user empowerment (Dittrich et al. to sufficiently motivate the vendors and to counter the risk of
2009; Fischer and Scharff 2000). In fact, research in software underinvestment. On the other hand, it is difficult to come up
engineering emphasizes the importance of user goals, prefer- with alternative mechanisms to protect the clients specific
ences, and skills in designing customized software (Hui et al. investments and intellectual properties other than through
2003). explicit IPR embedded in the contracts. With increasing

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Chen et al./IPR Sharing in Software Development Outsourcing

investments in specific assets, the clients quasi-rents increase threatening to withhold resources. Under such conditions, the
and, anticipating this, clients would expect more ex ante tenets of the PRT predict a greater degree of IPR allocated to
contractual safeguards in the form of higher IPR allocated to the party with the better bargaining position (Aghion and
themselves. Therefore, we hypothesize that Tirole 1994). Therefore, we hypothesize that

H3: Vendors that are contracted in customized H4: Vendors that are contracted in software
software development projects are less likely to be development projects based on vendors proprietary
assigned individual IPR or gain less IPR in SDO technology are more likely to be assigned individual
contracts. IPR or gain more IPR in SDO contracts.

Vendors Proprietary Technology Software Modularity

Although cost reduction is still the most common motivation We next turn our attention to software design modularity and
for software outsourcing (Lacity et al. 2009), many companies examine its implications for the extent of IPR shared with
have outsourced for more strategic reasons which include vendors. Modularity has emerged as a general set of
gaining access to leading-edge technologies and know-how to principles for software design and refers to the manner in
improve business or process performance (DiRomauldo and which a high level design is decomposed into constituent
Gurbaxani 1998). For example, even though Microsoft has subsystems (modules) that can communicate through
strong in-house software development capabilities, it hired standardized interfaces (Baldwin and Clark 2000). By
Inktomi to develop supporting software for Microsofts search adopting a more modular design, one avoids what would
engine. The main purpose of the contract was to access otherwise be an unmanageable spaghetti tangle of systemic
Inktomis proprietary coupled cluster technology that enables interconnections (Jordan and Lowe 2004). Work in the
the connection of multiple computers to operate as a single strategic management literature has examined the effect of
computing system. modularity on alliance control (Bush et al. 2010; Sanchez and
Mahoney 1996; Tiwana 2008a, 2008b) and has shown that
When vendors are hired to develop software using their that the design principles of loose coupling and standardized
proprietary technology, their preference, unless explicitly interfaces provide a form of embedded coordination that
controlled by the client, would be to make architectural design renders redundant overt managerial supervision (Sanchez and
choices that exploit their proprietary designs and technologies Mahoney 1996).
(which could include design methodology, development tools,
and other proprietary code needed to develop the new In software outsourcing, design modularity can be an impor-
software). Software development knowledge tends to be tant consideration both in the boundary between the out-
complex and involves a large number of different individuals sourced system and the clients base systems as well as,
and interacting technologies and routines. The connections among the different components of the new system. Modu-
between these elements are often highly context-specific. larity insulates the client from new and unfamiliar underlying
Therefore, the vendors proprietary technology and contextual technologies used by the vendor and affords the client the
knowledge become indispensable resources and clients will ability to plug its existing (base) systems into the new system
not be able to continue the focal software development project without changing its base applications (Kurbel 2008). Clients
without the vendors cooperation. In some circumstances, can apportion development tasks to multiple vendors with
vendors have accumulated innovation capabilities that exploit different skill sets. Multi-vendor sourcing helps to protect
their proprietary systems and can make unique intellectual clients from vendor opportunism by reducing the lock-in risk
contributions to the clients project. Thus, vendors can derive that is inherent when working with a single vendor. More-
bargaining power from the valuable resources they bring to over, modular systems are easier to change and replace,
the software development process and negotiate for more thereby reducing the overall control that a vendor can exercise
ownership or usage rights of the generated intellectual assets both in the current project as well as in future work (e.g.,
(Emerson 1962; Heiskanen et al. 2008; Mayer and Salomon through maintenance contracts). Therefore, modularity
2006; Mesquita et al. 2008). As vendors proprietary tech- reduces resource-dependence of the client and thereby
nologies becomes indispensable to the success of SDO weakens ex post bargaining positions of the vendor. Further-
projects, clients will be more likely to share ownership or more, modularity in software design helps protect the clients
usage rights with vendors as a form of incentive mechanism knowledge base from risks of misappropriation because no
to encourage valuable resource deployment. At the same single vendor is likely to gain access to the entire domain of
time, this can overcome opportunistic bargaining by vendors knowledge possessed by the client. Since the client will only

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Chen et al./IPR Sharing in Software Development Outsourcing

need to share with each vendor the knowledge needed for between the years 1992 and 2007 (both years inclusive). To
their particular subsystem as well as the interface knowledge maintain generality in our analysis, we excluded transactions
common to all vendors, this can significantly lower appro- where (1) the contract was a renegotiation or restatement of
priability concerns (Baldwin and Henkel 2014). a previous agreement between the two firms, (2) one firm had
a controlling interest in the other firm (greater than 50%), and
Modularity of products has also been shown to increase the (3) multiple vendors were specified in the same contract. We
level of standardization within an industry. For example, in also dropped 43 contracts due to substantial missing informa-
manufactured products such as bicycles (Galvin and Morkel tion. Our final sample comprised 171 SDO contracts span-
2001), it has been shown that increasing modularity in design ning 13 industries, of which 163 agreements were signed by
fragmented the industry into a series of largely independent U.S. companies and 8 by UK companies. 121 agreements
subcontractors hired primarily through market-based con- were with U.S. vendors and the remaining 50 were signed
tracts. The fragmentation of the industry based on specialized with vendors from 20 different countries. About 59% of the
capabilities led to economic efficiencies and lower barriers to clients were from high technology industries. The frequency
entry. Even though designing software remains a more distribution of the sample across industries was found to be
complex activity than bicycle manufacturing, it is likely that similar to those of other licensing agreements and alliance
the effects of greater modularity will have a similar impact on contracts which have been studied in prior literature (Anand
at least some segments of the software industry. The overall and Khanna 2000; Oxley 1997). Of the 171 contracts in the
effect would be to reduce the clients dependence on the final sample, 55 contracts released contract values, ranging
vendor and thereby to lower bargaining power for the vendors from a maximum exceeding $650 million to a minimum of
and lower willingness on the part of the clients to share or $20,000, with an average value of $5.66 million. A total of
cede IPR to the vendors. Therefore, we hypothesize the 54 contracts were for simple enhancements or for adaptive or
following: perfective changes to an existing system; 76 other contracts
involved reengineering an existing system; another 41
H5: Vendors that are contracted in software required vendors to develop new systems, interfaces, or appli-
development projects to develop modular systems cations. We were able to collect contract length information
(i.e., outsourced software has well-defined interfaces for 169 agreements from the contracts, the firms 10-K
with the clients existing systems) are less likely to reports, and press releases. The length of the contracts ranged
be assigned individual IPR or gain less IPR in SDO from 3 months to 300 months with a mean length of 29.8
contracts. months and a standard deviation of 29.1. Overall, about 71%
of the contracts used a flexible pricing structure (T&M and
cost-plus). About 39% of the contracts in the sample were
signed after the year 2000, with 20% of the clients having had
Empirical Analysis prior business interactions with the vendors.
Data Collection and Measures The data obtained from software contracts were supplemented
with additional variables that served as controls for the empi-
Data for our study comes from software development con-
rical analysis. For each contract, we searched the Factiva
tracts culled from the U.S. Securities and Exchange Commis-
News archive using client and vendor company names to find
sion (SEC) and further augmented with data from ICC full-
contract-related press releases. In addition, we collected
text annual reports for international company profiles.5 The
dominant client information from COMPUSTAT, CRSP, and
SEC regulations (17 C.F.R. Part 229) require publicly-listed
the firms financial statements. Statement of Financial
companies to disclose material contracts6 in their financial
Accounting Standards (FASB) No. 14 requires firms to dis-
filings and software development contracts are frequently
close the identity of any customer representing more than
included in the filings of companies registered in the United
10% of the total sales of a firm. We collected the customer
States. We initially collected 215 SDO contracts signed
abbreviations from the COMPUSTAT industry segment files
and followed the matching procedure used by Fee and
5
ICC Full-text Quoted Company Annual Report contains the annual reports
Thomas (2004) to get the full company names from CRSP.
published by 2,800 British companies listed on the London Stock Exchange When vendors were not publicly traded companies, we
and the top 500 European companies. collected information on dominant clients from the Business
Relationship and Risk Factors sections of the clients
6
Material contracts are generally understood as any contract upon which the financial statements and further searched contract information
registrants business is substantially dependent, as in the case ofagree- from other press releases. For nonpublicly listed firms, data
ment[s] to use a patent, formula, trade secret, process or trade name (SEC
about their revenue and the number of employees were culled
regulations (17 C.F.R. Part 229)).

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Chen et al./IPR Sharing in Software Development Outsourcing

from company websites and Bloomberg Businessweek data- right to use the developed software, redeployment right of
base for small and medium size companies. We downloaded know-how, and right to sell developed softwareare critical
the lists of IT technology companies from three online economic rights in software development relationships. Each
resources: the Fortune 1000 technology firms, the Informa- of the usage rights was coded as 1 if the client retained the
tion Week list of 500 technology companies, and the Inter- sole ownership of the software program (i.e., vendors did not
national Association of Outsourcing Professionals (IAOP) have joint or sole ownership) and granted the usage right to
Global Outsourcing 100 and sub-lists. Vendors reputation the vendor, and coded as 0 if the vendor did not have property
was coded based on whether the vendor was included in any ownership and the focal usage right (Adegbesan and Higgins
of these lists. Country-level software piracy rates were col- 2011; Elfenbein and Lerner 2012; Lerner and Malmendier
lected from the Business Software Alliances (BSA) annual 2010; Susarla 2012). Panel B in Table 3 shows that out of 90
piracy studies (BSA 2008; IPRC 2003) and were used as contracts where clients held sole ownership of software pro-
indicators of the legal protection environment for IPR. gram, about 41% granted vendors the right to sell developed
software and share proceeds with clients; only about 34% of
the contracts allowed vendors to use or modify the software
Dependent Variable program and code after the contract ended; and less than 18%
of vendors gained the right to redeploy residual information
We coded two dependent variables: the propensity for in other projects. Cross frequency analysis between the usage
sharing individual IPR with vendors and the extent of IPR rights indicated that less than 60% of client owners authorized
allocated to vendors. Referring to the economics and IT vendors both the right to use and the right to sell simul-
contract design literature (e.g., Carson and John 2013; taneously and only about 40% of vendors who were granted
Elfeibein and Lerner 2003; Leiponen 2008; Lerner and right to use software also had the right to redeploy residual
Malmendier 2010; Milgrow and Roberts 1992; Susarla 2010), information and know-how gained in the SDO process.
we developed a coding scheme to code the five types of
ownership rights and the three usage rights in each of the 171 Extent of Ownership/Usage Rights. The extent of vendor
contracts (see Table 2). ownership and usage rights were also used as dependent
variables to capture the total number of asset ownership
Ownership refers to the rights for full control over the pro- (either joint or sole ownership) and usage rights assigned to
perty and to the proceeds generated by the property. Each of vendors. The mean of the extent of ownership is 1.65 with a
the five types of assetssoftware program, database, standard deviation of 2.14, whereas the mean of the extent of
preparative material, derivatives, and otherswas coded as usage rights is 0.93 with a standard deviation of 0.90,
1 if ownership was assigned to the client, 2 if there was joint demonstrating a different rights allocation strategy between
ownership, and 3 if it was assigned to the vendor (Elfeibein ownership and usage rights and that asset ownerships were
and Lerner 2003). Panel A of Table 3 provides the frequen- bundled but usage rights were often assigned separately.
cies and cross frequencies of the five ownerships for all of the
contracts in the sample. As expected, most of the SDO con-
tracts assigned IPR ownership to clients. Overall, less than Explanatory Variables
37% of the sample contracts allocated sole ownership of any
of the five assets to vendors. For example, about 37% of the The measures of the five SDO project characteristics
sample assigned ownership of developed software to vendors, namely, extent of project newness (newness), task complexity
with only 28% giving vendors ownership of the database (complexity), customization (customization), vendor proprie-
created during the software development processes. Cross tary technology (proprietary), and software modularity
tabulation shows that at least 70% of contracts assign bundles (modularity)were coded from the Recital and Task and
of ownership rights to vendors. For instance, ownership of Technology Description sections in the SDO contracts. We
software program clustered with ownership of preparative coded newness as a three-level categorical variable based on
materials at a rate of 95%. Owning both assets gives vendors the levels of newness in the requirement specifications
the traceability to link software development requirements to (Kurbel 2008), coded as 2 if the vendor was contracted to
corresponding design artifacts, code, and test cases to support develop completely new systems or applications, as 1 if it was
numerous software engineering activities and software modi- to reengineer or add new functionalities to an established
fications (Pressman 2005). system, and as 0 if it was to do simple enhancement or modi-
fications on the clients existing system. Complexity mea-
Usage Rights. Clients, as property owners, can choose to sures the levels of difficulty in specifying task descriptions,
retain property ownership and grant usage rights to vendors performance measurements, and verifications in contracts
or share the proceeds from the property. Three usage rights (Lerner and Malmendier 2010). This measure for software

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Table 2. Coding Scheme for IPR Specifications


Type of IPR References Examples
Ownership of Bainbridge Example 1: Client Ownership
developed soft- (2007); [PrintOnTheNet.com, Inc., and Ducat Commerce, LLC] Developer agrees that the development of
ware program Keplinger et the printing related work of the Software is work made for hire within the meaning of the
Categorical (1-3) al. (1984) Copyright Act of 1976, as amended, and that the Software shall be the sole property of Buyer.
Example 2: Joint ownership
[U S West Communications, Inc. and OneLink Communications, Inc] In the course of or as a result
of performance under this agreement, inventions, discoveries, adaptations, ideas, specifications,
functional requirements, business and technical information, computer or other apparatus
programs, software, copyrightable material, documentation, trade secrets, trademarks, and other
ideas, knowledge or data, unless specified otherwise in this agreement, all such intellectual
property shall belong jointly to both Parties.
Ownership of Bainbridge Example 1: Client ownership
material for (2007); [PrintOnTheNet.com, Inc., and Ducat Commerce, LLC] Developer hereby assigns to Buyer, without
developed Keplinger et further compensation, all of its right, title and interests in any and all related materials with respect
software program al. (1984) to the Software (in the form of notes, sketches, drawings and as may otherwise be specified by
Categorical (1-3) Buyer).
Example 2: Vendor ownership
[Avesis and National Computer Services] The software, programs, and related documentation
developed by National for Avesis pursuant to this agreement shall be owned by National
(Developer).
Ownership of Bainbridge Example 1: Client ownership
database for (2007); [Avesis and National Computer Services] All of the information, data and contents of databases
software Keplinger et and reports developed and compiled by National for Avesis pursuant to this agreement shall be the
development al. (1984) property of Avesis.
Categorical (1-3) Example 2: Joint ownership
[mPhase and Lucent] All developed information, data and test results created jointly by one or more
employees, contractors, consultants or agents of one Party working in conjunction with one or more
employees, contractors, consultants or agents of the other party during the development period,
and as a direct result of work performed under this agreement, shall be owned jointly by both
parties.
Ownership of the Bainbridge Example: Client has right to make derivatives
derivative from (2007); [Federated Systems Group, Inc and Mobinetix Systems, Inc] The Buyer may use the New Software
developed Keplinger et to prepare derivative works of the Software, and may otherwise modify, enhance, reverse engineer,
software program al. (1984) decompile or otherwise handle it. All enhancements developed by the Buyer, including all modifi-
Categorical (1-3) cations and derivative works shall become and remain the sole and exclusive property of the
Buyer.
Ownership of other Bainbridge Example: Client owns ownership
assets not (2007); [American Insurance & Syntel 2000] To the extent that any Work Product, under applicable law,
specified in the Keplinger et may not be considered works made for hire, Syntel hereby irrevocably assigns and transfers to AH
contract or not al. (1984) the ownership of all rights, title and interests in such Work Product (including copyrights, whether
related to the published or unpublished and patents and all other intellectual property rights thereto)....Upon
developed termination of the Agreement for any reason, any Work Product will be delivered to AH with Syntel
software retaining no copies of Work Product.
Categorical (1-3)
Right to use Adegbesan Example: Client owns ownership but client grants Vendor the right to use technology after
technology after its and Higgins the end of the contract
creation and (2011); [CCSI and Pencom] Limited license of software package. Subject to CCSIs acceptance of the
contract termina- Carson and Phase Three Deliverables, CCSI will grant to PENCOM the worldwide right and license to use a
tion, Binary (0/1) John (2013); functionality, structure, sequence, or organization similar to that contained in the software package
Lerner and in developing software for third parties where PENCOM performs such development without
Merges reference to the software package.
(1998)

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Table 2. Coding Scheme for IPR Specifications (Continued)


Type of IPR References Examples
Right to sell the Adegbesan Example: Client owns ownership but grants vendor the right to sell or license the created
created technology and Higgins software
to other third party, (2011); [eMed and AWARE] eMed shall have the exclusive right to use and sublicense software developed
Binary (0/1) Carson and by AWARE for medical use....AWARE shall have the exclusive right to distribute software and other
John (2013); components included in the Work Product but AWARE shall not distribute the Work Product to the
Lerner and following companies in medical and healthcare industries
Merges
(1998)
Right to redeploy Susarla et al. Example: Client owns ownership but grants vendor the right to redeploy knowledge assets
knowledge assets (2010) in the third partys project
in other projects, [Carnival Cruise & Allin (2001)] Allin will not be precluded from using Residual Information in the
Binary (0/1) field of IT consulting and integration for itself or for other customer. The term Residual
Information shall mean information relating to ideas, concepts and techniques which are related to
Allins business activities.
Non-compete (0/1) Leiponen Example: Vendor cannot compete with the Client after the end of the contract:
(2008); Mayer During the term of this Agreement and for a period of 12 months after the termination of the
and Soloman Developers service, the Developer will not be interested or concerned in any business which
(2006) develops, manufactures, produces, provides, markets, distributes or otherwise deals in products or
services or both which are of a type similar to the products or services which are developed,
manufactured, produced, provided, marketed, distributed or otherwise dealt in by the Company now
or at any time during the term of the Developers consulting services. Such restriction will apply
within the geographical area of business operations in which the Company has an office and
carries on business or has carried on business within the 12 month period ending on the date of
termination of the Developers service.

Table 3. Frequency and Cross-Frequency of Individual IPR


Panel A: Ownerships (n = 171)
Client Joint Vendor Cross-Frequency (%)
Types N Freq(%) N Freq(%) N Freq(%) Program Database Material Derivative
Program 90 52.63 18 10.53 63 36.84
Database 105 61.40 18 10.53 48 28.07 76.19
Material 93 54.39 18 10.53 60 35.09 95.24 80.00
Derivative 102 59.65 19 11.11 50 29.24 76.19 70.83 75.00
Other 84 49.12 26 15.20 61 35.67 88.89 91.67 90.00 73.77
Panel B: Usage rights sharing when clients own the sole ownership of software program (n = 90)
Vendor Cross-Frequency (%)
N Freq(%) Use Redeploy
Use 31 34.44
Redeploy 16 17.78 39.29
Sell 37 41.11 58.89 18.89

complexity has been used in several studies (Dey et al. 2010; and quality requirements for deliverables, as 1 (medium) if
Gefen et al. 2008; Gopal and Sivaramakrishnan 2008; Gopal parts of technical description were specified in the contract
et al. 2003). Referring to the scale of software complexity without corresponding quality measurement criteria, and as 2
developed by Gefen et al. (2008, p. 551), we coded com- (high) when the contract had little by way of details regarding
plexity based on the levels of extensiveness of task descrip- the task or when the description was very generic. High
tion; it was coded as 0 (low) if it was easy to specify a clear levels of task complexity denote low levels of contractibility.
and extensive technical description, deliverable milestones, Following Susarla (2012), we coded customization as 1 if the

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contract required the vendor to have domain knowledge and To ensure coding consistency and reliability, two under-
skills unique to the clients business to develop custom soft- graduate law degree students independently carried out the
ware or to customize existing software, and as 0 if neither of coding of all the contracts and the supplementary data (control
these conditions held. Proprietary indicates the indispen- variables). Examples of sample provisions from actual
sability of the vendors to the contract and was coded as 1 or contracts were provided to the coders who were trained
0 based on whether or not the contract specified that the extensively with a few comprehensive contracts. We checked
vendor firm would utilize its copyrighted or patented tech- the inter-coder reliability for all variable coding and found
nologies for the SDO task. Modularity was coded as 1 if the them to be high (Cohens k = 0.81 or above). Two senior
project was to develop a subsystem of an existing system and computer science degree students also independently coded
the contract provided specifications for user exits to link the all the contracts and supplementary information following the
software to the existing systems (Kurbel 2008), and 0 same coding scheme to further ensure the reliability of the
otherwise. coding scheme among students with different domain knowl-
edge backgrounds. Throughout the coding process, the results
of the recoding were almost identical to the previous law
Controls degree students results. Overall, we believe that this process
resulted in a highly reliable coding of the contract and
In order to control for alternative explanations and other supplementary data. Table 5 provides the summary statistics
potential confounds, we included several additional variables and correlations of the main variables in our empirical
that served as important controls: (1) flexible pricing struc- analysis.
ture (Gopal and Koka 2010), (2) prior inter-firm interaction
between contract parties (Goo et al. 2009; Rai et al. 2009),7
(3) dominant client (Banerjee and Duflo 2000; Fee et al. Model Estimation and Results
2006; Fee and Thomas 2004; Susarla et al. 2010), (4) ven-
dors reputation (Banerjee and Duflo 2000; McGuire et al. We propose an econometric model that explains a vendors
1988; Preston and OBannon 1997; Susarla et al. 2010), ownerships and usage rights as a function of the variables
(5) software piracy level in the vendors operating countries featured in the hypotheses, along with all the controls
(Marron and Steel 2000; Moores and Chang 2006), described above. The first set of dependent variablesthe
(6) log(vendors age) indicating vendors relative experience, propensity of individual ownership and usage rights
(7) high-tech client indicating whether the client is in a high- sharingare ordinal and binary variables respectively; and
tech industry8 (Francis and Schipper 1999), (8) log(clients the second set of dependent variablesthe extent of owner-
age), (9) clients size, (10) log(contract length) (Susarla et al. ships and usage rights sharingare ordinal.
2010), and (11) year dummy to capture other unaccounted
time-period effects by using the year 2000 as the cut-off point. Care was taken to address potential endogeneity concerns in
In some circumstances, the client may have granted the ven- our econometric specification. First, IPR assigned to the
dor the right to sell but simultaneously used a non-compete vendor is typically negotiated during the contracting process
clause to restrict the vendor from competing with the clients and may be co-determined with other governance mechanisms
business, for example, by selling software directly to the such as pricing structure (i.e., simultaneity and self-selection
clients customers. This type of non-compete restriction will issues). As depicted in Figure 1, the typical arrangement in
reduce the value of the vendors usage rights. Hence, we SDO is for the client to search and identify a vendor company
included a non-compete control dummy to indicate whether to develop and implement a software system with stated
the contract specifies a non-compete clause.9 Table 4 pro- functionalities (Gefen et al. 2008). The client and the vendor
vides a description of the variables and measurements. will then negotiate the specific terms such as what is to be
developed, how the work will proceed, and the payment terms
ex ante and come to agreement on the most important aspects
7
We identified prior interaction from the Recital section in the contract and which will then be written into the contracts before the
Business Relationship section from the financial statements. We aug- development work starts. Second, additional and potentially
mented the information of business interactions through searching of press relevant characteristics that influence IPR allocations may be
releases and industry reports. unobserved in the contracts. Unobserved factors, such as the
8
clients software development capabilities and its risk pref-
The full list of high-tech industries is available on the website of the Bureau erences, might influence the clients inclination to share IPR
of Labor Statistic ( http://www.bls.gov/opub/mlr/2005/07/art6full.pdf).
with the vendor. Failure to account for these possibilities
9 could lead to biased estimates of the effects of our focal
We thank one of the reviewers for pointing out the possibility that non-
compete restrictions may interfere with the usage rights. explanatory variables. The prior literature on outsourcing

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Table 4. Variable Descriptions and Measurements


Variable Description Examples and Measures Referred literature
Newness Categorical variable = 2 if vendor is Example 1: [A. I. Soft, Inc. & Empire Group 2001] 1.1 Services: Gefen et al. (2008);
contracted to develop new systems, the Developer hereby agrees to develop the Companys first Gopal and Koka (2009);
interfaces or applications for the client artificial intelligence software algorithm, known as Randomix, as set Pressman (2005)
(i.e., no existing system with similar out in the Business Plan of the Company.... (Newness =2).
functionalities); = 1 if vendor is Example 2: [Tribune & AdStar, INc (2002)] Recitals: WHEREAS,
contracted to reengineer an existing AdStat agreed to develop, customize and deploy the CareerBuilder
system or add new functionalities to an Service solely for the benefit of Tribune; the Parties now desire to
established system; = 0 if vendor is enhance the existing CareerBuilder Service by developing,
contracted to do simple enhancements, customizing and deploying new Tribune specified functionalities, in
adaptive or perfective changes to an the form of software Modules, for use with the CareerBuilder
existing system. Network.... (Newness =1).
Complexity Categorical variable = 0 if the contract Example: [Tribune & AdStar, Inc. (2002)] Argyres et al. (2007);
has very extensive technical AdStar shall be responsible for (i) reconfigure and customize the Mayer and Soloman
description, deliverable milestones, and AdStar Service, (ii) install data and other components into the (2006); Susarla (2012)
specific criteria to determine the quality AdStar database, and (iii) develop the Modules and complete
of the end product; = 1 if the contract certain specified tasks, all in the manner, time and date as
has some technical description but has specified on Exhibit A hereto and as necessary to support the
no product measurement requirements of the CareerBuilder services....Upon delivery of the
criteria/milestones; = 2 if the contract completed CareerBuilder Service, Tribune shall conduct the
contains very little details or generic Acceptance Tests as specified in Exhibit A.... (Complexity = 0
description of the task and indicating low level of task complexity).
measurement criteria.
Customization Binary(0/1) = 1 if the vendor shall have Example 1: [Canon Computer Systems, Inc. & Pencom Systems Chen and Bharadwaj
specialized knowledge or skills unique Inc. (1994)] CCSI desires to retain Pencom to use its technical (2009); Mayer and
to client (e.g., vendor develops software information and know how to develop a wholesale distribution Soloman (2006); Susarla
using the clients application systems for tracking CCSIs imports and exports....Pencom will (2012);
development environment; or the identify the major business objects in the problem domain, their
software is customized to the clients attributes, class hierarchy, and relationships. Pencom shall
business processes and activities); = 0 document these specifications and shall include Booch class
if none of the above two situation instance, process, and timing diagrams in sufficient detail to clearly
exists. convey the system requirements....The document will be focused
on defining the areas and problems to be addressed by the new
system, the basic form that the functionality will take, and the return
to be expected from the improvements. (Customization = 1).
Example 2: [American Insurance & Syntel (2000)] Syntel will
maintain (1) a Time Reporting System; and (ii) a Project
Management Systems. Both of these systems may be a non-
customized, off the shelf version of current software, acceptable to
AH....(Customization = 0).
Proprietary Binary (0/1) = 1 if the software is Example: [Tribune and Adstar, Inc. (2002)] RECITALS, Argyres et al. (2007);
developed using vendors existing WHEREAS, AdStar is the sole and exclusive developer and Mayer and Soloman
proprietary technologies including worldwide owner of a proprietary software product that is used, (2006);
copyrighted and patented technologies; together with AdStars hosting and servicing facilities, to provide
= 0 if the contract does not specify use Tribune a service known as the AdStar Service (Proprietary = 1).
of any of the vendors existing
proprietary technologies.
Modularity Binary (0/1) = 1 if the contract requires Example: [Danka Office Imaging Company (Danka) & Network Adapted from Gefen et al.
vendor to develop a subsystem or a Printing Solutions Ltd. (NPS) (2003)] Exhibit A: 4. NPS shall (2008); Tiwana (2008a,
standalone system or provides clear redesign the Danka Print Manager Application User Interface. a. 2008b)
interface specifications to connect to NPS shall integrate the various modules of JAS Print into a single
the clients existing system(s). No Windows application. The Danka Print Manager will be accessed
impact on other systems is expected through a single icon on the user desktop and/or Start Menu. The
and no knowledge of other systems is Danka Print Manager application will then provide access to the
required; = 0 if the contract does not various sub-modules currently included in JAS Print Solutions.
specify the vendor to develop a Danka and NPS will jointly develop the best practice to accomplish
subsystem and contract does not this task, which may include the use of a Window with tabs for each
provide any clear interface function, or a task bar that contains controls to launch the sub-
specifications to connect to the clients functions of JAS. (Modularity =1).
existing system(s)

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Table 4. Variable Descriptions and Measurements (Continued)


Variable Description Examples and Measures Referred literature
Flexible pricing Binary (0/1), control = 1 if the contract specifies flexible pricing for software Banerjee and Duflo
development (e.g., time & material or cost plus pricing), (2000); Gopal and Koka
= 0 if the contract specifies fixed price payment for software (2009); Gopal et al. (2003)
development.
Prior interaction Binary (0/1), control = 1 if client and vendor had prior business interaction such as Chen and Bharadwaj
software development, marketing relationship, or equity exchange (2009); Mayer and
before the contract; otherwise = 0. Salomon (2006)
Dominant client Binary (0/1), control = 1 if the client firm accounted for 10% or more of the vendors Banerjee and Duflo
annual revenues, which is mandated disclosure by SEC guidelines; (2000); Fee et al. (2006);
otherwise = 0. Fee and Thomas (2004);
Susarla et al. (2010)
Vendors Binary (0/1), control = 1 if the vendor was listed among any of the following: (i) the Banerjee and Duflo
reputation Fortune 1000 technology firms, (ii) Information Week list of 500 (2000); McGuire et al.
technology companies, or (iii) International Association of (1988); Preston and
Outsourcing Professionals (IAOP) Global Outsourcing 100 and OBannon (1997); Susarla
sublists; otherwise = 0. et al. (2010)
Piracy level Categorical data (0-2), control = 2 if the piracy level of vendor country in the contract year was Marron and Steel (2000);
more than 0.70; = 1 if the piracy level was in the range of 0.30-0.69; Moores and Chang (2006)
and = 0 if the piracy level was below 0.30.
Log(firms age) Numerical data, control = log(number of years of the establishment of firms). Self-generated
High tech client Binary (0/1), control = 1 if the clients primary 3-digit SIC code is any of the followings: Francis and Schipper
283, 357, 360, 361, 362, 363, 364, 365, 366, 367, 368, 481, 737, (1999, p. 343)
and 873; otherwise = 0.
Client size Categorical data (1-4), control = 1 if the number of clients employee was in the range of 50-100; = U.S. Small Business
2 if it was in the range of 100-250; = 3 if it was in the range of 250- Administrations small
5000; = 4 if it was more than 5000. business size standards
Log(length) Numerical data; control Measured as log(total months of contract duration). Susarla et al. (2010)
Year dummy Binary (0/1), control = 1 if the contract was signed after Year 2000; Chen and Bharadwaj
= 0 if the contract was signed before or at Year 2000. (2009)
Non-compete Binary (0/1), control = 1 if the contract had a non-compete clause; otherwise = 0. Leiponen (2008); Mayer
and Soloman (2006)
Public vendor Binary (0/1), instrument = 1 if the vendor was a public company in the contract year; Self-generated
otherwise = 0.
Distance dummy Binary (0/1), instrument = 1 if the geographical distance between two contract parties Self-generated
operating address > 500 kilometers; otherwise = 0.
Labor cost Binary (0/1), instrument = 1 if the change of average wage index > U.S. GDP growth rate; = Self-generated
0 otherwise.
Extent of IPR Dependent variables: Total number of ownership (either joint or sole ownership but not Carson and John (2013);
Sharing Ownership (0-5); Usage rights (0-3) double counted) awarded to the vendor; total number of usage Lerner and Merges (1998)
rights allocated to the vendor.
Individual IPR Dependent variables: Ownership is coded as a three-scale variable = 1 if this IPR is Elfenbein and Lerner
Sharing Ownership (1-3); Usage right (0/1) allocated to the client; = 2 if this IPR is jointly owned; = 3 if the (2003, 2012)
vendor has the ownership. Usage right uses binary coding = 1 if
the vendor has the usage right but is not awarded any type of
ownership of software program.

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Table 5. Summary Statistics and Variable Correlations


Mean Std. Min Max Flex New Comp. Cust. Prop Mod. Prior V.rep Dom. Leng
Flexible pricing 0.71 0.46 0.00 1.00 -0.04
Newness 0.92 0.74 0.00 2.00 -0.09 1.00
Complexity 0.73 0.75 0.00 2.00 -0.05 0.07 1.00
Customization 0.54 0.50 0.00 1.00 0.10 0.05 -0.27 1.00
Proprietary 0.58 0.50 0.00 1.00 0.08 0.15 -0.02 0.03 1.00
Modularity 0.58 0.50 0.00 1.00 -0.02 0.13 -0.10 0.12 0.14 1.00
Prior 0.20 0.40 0.00 1.00 0.09 -0.03 -0.07 0.17 -0.18 0.02 1.00
V. reputation 0.33 0.47 0.00 1.00 0.05 0.10 -0.08 0.04 0.07 0.04 0.08 1.00
Dominant client 0.30 0.46 0.00 1.00 -0.10 -0.01 -0.09 0.03 -0.04 -0.04 0.08 0.12 1.00
Log(length) 3.13 0.73 1.10 5.70 -0.19 -0.05 0.08 -0.07 -0.02 -0.14 0.01 0.02 0.02 1.00
Ownerships 1.65 2.14 0.00 5.00 -0.05 0.00 0.26 -0.16 0.05 -0.33 -0.04 -0.04 0.06 0.22
Usage rights 0.93 0.90 0.00 3.00 -0.04 0.21 0.32 -0.30 0.18 -0.05 -0.02 -0.16 0.02 0.04
Mean Std. Min Max Flex New Comp. Cust. Prop Mod. Prior V.rep Own Usage
Year dummy 0.39 0.49 0.00 1.00 0.14 0.07 -0.04 0.07 0.12 0.07 -0.07 0.01 -0.22 -0.15
Log(vendor age) 1.90 1.00 0.41 5.04 -0.07 0.08 0.00 -0.09 -0.04 0.03 0.04 0.07 -0.20 -0.07
Piracy level 0.83 0.57 0.00 2.00 0.01 0.11 -0.09 0.06 0.02 -0.03 0.20 0.21 -0.07 -0.07
High tech client 0.59 0.49 0.00 1.00 0.14 0.17 -0.01 -0.12 0.11 -0.06 0.07 0.07 -0.02 0.02
Log(client age) 2.55 1.29 0.41 5.24 -0.21 -0.11 -0.01 -0.02 -0.06 0.12 0.01 -0.05 -0.12 0.02
Client size 2.04 1.18 1.00 4.00 -0.05 -0.20 -0.01 -0.01 -0.17 -0.04 0.12 0.05 -0.07 0.05
Non-compete 0.09 0.29 0.00 1.00 0.16 0.22 -0.04 0.01 -0.01 -0.13 0.09 0.12 0.11 0.20
Public vendor 0.43 0.50 0.00 1.00 0.15 -0.16 -0.03 -0.12 -0.02 0.05 0.05 0.04 -0.22 -0.01
Distance
0.54 0.50 0.00 1.00 -0.02 -0.05 0.02 0.03 -0.16 -0.04 0.09 -0.01 0.17 0.09
dummy
Labor cost 0.85 0.36 0.00 1.00 -0.06 0.01 0.04 0.00 -0.03 0.00 0.09 -0.02 0.05 -0.07

N = 171 (note: N for usage rights is 90). Bold numbers indicate significant correlation at p < 0.05.

suggests that pricing structure is endogenous to the con- than U.S. GDP growth rate, indicating a high labor cost busi-
tractual governance structure because clients often select ness environment. Most of the clients in our sample were
pricing structure as a major incentive mechanism to control located in the United States. We used U.S. AWI data
the risks and costs in contractual relationships (Banerjee and published on the USA Social Security Official Website and
Duflo 2000; Gefen et al. 2008; Gopal and Sivaramakrishnan collected GDP growth rate from the U.S. Bureau of Economic
2008). Therefore, in order to correct for potential biases that Analysis website10 to calculate labor cost. These three vari-
could arise as a consequence of endogeneity, we adopt the ables may affect a firms selection of flexible pricing but are
two-stage control functions approach (Heckman and Robb less likely to influence the IPR sharing.11 In the second stage,
1985; Wooldridge 2007) for our empirical analysis. In the
two-stage estimation, we estimate an equilibrium model of
pricing structure that predicts the probability of choosing 10
USA Social Security: http://www.socialsecurity.gov/oact/cola/
flexible pricing in the first stage. AWIgrowth.html; U.S. Bureau of Economic Analysis: http://www.bea.gov/
itable/index.cfm.
We use three instrumentspublic vendor, distance dummy,
and labor costto satisfy the requirement of the exclusion 11
Public vendors have more reliable financial resources and care more about
restriction for the two-step control function estimation ap- their reputation. Therefore, clients may be more comfortable signing variable
proach. Public vendor is measured as 1 if the vendor was a pricing contracts with public vendors. A large geographic distance increases
publicly listed firm. Distance dummy is an indicator for the costs of travelling from the vendor site to the client. Thus, clients may be
more prone to select fixed price contracts to control such costs. Clients are
geographical distance (of more than 500 km apart) between less likely to select flexible pricing if the labor costs change frequently.
the clients and vendors operating addresses, and labor cost However, these three factors would likely not affect IP ownership and usage
is measured as 1 if the average wage index (AWI) was higher rights allocation in SDO contracts.

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we use estimates from the pricing structure model to derive sharing. The extent of ownership sharing was measured as
the correction terms lambda, which is the inverse Mills ratio the total number of IP ownerships (either joint or sole owner-
(IMR)the error correction term generated in the first stage ship but not double counted) that vendors have. The extent of
equation. Lambda is then included in the regression of IPR usage rights was measured as the total number of usage rights
allocations in the second stage equation to control for the granted to the vendor under the circumstances that the vendor
correlation between the error terms of the two equations. In was not awarded any type (i.e., joint or sole) of ownership
sum, our econometric model is structured as follows: rights to the software. In our sample, 90 out of 171 contracts
did not grant vendors any type of ownership. The estimation
First Stage: Pricing Structure Model results reported in Columns (2) and (3) in Table 6 provide
good support for the hypotheses. We found project newness
PR(FlexiblePricing = 1|X) = (X'); to be significantly associated with the extent of usage rights
sharing but not the ownership, thus partially supporting H1.
PR(FlexiblePricing = 0|X) = 1 = (X'); Task complexity was positively associated with the extent of
vendors ownership and usage rights, thus supporting H2.
where, Pr denotes probability, is the cumulative The marginal effect of task complexity indicates that task
distribution function (CDF) of the standard normal complexity leads to 0.34 more ownership and 0.49 more
distribution, and X denotes a vector of regressors
usage rights assigned to the vendor. Customization was
including five explanatory variables, all controls and
negatively and significantly related to the extent of the owner-
three instruments.
ship and usage rights, supporting H3. The marginal effect of
customization was -0.48 for ownership and -0.88 for usage
Second Stage: Individual IPR Sharing Propensity
rights. Consistent with our prediction in H4, the results
and Extent of IPR Sharing Model
demonstrate that a vendors use of proprietary technology
was positively associated with more IPR assigned to the
PR(IPR Sharing)/Extent of IPR Sharing =
M(xoo + ePricing + 1Lamda + g2) vendor with a marginal effect of 0.47 for ownership and 0.77
for usage rights. The estimated marginal effects associated
where, M(@) is a probit or ordered probit function for with modularity were -0.71 for ownership and -0.70 for usage
Pr(IPR Sharing) and extent of IPR sharing, respec- rights, suggesting that increasing software modularity reduces
tively, xo is a vector of variables including the five the clients proclivity to share ownership and usage rights of
explanatory variables and all controls, and Lambda end products with vendors, fully supporting H5.
is the error correction term generated from the first
stage model estimation. We also use the same estimation method to analyze the
propensity of sharing of individual IPR. As seen from the
We report the marginal effects of explanatory variables and results reported in Columns (1) through (8) in Table 7, project
controls in Tables 6 and 7. Column (1) in Table 6 presents newness was only positive and significant for redeployment
the first-stage probit results of the pricing model. Task right, whereas customization was negatively associated with
complexity, year dummy, client age, and non-compete dummy the ownership of data, right to use, and right to sell. We
were significantly associated with pricing structure. It shows observe that task complexity was positive and significant for
that complex software development contracts were more many of the IPR except for the ownership of data, right to use,
likely to use flexible pricing and experienced clients preferred and right to redeploy. As hypothesized, proprietary was also
fixed pricing to avoid moral hazard and shirking problems, positive and significant for the majority of IP rights except for
which is in line with earlier findings (Gopal and Sivarama- the right of derivative. Vendors do not need to negotiate for
krishnan 2008). Contracts signed after Year 2000 preferred the ownership of derivative because they own the proprietary
to use flexible pricing and contracts with a non-compete technology that is the key for the software development.
clause were more likely to choose flexible pricing. Two out Instead, they might negotiate for the ownership of the soft-
of three instrumentspublic vendor and labor costwere ware program to derive financial benefits from the developed
significantly related to pricing structure. From correlation software without restrictions. Modularity was negative and
statistics, we also see that these two controls were not signi- significant for most of the IPR except for the ownership of
ficantly correlated with IPR allocations, demonstrating that database, right to use, and right to sell. This finding is consis-
these two instruments were indeed exogenous variables. tent with one of the major benefits of modularity: modular
design reduces the interdependence among modules and
We first run the two-stage control function model estimations minimizes the need for the sharing of proceeds. We sum-
to analyze the extent of IP ownership and usage rights marize these key findings in Table 8.

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Table 6. Regression Results (Dependent Variable = Extent of Vendors IPR)


Two-Stage Control Function 2SRI SURE
(1) (2) (3) (4) (5) (6) (7)
VARIABLES Pricing Ownership Use Right Ownership Use Right Ownership Use Right
-0.588** -0.321 -0.869** -1.048* -0.749** -0.119
Flexible pricing
(0.232) (0.419) (0.392) (0.577) (0.323) (0.226)
-0.277 0.086 0.608** 0.014 0.895*** 0.076 0.365***
Newness
(0.172) (0.183) (0.253) (0.198) (0.282) (0.205) (0.123)
0.388** 0.337** 0.489** 0.325** 0.462** 0.291* 0.237**
Complexity
(0.164) (0.144) (0.203) (0.142) (0.200) (0.156) (0.111)
-0.217 -0.478** -0.883*** -0.517** -1.080*** -0.400 -0.501***
Customization
(0.267) (0.234) (0.312) (0.234) (0.327) (0.297) (0.175)
0.227 0.472* 0.767** 0.518** 0.624** 0.347* 0.449***
Proprietary
(0.242) (0.243) (0.303) (0.247) (0.308) (0.186) (0.167)
0.390 -0.707*** -0.695** -0.634** -1.071*** -0.421** -0.429**
Modularity
(0.244) (0.245) (0.334) (0.255) (0.382) (0.174) (0.179)
-0.126 0.222 0.144 0.199 0.021 0.111 0.078
Prior
(0.296) (0.279) (0.341) (0.280) (0.347) (0.363) (0.198)
0.135 0.043 0.318 0.082 0.104 0.014 0.172
Vendor reputation
(0.257) (0.231) (0.296) (0.235) (0.310) (0.306) (0.170)
0.447* -0.550** -0.314 -0.457 -0.073 -0.725** -0.237
Year dummy
(0.256) (0.271) (0.326) (0.287) (0.363) (0.298) (0.162)
0.281 0.091 -0.064 0.132 -0.183 0.113 -0.056
Dominant client
(0.268) (0.227) (0.312) (0.231) (0.319) (0.310) (0.183)
0.170 -0.253 -0.297 -0.224 -0.343 -0.265 -0.134
Piracy level
(0.226) (0.223) (0.248) (0.222) (0.249) (0.267) (0.145)
-0.047 -0.308*** -0.036 -0.301*** -0.277 -0.387 -0.012
Log(vendor age)
(0.125) (0.111) (0.331) (0.110) (0.343) (0.307) (0.180)
0.272 -0.303 0.034 -0.238 0.058 -0.404*** -0.013
High tech client
(0.244) (0.247) (0.151) (0.255) (0.151) (0.148) (0.086)
-0.256** -0.054 -0.444*** -0.010 -0.587*** -0.110 -0.236***
Log(client age)
(0.102) (0.116) (0.153) (0.123) (0.165) (0.122) (0.076)
-0.003 -0.071 0.054 -0.070 0.031 -0.038 0.019
Client size
(0.070) (0.063) (0.080) (0.063) (0.082) (0.083) (0.047)
-0.149 0.271* 0.024 0.235 0.170 0.476** 0.022
Log(length)
(0.168) (0.162) (0.220) (0.164) (0.232) (0.209) (0.127)
1.307** 0.469 0.869 0.775 -0.168 0.680 0.543*
Non-compete
(0.641) (0.454) (0.540) (0.601) (0.766) (0.523) (0.289)
0.575**
Public vendor
(0.249)
0.095
Distance dummy
(0.230)
-0.414*
Labor cost
(0.208)
0.223 -0.060 0.301 -0.856*
Lambda/Residual
(0.643) (0.829) (0.356) (0.496)
Observations 169 169 89 169 89 89 89
Log likelihood -85.78 -166.14 -83.87 -165.85 -82.36 -117.6 -117.6
Pseudo R/R 0.164 0.159 0.212 0.161 0.227 0.127 0.385
Note: Two contracts did not disclose the lengths. All coefficients represent marginal effects. Standard errors in parentheses. ***p < 0.01, **p <
0.05, *p < 0.10

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Table 7. Two-Stage Control Function Analysis Results (Dependent Variable = Propensity of Individual
IPR Sharing)
(1) (2) (3) (4) (5) (6) (7) (8)
VARIABLES Program Material Data Derivative Other Use Redeploy Sell
-0.701*** -0.761*** -0.755*** -0.539** -0.438* -0.051 -0.667 -0.387
Flex. pricing
(0.235) (0.236) (0.235) (0.233) (0.226) (0.517) (0.674) (0.552)
-0.025 -0.142 -0.058 0.032 0.119 0.404 0.801** 0.471
Newness
(0.186) (0.188) (0.187) (0.186) (0.181) (0.309) (0.351) (0.310)
0.347** 0.338** 0.194 0.364** 0.313** 0.320 0.502 0.505*
Complexity
(0.149) (0.149) (0.151) (0.150) (0.144) (0.251) (0.360) (0.264)
-0.257 -0.313 -0.502** 0.031 -0.168 -1.085*** -0.771 -1.145***
Customization
(0.234) (0.235) (0.234) (0.231) (0.226) (0.398) (0.510) (0.399)
0.625** 0.686*** 0.618** 0.359 0.505** 0.656* 0.916** 0.634*
Proprietary
(0.254) (0.255) (0.254) (0.247) (0.237) (0.376) (0.405) (0.382)
-0.703*** -0.599** -0.211 -0.671*** -0.699*** -0.556 -0.860* -0.516
Modularity
(0.246) (0.245) (0.248) (0.248) (0.240) (0.425) (0.493) (0.441)
0.254 0.197 0.156 0.397 0.070 -0.028 0.715 0.693
Prior
(0.276) (0.277) (0.282) (0.274) (0.262) (0.409) (0.601) (0.431)
0.085 -0.037 0.005 0.320 -0.008 0.356 -0.115 0.281
V. reputation
(0.237) (0.237) (0.237) (0.237) (0.227) (0.359) (0.464) (0.382)
-0.715*** -0.547** -0.559** -0.762*** -0.925*** -0.067 -0.402 -0.687
Year dummy
(0.271) (0.268) (0.270) (0.268) (0.261) (0.400) (0.539) (0.443)
0.058 0.199 0.156 -0.255 0.108 -0.679* 0.720 0.068
Dom. client
(0.233) (0.234) (0.234) (0.237) (0.224) (0.412) (0.491) (0.387)
-0.385* -0.263 -0.000 -0.433* -0.312 -0.063 -0.655 -0.259
Piracy level
(0.231) (0.229) (0.227) (0.229) (0.217) (0.296) (0.444) (0.309)
-0.322 -0.236 -0.421 -0.483* -0.458* -0.581 0.453 -0.021
Log(v. age)
(0.253) (0.253) (0.257) (0.250) (0.246) (0.421) (0.575) (0.192)
-0.172 -0.219* -0.219* -0.172 -0.168 -0.097 0.381 0.366
H. tech client
(0.112) (0.113) (0.113) (0.110) (0.107) (0.187) (0.262) (0.424)
-0.155 -0.132 -0.087 -0.064 -0.081 -0.282 -0.484** -0.295
Log(client age)
(0.117) (0.117) (0.118) (0.118) (0.112) (0.182) (0.241) (0.189)
0.026 0.029 0.028 -0.047 0.022 0.099 0.069 -0.014
Client size
(0.064) (0.064) (0.064) (0.064) (0.061) (0.101) (0.129) (0.098)
0.360** 0.374** 0.353** 0.297* 0.340** 0.160 0.456 0.369
Log(length)
(0.170) (0.170) (0.173) (0.171) (0.161) (0.283) (0.346) (0.287)
0.285 0.441 0.132 0.566 0.157 -0.051 1.112 1.183
Non-compete
(0.490) (0.490) (0.492) (0.474) (0.470) (0.694) (0.727) (0.735)
Lambda -0.054 -0.021 0.102 -0.590 -0.373 0.051 -0.212 1.470
(0.651) (0.657) (0.665) (0.661) (0.631) (0.517) (1.278) (1.224)
Observations 169 169 169 169 169 89 89 89
Pseudo R 0.200 0.196 0.158 0.170 0.175 0.226 0.328 0.300
Note: For the first stage result, refer to Column (1) in Table 6. Two contracts did not disclose the lengths. Standard errors in parentheses. ***p
< 0.01, **p < 0.05, *p < 0.1

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Table 8. When to Share Individual IPR (Based on the main results in Table 7)
Transaction Characteristics
Contract requires Contract requires
Vendors Vendors high relationship- high relationship-
bargaining bargaining specific specific SDO project has
power is high power is high investment investment high uncertainty
(measured by (measured by (measured by (measured (measured by
Instance of IPR proprietary) modularity) newness) customization) complexity)
Program Yes Yes No No Yes
Material Yes Yes No No Yes
Data Yes No No Yes No
Derivative No Yes No No Yes
Other Yes Yes No No Yes
Right to use Yes No No Yes No
Redeployment Yes Yes Yes No No
Right to sell Yes No No Yes Yes

Among all the controls, flexible pricing was negatively hypothesis at the p < 0.05 level, demonstrating that the three
associated with the all of the ownership types but not the instruments are indeed good instruments to control for the
usage rights. The negative coefficients of pricing indicate potential endogeneity of pricing structure.
substitutive relationships between two types of incentive
mechanisms: monetary incentive and property ownership We also used the two-stage residual inclusion (2SRI) method
incentive. Prior interaction and vendor reputation were not to estimate the extent of IPR sharing and the propensity of
significantly associated with any of the IPR. The year dummy individual rights sharing. Instead of using the error correction
was negatively and significantly associated with all instances term (i.e., Lambda), we included the response residual in the
of the ownership but not the usage rights, indicating that, in first-stage probit analysis as an additional regressor in the
more recent years, clients were more reluctant to cede owner- second-stage estimation. Prior econometric literature has
ship to vendors, perhaps due to greater level of industry proved that 2SRI estimation is consistent for nonlinear
maturity and standardization. Contract length was positive regression models (Terza et al. 2008). The results of the
and significant for all ownership types but not the usage extent of IPR sharing were reported in Columns (4) and (5) in
rights. This result suggests that ownership sharing is used Table 6. We report the 2SRI estimation of individual IPR
more often as an incentive mechanism than usage rights sharing propensity models in Table 9. The 2SRI results for
sharing in long-term contracts. Other controls such as vendor the main explanatory variables were mainly consistent with
age, dominant clients, high tech clients, client age, client size, the results of using error correction terms in the control
and non-compete were largely not significant factors in function estimation.
influencing IPR sharing propensities.
Another concern relevant to our study is to examine whether
vendors preferred additional ownership when compared to
usage rights. In estimating the vendors aggregate number of
Robustness Checks IPR as the dependent variable, our results do not provide any
information about the relative importance of these two sets of
Additional robustness checks, beyond the two-stage control rights. To examine this possibility, we used the Chow test
functions estimation described above, were also carried out. after a seemingly unrelated regression (SURE) (Green 2003)
One concern is related to the exclusion restriction of the three of 90 contracts to examine whether there exist significant
instruments used in our models. We performed a two-stage differences in preferences between ownership and usage
least square estimation on the extent of vendor ownership by rights (Columns (6) and (7) in Table 6). The Chow test
including the three instrumental variables. The Sargan revealed significant differences between the estimated coeffi-
statistic (for test of over-identification) was 4.93 at p-value = cients of all five main explanatory variables in the regressions
0.085 under the null hypothesis that the all instruments are of the extent of ownership and usage rights at the p < 0.05
valid instruments. Therefore, we failed to reject the null level. The marginal effects of four main variablesproject

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Table 9. Two-Stage Residual Inclusion (2SRI) Estimation Results


(1) (2) (3) (4) (5) (6) (7) (8)
VARIABLES Program Material Data Derivative Other Use Redeploy Sell
Flexible pricing -0.765* -0.869** -1.009** -0.262 -0.433 -1.365* -1.375 -0.081
(0.395) (0.396) (0.400) (0.399) (0.377) (0.768) (0.884) (0.720)
Newness -0.059 -0.188 -0.139 0.033 0.052 0.737** 1.063** 0.577*
(0.198) (0.199) (0.198) (0.198) (0.191) (0.367) (0.518) (0.334)
Complexity 0.338** 0.326** 0.175 0.353** 0.288** 0.315 0.509 0.446*
(0.147) (0.147) (0.148) (0.149) (0.142) (0.250) (0.372) (0.255)
Customization -0.278 -0.339 -0.544** 0.027 -0.213 -1.344*** -0.598 -1.209***
(0.235) (0.236) (0.235) (0.233) (0.228) (0.443) (0.543) (0.407)
Proprietary 0.650** 0.719*** 0.672*** 0.362 0.551** 0.539 0.717 0.539
(0.257) (0.258) (0.256) (0.250) (0.239) (0.391) (0.520) (0.389)
Modularity -0.667*** -0.551** -0.125 -0.676*** -0.628** -0.988** -1.207** -0.622
(0.256) (0.255) (0.258) (0.261) (0.249) (0.492) (0.597) (0.476)
Prior 0.243 0.183 0.131 0.403 0.052 0.095 0.851 0.597
(0.277) (0.278) (0.283) (0.276) (0.263) (0.428) (0.633) (0.427)
Vendor reputation 0.102 -0.014 0.046 0.315 0.027 0.125 -0.373 0.199
(0.240) (0.240) (0.240) (0.240) (0.230) (0.378) (0.526) (0.396)
Year dummy -0.672** -0.489* -0.455 -0.770*** -0.843*** -0.519 -0.031 -0.490
(0.287) (0.284) (0.285) (0.285) (0.275) (0.472) (0.602) (0.477)
Dominant client 0.077 0.225 0.202 -0.262 0.142 -0.846* 0.641 0.036
(0.238) (0.238) (0.239) (0.242) (0.229) (0.435) (0.507) (0.391)
Piracy level -0.369 -0.242 0.038 -0.425* -0.278 -0.111 -0.697 -0.272
(0.231) (0.229) (0.227) (0.228) (0.217) (0.300) (0.440) (0.307)
Log(vendor age) -0.171 -0.217* -0.213* -0.185* -0.173 -0.869* -0.446 0.239
(0.111) (0.112) (0.112) (0.110) (0.107) (0.457) (0.290) (0.435)
High tech client -0.288 -0.191 -0.338 -0.481* -0.389 -0.088 0.258 0.015
(0.259) (0.259) (0.263) (0.257) (0.252) (0.192) (0.591) (0.189)
Log(client age) -0.179 -0.163 -0.141 -0.066 -0.127 -0.454** -0.605** -0.346*
(0.124) (0.124) (0.124) (0.124) (0.118) (0.208) (0.262) (0.194)
Client size 0.029 0.032 0.033 -0.049 0.025 0.084 0.045 -0.015
(0.064) (0.064) (0.064) (0.064) (0.061) (0.103) (0.133) (0.098)
Log(length) 0.340* 0.347** 0.305* 0.295* 0.302* 0.334 0.608 0.339
(0.174) (0.174) (0.175) (0.174) (0.164) (0.297) (0.381) (0.299)
Non-compete 0.399 0.603 0.445 0.431 0.317 1.426 0.082 1.022
(0.621) (0.619) 0.619 (0.610) (0.600) (1.018) (1.149) (1.047)
Residual 0.074 0.121 0.278 -0.274 0.019 -1.345** -0.912 0.249
(0.354) (0.354) (0.357) (0.360) (0.341) (0.651) (0.831) (0.652)
Observations 169 169 169 169 169 89 89 89
Log likelihood -126.6 -126.3 -125.93 -127.2 -139.6 -42.63 -27.52 -43.03
Pseudo R 0.200 0.196 0.160 0.169 0.174 0.259 0.344 0.288
Note: Two contracts did not disclose the lengths. Standard errors in parentheses. ***p < 0.01, **p < 0.05, *p <0.10.

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newness, customization, proprietary, and modularityon results is reported in Table 11. Although the ratio of flexible
usage rights are larger than those on ownership, demon- pricing contracts is still high compared to other studies, the
strating that clients preferred to cede vendors usage rights consistent results obtained indicate that the potential over-
rather than grant ownership when they outsourced for devel- sampling of flexible pricing should not pose a significant
opment projects of high asset-specificity and when the concern to the results reported here.
vendors bargaining power was relatively strong.

The pricing structure is potentially endogenous to contractual


IPR allocation as mentioned above. The selection of the Discussion and Conclusion
pricing structure may influence the IPR allocations and these
effects may differ across the selected pricing model. To We started this paper by highlighting two research gaps in our
assess the consequences for self-selection on vendor IPR allo- understanding of the IPR and the determinants of IPR
cation, in the second stage of the control function estimation, allocation in SDO. Bridging these gaps is important for
we divide the dataset into two subgroups, flexible pricing and developing a consistent theoretical framework for analyzing
fixed pricing contracts, and run two separate ordered probit IPR allocation in SDO contract design, especially as
estimations to estimate the parameters across the two pricing intellectual property has become more important to the
structures. As shown in Table 10, the estimated parameters competitive positioning of firms in the digital economy
varied across the two pricing structures. Project newness, (Leiponen 2008; Lerner and Malmendier 2010). Our paper is
customization, and proprietary technology were significant among the first to comprehensively examine the different
only for flexible pricing contracts but not for fixed pricing types of IPR involved in software development processes.
ones. Clients expectations about the higher risk of flexible Modern property rights theory (Grossman and Hart 1986;
pricing coupled with appropriation concerns and dependence Hart 1988; Hart and Moore 1990) defines ownership as the
on vendors technology may have led to IPR sharing as a control rights over the assets. This simplified notion of
particularly useful mechanism to reduce ex post opportunism. ownership implicitly assumes a monolithic nature of property
Task complexity was positive and significant for the extent of rights and fails to account for a multifaceted concept of
ownership sharing in fixed pricing contracts but not for property rights as asset ownership is actually a bundle of
flexible price contracts, indicating that the effect of IPR partitions of property rights (Alchian and Demsetz 1972,
allocation on addressing the uncertainty-caused ex post 1973). Our study overcomes this limitation through a com-
opportunism issues is more prominent in fixed pricing prehensive content analysis of 171 SDO contracts. We find
contracts. Modularity was negative and significant for both that IPR embodied in software contracts is not monolithic.
fixed and flexible pricing contracts in terms of ownership Instead it is a hybrid bundle of ownerships and usage rights
sharing but not for usage rights, demonstrating that modular and the ways that these rights are allocated are quite diverse
design decreased the need for ownership-based incentive across software contracts. For example, about 53% of the
mechanisms. The different results across two types of pricing contracts in our sample offered sole ownership of the software
contracts provide a more insightful understanding of how program to the client; less than 37% granted any rights to the
IPR-based incentives substitute for pricing incentives in vendor, and the remaining 10% provided for joint ownership
different kinds of outsourcing tasks. between the two contract parties. This ratio in our sample is
consistent with the SDO practice that clients own all the IPR
Another concern relates to the high percentage of flexible of deliverables based on the default work-made-for-hire rule
pricing contracts in our sample (71%). One of the possible and it also hints that the value of different types of IPR are
explanations might be that some contracts combined software heterogeneous and contract specific. The empirical finding on
development and maintenance services in one agreement and the diversity of IPR framework sheds light on the multifaceted
used both fixed and flexible pricing methods for different nature of IPR in SDO contracts and responds to the calls for
tasks. We tried to address this issue by dropping contracts correcting the PRT theory for the lack of accounting for
with long durations (more than 60 months) from the sample partitioning of ownership (Kim and Mahoney 2005, p. 236).
and reran the two-stage control function analysis of individual As a significant step in this direction, our study suggests that
IPR sharing. When dropping long contracts, we assumed that IPR allocation in incomplete contracts should take into
such contracts were hybrid contracts. As a result, 24 con- account different types of IPR and their independent values in
tracts were dropped from the sample. Among 147 contracts contractual relationships. Hence our research enriches the
left in the sample, 101 contracts (68%) were flexible pricing modern property rights theory and adds to the growing body
ones and the other 46 were fixed pricing ones. The main of literature that examines contractual governance of SDO
results of this alternative sample were consistent with the contracts (Chen and Bharadwaj 2009; Susarla et al. 2010;
results using our full sample. This set of robustness check Walden 2005; Whang 1992).

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Table 10. Second-Stage Ordered Probit Analysis Results


Ownership Usage Rights
(1) (2) (3) (4)
VARIABLES Fixed Flexible Fixed Flexible
0.176 0.405** 1.194 0.491**
Newness
(0.252) (0.184) (1.439) (0.203)
0.596** 0.277 1.012 0.569***
Complexity
(0.262) (0.177) (0.937) (0.221)
-0.631 -0.650** -2.092 -0.521*
Customization
(0.407) (0.270) (1.424) (0.303)
-0.234 0.776*** -0.125 0.496*
Proprietary
(0.416) (0.290) (1.370) (0.296)
-0.814* -1.070*** -0.385 -0.512
Modularity
(0.455) (0.277) (1.101) (0.326)
-0.586 -0.688** -0.610 -0.113
Year dummy
(0.479) (0.284) (2.912) (0.312)
-0.067 -0.484** -2.009* -0.268
Log(length)
(0.245) (0.198) (1.093) (0.218)
-0.861 -0.191 2.410 -1.149
Lambda
(0.701) (0.483) (1.719) (0.706)
Observations 50 119 17 72
Log likelihood -57.55 -105.9 -11.68 -72.68
Pseudo R 0.069 0.195 0.447 0.145
Note: due to the small sample size, we only included the main explanatory variables in the regressions. Standard errors in parentheses. ***p <
0.01, **p < 0.05, *p < 0.1

The results show that IPR sharing depends on the vendors mechanism to ensure vendors investment efforts in tasks with
bargaining power, asset-specificity, and the degree of uncer- a high degree of uncertainty. Derivative ownership is useful
tainty in SDO projects. But different types of intellectual in SDOs that are replete with project and performance uncer-
property rights have different values and functions to motivate tainties but may not work in projects requiring a high level of
the contract parties and safeguard against contractor oppor- asset specificity. Our finding of negative impacts of modu-
tunism. All of the ownerships, with the exception of deriva- larity on IP ownership sharing indicates that client firms can
tive ownership, seem quite sensitive to the relative bargaining use software modularity to offset the need to share ownership
power of the parties measured by proprietary technology. with vendors. A strategic implication of this finding is that
When a software development project relied more on the investment on developing product and process modularization
vendors proprietary technology, the predicted sharing of capabilities can be very valuable for client companies.
ownership increased, a finding that is consistent with prior
theory (Aghion and Tirole 1994; Argyres and Liebeskind Beyond ownership rights, clients can also grant usage rights
1999; Kim and Mahoney 2005). Project level uncertainty is to encourage vendors to invest in relationship-specific assets.
another important determinant to the division of IP rights. However, when significant uncertainties exist, usage and
Many software development projects are replete with uncer- redeployment rights do not appear to be useful mechanisms
tainty and performance risk. We find that this is explicitly for incentivizing vendors. Instead, clients may consider
taken into account in the contract parties investment deci- granting vendors the right to sell the developed software if
sions and addressed up front in contract negotiation through they do not want to cede any property ownership to vendors.
IPR sharing. We find that for the majority of intellectual IP owners have full control over future income because
assets, the vendors ownership increased with the task com- ownership confers the ability to make decisions affecting the
plexity of outsourced projects. The finding suggests that distribution of an income stream whose magnitude and even
clients can effectively use IP ownership as an incentive existence are uncertain ex ante. A significant managerial

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Table 11. Analysis Results after Dropping 24 Long Contracts


(1) (2) (3) (4) (5) (6) (7) (8) (9)
VARIABLES pricing program material data derivative other use redeploy sell
-0.789*** -0.921*** -0.869*** -0.568** -0.546** -0.113 -1.193* -0.369
Flex. pricing
(0.257) (0.259) (0.260) (0.256) (0.248) (0.583) (0.652) (0.637)
-0.267 -0.084 -0.171 -0.129 -0.067 0.133 -0.085 0.485** 0.468
Newness
(0.188) (0.200) (0.202) (0.202) (0.202) (0.195) (0.339) (0.236) (0.332)
0.383** 0.317** 0.349** 0.265* 0.302* 0.277* 0.783*** 0.256** 0.712**
Complexity
(0.167) (0.157) (0.157) (0.161) (0.159) (0.152) (0.276) (0.124) (0.299)
-0.159 -0.197 -0.282 -0.570** 0.103 -0.139 -0.689* -0.406** -1.133***
Customization
(0.293) (0.247) (0.248) (0.251) (0.246) (0.239) (0.409) (0.195) (0.435)
0.188 0.617** 0.638** 0.585** 0.489* 0.478* 0.459 0.218* 0.781*
Proprietary
(0.266) (0.276) (0.278) (0.281) (0.276) (0.258) (0.441) (0.126) (0.443)
0.284 -0.794*** -0.660** -0.281 -0.750*** -0.722*** -0.256 -2.939* -0.678
Modularity
(0.266) (0.267) (0.268) (0.274) (0.270) (0.261) (0.496) (1.549) (0.501)
0.270 0.192 0.285 0.205 0.203 0.161 0.718 0.476 0.436
Prior
(0.356) (0.316) (0.320) (0.328) (0.318) (0.301) (0.502) (1.802) (0.483)
0.189 -0.067 -0.121 0.022 0.203 -0.092 0.316 -0.197 -0.043
V. reputation
(0.282) (0.261) (0.262) (0.264) (0.262) (0.250) (0.407) (0.128) (0.434)
0.569** -0.586** -0.452 -0.458 -0.622** -0.867*** -0.528 -0.090 -0.951*
Year dummy
(0.277) (0.280) (0.281) (0.286) (0.279) (0.271) (0.430) (0.951) (0.538)
0.505* 0.044 0.167 0.176 -0.286 0.115 -0.819* 0.362* -0.219
Dom. client
(0.299) (0.250) (0.252) (0.253) (0.257) (0.241) (0.440) (0.201) (0.436)
0.146 -0.258 -0.207 0.037 -0.296 -0.244 0.233 -0.215* -0.185
Piracy level
(0.236) (0.238) (0.242) (0.242) (0.238) (0.226) (0.341) (0.118) (0.323)
-0.015 -0.207* -0.224* -0.269** -0.178 -0.190 -0.105 -0.078 -0.097
Log(v. age)
(0.035) (0.121) (0.123) (0.125) (0.120) (0.116) (0.204) (1.145) (0.217)
-0.077 -0.468 -0.322 -0.559* -0.578** -0.565** -0.626 0.303* 0.289
H. tech client
(0.138) (0.287) (0.290) (0.302) (0.287) (0.279) (0.450) (0.165) (0.458)
0.195 -0.089 -0.019 0.004 -0.059 -0.006 -0.166 0.340 0.303
Log(c. age)
(0.271) (0.126) (0.127) (0.131) (0.127) (0.122) (0.206) (0.573) (0.215)
-0.245** 0.030 0.006 -0.001 -0.006 0.016 0.207* 0.158** 0.003
Client size
(0.120) (0.070) (0.070) (0.071) (0.070) (0.068) (0.115) (0.072) (0.114)
-0.098 0.363* 0.450** 0.472** 0.401* 0.457** 0.004 0.303** 0.270
Log(length)
(0.079) (0.216) (0.218) (0.226) (0.223) (0.209) (0.376) (0.128) (0.398)
-0.314 0.494 0.566 0.158 0.984* 0.256 1.254 0.456** 1.862**
Non-compete
(0.241) (0.517) (0.518) (0.524) (0.506) (0.500) (0.829) (0.202) (0.909)
1.178*
Public vendor
(0.671)
0.812***
Dis. dummy
(0.288)
-0.430
Labor cost
(0.255)
-0.322 -0.380 -0.267 -0.412 -0.689 0.341 0.228 2.030
Lambda
(0.718) (0.728) (0.757) (0.726) (0.698) (1.127) (0.342) (1.598)
Observations 147 147 147 147 147 147 80 80 80
Log likelihood -70.75 -109.1 -108.2 -106.0 -107.6 -119.5 -37.68 -13.36 -36.29
Pseudo R 0.204 0.203 0.205 0.181 0.189 0.180 0.305 0.640 0.343
Standard errors in parentheses. ***p < 0.01, **p < 0.05, *p < 0.10

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implication of these results for SDO client firms is that relation-specific assets or when vendors have relatively strong
sharing of individual IPR can be used as incentives for non- bargaining power. These findings suggest that IPR allocation
contractible investments and to safeguard from ex post can be used to address residual contractual hazards and hence
opportunism. When and how to use IPR sharing will however complement pricing incentives. This result has important
depend on the relative bargaining position of vendors, the strategic implications for incomplete contracting and requires
complexity level of the SDO projects, and the asset specificity further examination.
of the underlying investments.
Finally, it is also interesting to note that the vendors share of
Naturally, there are some limitations to our study. First, the IPR in SDO contracts seems to have decreased in recent
data were limited to information disclosed in SEC filings and years. The results based on a binary distribution of the
complementary data sources. These sources provided limited sample into two time periods (before and after year 2000),
background information about the vendors and the clients. shows less vendor IPR allocation in the latter period.
Our choice of variables was subject to the availability of the Additional regression analyses by calendar year show that
contract data. Although our results are suggestive of the IPR sharing arrangements have been less frequently used over
effects of software characteristics such as task complexity, time and that the extent of IPR sharing (depth of use) has
proprietary technology, and modularity on the decisions of decreased over the years. One possible explanation for this
IPR allocation, our measures are somewhat blunt and may not trend is that writing IPR clauses in contracts requires adequate
perfectly capture or fully reflect the breadth of the underlying specification of property rights and therefore the cost of
project and technology characteristics. The results obtained negotiation for IPR is higher than that for other contractual
here are also subject to potential sample selection bias, in the governance mechanisms such as pricing and revenue sharing.
sense that we only observe contracts for publicly listed firms Whether or not the reduced usage of IPR sharing in later years
and only those contracts that the firms choose to file with the is due to a learning effect is left for future research.
SEC.

Notwithstanding these limitations, the results obtained here References


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World Business (31:1), pp. 30-37. Yuanyuan Chen is an assistant professor in the Department of
Susarla, A. 2012. Contractual Flexibility, Rent Seeking, and Information Systems at the National University of Singapore (NUS).
Renegotiation Design: An Empirical Analysis of Information She joined NUS in September 2008 after she received her Ph.D.
Technology Outsourcing Contracts, Management Science (2008) and LL.M. (Master of Law) degrees from Emory University
(58:7), pp. 1388-1407. (USA). She also holds a LL.M. degree from National Huaqiao
Susarla, A., Subramanyam, R., and Karhade, P. 2010. Contractual University (China) and is a certified lawyer in China. Yuanyuans
Provisions to Mitigate Holdup: Evidence from Information current research focuses on law and economics of IT and IT-enabled
Technology Outsourcing, Information Systems Research (21:1), services. In specific, her research interests include the following
pp. 37-55. three areas: economics of intellectual property; global governance
Teece, D. J. 1986. Profiting from Technological Innovation: framework for cloud computing; and cybersecurity and data
Implications for Integration, Collaboration, Licensing and Public protection. Her research has been published in journals such as
Policy, Research Policy (15:6), pp. 285-305. Information Systems Research, Journal of Strategic Information
Terza, J. V., Basu, A., and Rathouz, P. J. 2008. Two-Stage Systems, and Journal of Singapore Academy of Law.
Residual Inclusion Estimation: Addressing Endogeneity in
Health Econometric Modeling, Journal of Health Economics Anandhi Bharadwaj is the Goizueta Term Professor of Information
(27:3), pp. 531-543. Systems at the Goizueta Business School, Emory University. Her

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Chen et al./IPR Sharing in Software Development Outsourcing

research interests include the business value and impact of infor- at the National University of Singapore (NUS). He received his
mation technology, digital business strategies, healthcare processes Ph.D. degree (2005) in Business Administration (Marketing:
and systems, and technology outsourcing. She currently serves as Economics and Quantitative Methods) from the University of
a department editor at Management Science. She also has served as Chicago, Booth School of Business. He holds a B.Sc. (First Class
a senior editor at Information Systems Research (20092015), and Honours) degree (1997) in Computer and Information Sciences and
as an associate editor at Management Science (20072014), Infor- a M.Sc. degree (1998) in Information Systems from the National
mation Systems Research (20032008), MIS Quarterly (20022004), University of Singapore. Khim-Yongs research interests include
and Journal of the AIS (20022008). Her research has won consumer and firm behaviors in markets with network and social
interaction effects, marketing and advertising in digital media
numerous awards and been published in several leading journals
environments, competitive product, pricing and promotional
such as Information Systems Research, Management Science, MIS
strategies in IT-mediated markets, and applied econometric and data
Quarterly, Organization Science, Productions & Operations Man-
analytic methods. Khim-Yongs research work has been published
agement, IEEE Transactions, and Annals of Operations Research.
in top-ranked international academic journals such as Management
She has presented her research at numerous national and inter- Science, Journal of Marketing Research, Information Systems
national conferences. Research, IEEE Transactions on Engineering Management, Journal
of the Association for Information Systems, Information and
Khim-Yong Goh is an associate professor of Information Systems Management, Journal of Interactive Marketing, and Journal of
and Assistant Dean (External Relations) in the School of Computing Electronic Commerce Research.

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162 MIS Quarterly Vol. 41 No. 1/March 2017
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