Principal-Agent Software Development Model

From Information Systems at Pitt Business

This paper posits that software development projects are often over budget, late and lacking functionality due to a principal-agent problem. Where the principal (user of the system) has the agent (system developer) create a system for the principal, even though the goals of these two individuals are not in alignment. Due to this misalignment between the parties, it is highly likely that the outcome of the system development will not meet the requirements (in either functional or project terms) as dictated by the principal. Most organizations know that software development projects are so complex and thus engage a myriad of controls in an attempt to alleviate or reduce the problems that ultimately still occur. This paper attempts to create a decision model based of of principal agency theory to help the principal in determining how to engage the agent in this process.

The two criteria developed in the model are precision and sensitivity, which are assess through various measures. In essence, the model suggests that measures that are both relatively more precise and more sensitive in the long-term will be preferred by both the principal and agent. This model is then applied to two mini cases to illustrate its use with both an internal and external set of agent software developers.

[edit] Abstract

The information systems (IS) development activity in large organizations is a source of increasing cost and concern to management. IS development projects are often over-budget, late, costly to maintain, and not done to the satisfaction of the requesting user. These problems exist, in part, due to the organization ofthe IS development process, where information systems development is typically assigned by the user (principal) to a systems developer (agent). These two parties do not have perfectly congruent goals, and therefore a contract is developed to specify their relationship. An inability to directly monitor the agent requires the use of performance measures, or metrics, to represent the agent's actions to the principal. The use of multiple measures is necessary given the multi-dimensional nature of successful systems development. In practice such contracts are difficult to develop satisfactorily, due in part to an inability to specify appropriate metrics.

This paper develops a principal-agent model that provides a set of decision criteria for the principal to use to develop an incentive compatible contract for the agent. These criteria include the precision and the sensitivity of the performance metric. After presenting the formal model, some current software development metrics are discussed to illustrate how the model can be used to provide a theoretical foundation and a formal vocabulary for performance metric analysis. The model is also used in a positive (descriptive) manner to explain why current practice emphasizes metrics that possess relatively high levels of sensitivity and precision. Finally, some suggestions are made for the improvement of current metrics based upon these criteria.

[edit] Paper Information

Authors: Rajiv Banker, Chris Kemerer

Check out the paper at Performance Evaluation Metrics for Information Systems Development: A Principal-Agent Model

This article was originally published in ISR, Vol 3, No. 4, December 1992.

[edit] Keywords

Software engineering, management of computing and information systems