Online Reverse Auctions for Out-sourcing Small Software Projects: Determinants of Vendor Selection

Abstract

Online service marketplaces have enabled small firms to efficiently outsource small-scale IT projects by providing reduced transaction costs and increased competition among bidders. This paper presents an explanatory study that examines the vendor selection process using data from a large online service marketplace. Theories from production economics, resource dependency, and software risk management are applied in a small-firm context. The empirical results suggest that a client’s utility function increases with a lower bid price, shorter lead-time, higher vendor average feedback rating, higher degree of vendor experience, and domestic (U.S.) location. There was not sufficient evidence to support strategically differentiated vendor selection behavior with respect to project value (or price). This study’s findings help understand patterns of bid evaluation in online auctions, where a large percentage of transactions consist of small IT projects.