The software business has the potential to grow to one of the most important industries also in Finland. This requires though new successful start-ups to emerge into the markets and that the business does not run into barriers of employment, funding, global marketing or legal problems (Autere, Lamberg et al. 1999, 13).
In the Internet era companies must use more flexible and cooperative methods and development techniques to introduce new products faster than the traditional companies (Cusumano & Yoffie 1999). The life cycle to innovate and develop new software shortens even more with the nascent mobile Internet. In this environment the service providers and software developers compete fiercely with new and creative solutions that continuously turn up in the markets and vanish almost as fast as they have emerged if the markets are not favourable for the new product or service. The study of the National Technology Agency in Finland (Tekes) shows important reasons for cooperation and networking between companies as having the potential to facilitate entry into new markets. This is achieved through joint commercialisation and development projects for better features of products and services and further to be able to concentrate on developing the company’s core competencies (Itkonen, Pohjonen et al. 2000).
The cited report emphasises the need for Finnish software companies to move into the international software product industry that ultimately is the most interesting and economically lucrative business branch in this field. In a favourable environment the Finnish software industry could make significant progress in economic terms if only small progress on a global scale. However, to achieve this improvement path it demands that all the elements in the business context must be sharpened in consonance with each other. One of these elements is without question the ability and knowledge to protect the software company’s proprietary rights in all situations. The business needs more experts that administer not only the software technology and development processes, but also the other levels of business development. The weakness of contracting is expressed explicitly among the marketing, sales and delivery issues. In this the Intellectual Property Rights (IPR) with all its elements are emerging as one of the most critical issues for whole information technology industry.
Cooperation, financing and acquisitions demand for exact knowledge of the ownership of the products, i.e. the rights to these products and services. These are the capital of the software company in its most transparent form. For example, in a still immature component technology market the contracting aspects are also new and undefined (Niemelä, Kuikka et al. 2000). However, the major juridical problems of the component business give insight to the variety of different issues that the software company must take into consideration when forming its business strategy. The IPR concepts include patent, copyright and trade secret issues. These will, in the future, have a more important role as the IPR are forming longer chains and networks of contracts in which every participant will get its small but justified share of the whole profit.
Especially when companies enter international markets the main cooperative forms for technology companies are: reseller or agent, affiliate, selling of license, own marketing company, joint venture or franchising as indicated in the report by (Itkonen, Pohjonen et al. 2000). Also the need for external expertise in international technology transfer projects indicated a need for expertise in contract negotiations, the IPR issues are also issues of interest (ibid). The companies questioned found that skilful professionals for these matters were hard to find. Software contracting forms an important subject that the software company must govern in order to succeed in international competition. The business environment is in constant change as the companies form and reform alliances with other companies and the fast development of the technology puts more pressure on company management.
A study of the experience of and future needs related to international technology transfer in SMEs gave insight into the technology companies needs. The most important goals are entering new markets, commercialisation or developing of the product or service and concentrating on the company’s core competence (ibid). The main obstacles hindering this international technology cooperation from developing among the companies are the lack of financial resources, technology strategy, plans for internationalisation, time and competent expertise, and finally the difficulty of making agreements (ibid). Further the companies regarded the lack of legal experts in technology transfer operations a serious problem and they acknowledged that the companies were not putting more effort into the contracting and they also understood that this may be a problem in the near future as the important role of the IPR has grown considerably during the last years.
This study focuses on the software company’s contracting process and how the company uses it to control and coordinate its software producing processes and business relationships. Is the contracting process defined? In other words, is its existence understood, does it have an explicit owner and is it developing? How it is managed and what is its scope? These questions are among those that are treated in this thesis. The four domains of interest and of relevance in this research are software development process (computer science), business process (economics), juridical process (science of law) and contracting process (software contract). The focal software contracting process embeds three disciplines. This may bring about difficulties, as these must be mastered at least to some extent that is relevant to conduct the research process successfully. Also organizational aspects could have been included, but that would have complicated the issue even more. Already back in the 1960s Macaulay (1963, 66) advocated the view that “Contract, then, often plays an important role in business, but other factors are significant. To understand the functions of contract the whole system of conducting exchanges must be explored fully”.
The software producing companies try all the time to keep pace with the constantly changing turbulent and fast developing environment. However, at the same time the companies would like to standardize their operations and processes to be in a better position to answer to the rapid emerging market’s demands. This is an ambivalent situation, as the company should be flexible and receptive to new ideas and technological developments and on the other hand to be able to stabilize, i.e. trying to clarify and plan carefully and explicitly its business processes. It is analogous to innovation activities as Tidd et al. (2001, 15) notes “Firms need to learn to manage both the steady state ‘doing what we already do better [than others]’ kind of innovation and the radical new generations”.
The software company can be seen as a nexus of contracts, or in fact the company itself is defined and distinguished from its environment as an individual entity by the contracts that are made in its name. Though the economists do not have a consensus on how to define the firm. As Hodgson (1998) argues the theoretical analyses used make good use of one of two perspectives: the contractual, i.e. emphasizing the making and monitoring transactions or the competence, i.e. individual or team skills and tacit knowledge. All the different contractarian theories share the informational and other difficulties in formulating and monitoring the contracts as the crucial explanatory elements (ibid). For the purposes of this study the contractual viewpoint is a self-evident choice, as the study is about contracting as an instrument of software development and relationship governance.
The domain and focus of this study is especially on contracting. This study analyses the process of contracting, i.e. the dynamics, dependencies and elements of process related issues. The empirical part of the study was completed using interviews and documents to observe the contracting process unfolding in software developing companies. This study does not profoundly treat the actual contracts and scrutinize their phrasings – from a legal point of view – as the aim of the research is to thoroughly solve the contracting process itself and its functioning from the software company’s perspective.
Hodgson (ibid) further rightly argues in favour of non-contractual elements – such as trust and moral norms – that function. Also Halinen (1994) emphasizes the importance and essential role of unwritten rules and customs in business relationships compared to written and formal contracts, but still the business life would not prosper without any formal agreements. Macneil (1978, 865) defines the firm to be “in significant ways, nothing more than a very complex bundle of contractual relations”. Klein et al. (1978, 326) also considers the firm as a particular set of interrelated contracts and suggest that these may be used to examine the economic rationale of different kinds of contractual relationships. They present the fundamental economic question for the contractual study: "What kinds of contracts are used for what kinds of activities and why?”.
This research is on Contracting in software business; based on an analysis of evolving contract processes and relationships. The research was carried out to answer the following questions:
How has been approached software contracting and what concepts and models have been presented to understand it?
What is the role of inter-organisational relationships and intra-organisational process evolution in software contracting?
How, in practice, do contracting processes form and evolve in the context of software businesses?
What kind of a model would help understand the evolving contract processes and relationships?
How can contracting processes be managed as part of the software businesses?
What implications does the contracting process in a software developing company have on the governance of the software development process and how does it affect the development of the relationship between the cooperating partners. These issues are of key interest in this research.