Recent literature in information systems notes that software development outsourcing is increasingly prevalent, despite the complexity of managing development across organizational boundaries. Information systems researchers have used transaction cost and agency theories to propose incentive schemes to address this problem. Drawing on legal and organizational theories about contractual relations between firms, this article describes and illustrates a set of contractual elements, essentially hierarchical control mechanisms, that can contribute to the governance of external software development. Software outsourcing contracts using such elements should be viewed as hierarchical, rather than market, organizational forms, in that they are sheltered from the disciplining influence of market forces. Following transaction cost theory, the article proposes that the use of hierarchical elements will vary with transaction characteristics. Actual software contracts are content analyzed to lend empirical support to the propositions. Future research directions and content‐analytic research designs appropriate for analyzing software contracts are then elaborated.
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