A strong focus on low price when selecting software providers increases the likelihood of failure in software outsourcing projects

Context: Bidding rounds are frequently used to select competent and cost-efficient providers for software projects. Objective: We hypothesize that emphasizing low price when selecting software providers in such bidding rounds substantially increases the likelihood the project will fail. Method: The hypothesis is tested by analyzing a dataset of 4,791,067 bids for 785,326 small-scale projects registered at a web-based marketplace connecting software clients and providers. Results: We find evidence supporting our hypothesis. For example, selecting providers with bids 25% lower than the average bid is connected to a 9% increase in the frequency of project failures for the same level of provider skill. In addition, we found that clients emphasizing a low price, on average, selected providers with lower skill levels. This decrease in provider skill level further strengthened the negative effect of a strong focus on low price on project failures. For example, selecting a provider with a 15% failure rate for previous projects instead of 5% increased the failure rate by 33%. Conclusion: We interpret the findings to suggest that a client may substantially reduce the likelihood of project failure by reducing the emphasis on low price when selecting a provider.