Performance evaluation metrics for information systems development : a principal-agent model

40 Pages·1991·1.2 MB·English

by  Banker, Rajiv D

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Performance Evaluation Metrics for
Information Systems Development:
A Principal-Agent Model
Rajiv D. Banker*
Chris F. Kemerer**
June 1991
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139

Performance Evaluation Metrics for
Information Systems Development:
A Principal-Agent Model
Rajiv D. Banker*
Chris F. Kemerer**
June 1991
MIT Sloan School of Management Working Paper #3303-91-MSA
* University ofMinnesota
** Massachusetts Institute ofTechnology
This research was made possible, in part, by support from NSF Grant SES-8709044 (Carnegie
Mellon University), the Center for Information Systems Research (MIT) and the International
Financial Services Research Center (MIT). Helpful comments from C. Beath and E. Brynjolfsson
on the firstdraft are gratefully acknowledged.

Performance Evaluation Metrics for
Information Systems Development:
A Principal-Agent Model
Rajiv D. Bankerand Chris F. Kemerer
Abstract
The information systems (IS) development activity in large organizations is a source ofincreasing
cost andconcern to management IS development projects are often over-budget, late, costly to
maintain, and not done to the satisfaction ofthe requestingclient. These problems exist, in part,
due to the organization ofthe IS developmentprocess, where information systems development is
typically assigned by the client (principal) to adeveloper (agent). The inability to direcdy monitor
the agentrequires the use ofmultiple performance measures, or metrics, to represent the agent's
actions to the principal.
This paperdevelops a principal-agent model (based on information economics) that is solved to
provide the set ofdecision criteriafor the principal to use to appropriately weight each ofthe
multiple metrics in orderto provide an incentive compatible contract forthe agent. These criteria
include the sensitivity and the precision ofthe performance metric. Afterpresenting 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 forperformance metric
evaluation. The model can also be used in a positive manner to suggest explanations for the
currentrelative emphasis in practice on particularmetrics.
M.l."^ UORARIES
JUN 2 6 1991