Incomplete Contracts and Complex Requirements: Contract Theory and the Persistence of Bespoke Website Design Services
Modern contract theory, notably Grossman and Hart, emphasizes that contracts cannot identify every possible future contingency, state of the world, or ongoing need for the parties at the time they create a contract. The consequences of this academic principle are significant for the digital marketplace. One example of this is the continual existence of custom website design services, even with the introduction of standardized template-based website builders (e.g., Wix, Squarespace).
When one considers the availability of pre-built website templates, one may believe that the problem of web development is solved. After all, millions of businesses have created websites using drag-and-drop technology at a low cost. However, the web development industry remains in the multi-billion dollar range for custom web development services due to the inability to contractually identify and provide for all possible needs when a website design is created as a result of an unrealized contract.
Contract Theory and Incomplete Specifications
According to Grossman–Hart contract theory, control rights of the parties to a contract become very important when future contingencies cannot be specified or enforced. Therefore, where it is not feasible to write a complete contract, ownership and flexibility are both important.
Typical examples of incomplete contracts are web projects. At the start of the project, neither the customer nor the developer will be able to specify completely:
- How usability flows will change after launch
- What the scaling effect of growth will be
- What will happen as the regulatory environment changes
- What new integrations (such as CRM, ERP, and payment systems) will need to be developed
- How cybersecurity risks will evolve
Providing templates assumes the need for standard requirements and works very well when requirements can be planned for and bounded. However, when a project is developed within an uncertain environment and the contract is evolving or being re-evaluated throughout the contract term, using standard templates will be inefficient.
Why Standardization Breaks Down
Think about scalability. A startup may start out with a simple marketing website. Six months later, it might be adding API integration, custom dashboards, or proprietary back-end systems. Template platforms fit well for common use cases, but also allow for extensibility to a degree.
Templates are a low-cost solution when requirements are homogeneous. The cost of modifying a standardized system rises steeply when requirements move away from homogeneity. This line of reasoning is consistent with contract theory: when it is difficult to predict future states due to uncertainty, the inefficiencies created by rigid contracts (or a rigid platform) can be significant.
Statistical data indicate a steady increase in the global amount spent on web development services, regardless of the increase in template usage. This would suggest that the market is becoming more segmented than displaced, where the standardized segment serves simple projects and bespoke companies provide for complex and evolving projects.
Real-World Illustration
Markets for enterprise websites typically include a proprietary database, a customer management system, or an infrastructure for compliance. For example, financial services companies need to adhere to a variety of data protection and user authentication requirements and regulations. Likewise, medical providers must comply with a number of laws pertaining to HIPAA. Many e-commerce companies need the capability to track real-time inventory from multiple warehouses or distribution centers.
While a template-based solution can provide the necessary technical functionality, when the market for the template solution changes as a result of changes in integration and compliance requirements, the legal enforceability of the contract and the resulting limitation on the ability to renegotiate contract terms, alter the associated system architectures, and subsequently reallocate control can become valuable.
Bespoke vendors or solutions do not simply provide software development services — they also offer an unparalleled level of adaptability. They provide the residual rights of control on behalf of the parties to the incomplete contract.
Economic Forces Driving the Persistence of Customization
A number of things help create this environment.
Digital business models tend to change very quickly. "Scope creep" is something that you can expect if you want to grow. As well, the complexity of the regulations governing a business has become more complex over time, making it difficult to know for sure if you are in compliance with the law. Additionally, it takes a unique user experience to differentiate your products and services from your competition, which cannot be replicated using templates alone.
The theory of incomplete contracts suggests that a flexible governance structure will produce better results than a rigid one when there is high uncertainty and you cannot clearly describe the future. Custom development companies provide that flexibility in governance structure.
Ramifications for Market Structure
The ongoing use of bespoke services does not contradict the use of template platforms but rather indicates the presence of segmentation in the overall market. In general, standardisation will take precedence where there are predictable or lower-risk needs, whereas customisation will dominate in environments characterised by greater complexity and uncertainty.
On the other hand, a dependence on bespoke development can also create higher switching costs and ongoing dependency; thus, control of the code and infrastructure becomes a strategic factor for businesses. Companies must pay attention to both the lower initial cost of contract deliverables and their long-term adaptability.
From a welfare perspective, the incompleteness of contracts means that there can be no single universal solution. Efficiency will depend on aligning a business's production structure with the level of uncertainty.
Conclusion
Contract theory explains why bespoke website design services are still successful. When requirements are very complex and changing and when it is difficult to determine the exact requirements before hand, then using standard platforms will not work. Customizing something has value because you cannot pre-code everything.
In the digital economy, incomplete contracts are not bad or wrong; they're just the way it is. Where there is more complexity than can be accommodated by standardisation, you have areas of specialisation.
