Software Acquisition: The Custom/Package and Insource/Outsource Dimensions

Abstract

This paper presents a decision framework that captures the major tradeoffs a firm faces when a software acquisition decision is made. This framework and the method of empirical analysis differ significantly from previous work on software acquisition. The software acquisition problem is depicted as two-dimensional, with the firm deciding whether to custom develop the software or base it on a package and whether to insource acquisition tasks or outsource them. Multinomial logit analysis of extensive field data on actual business decisions (not stated rationales) identifies and measures the key factors affecting these two decisions. We present evidence that: A significant interaction exists between decisions on the two dimensions of the software acquisition problem. This "confounding effect" leads firms to make the custom/package and insource/outsource decisions simultaneously. Software acquisition decisions are strongly affected by application properties, technological characteristics and organizational considerations. Suprisingly, we find the software acquisition decision to be largely unaffected by whether or not the system is strategic. Finally, while there is support for the popular belief that software development outsourcing has increased over time, we do not find evidence of such a trend for packages. The framework and empirical results in this paper offer managers a basis for structuring and benchmarking their software acquisition decisions. The paper also characterizes the types of software projects that will be most beneficial for vendors to target.

JEL Classification: C88, L86