The impacts of industry environment on software insourcing, outsourcing, and buying
| DOI | https://doi.org/10.1108/IMDS-08-2021-0511 |
| Published date | 11 May 2022 |
| Date | 11 May 2022 |
| Pages | 1541-1559 |
| Subject Matter | Information & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems |
| Author | Xiaowei Liu,Wen Guang Qu,Alain Pinsonneault |
The impacts of industry
environment on software
insourcing, outsourcing,
and buying
Xiaowei Liu and Wen Guang Qu
School of Management, Zhejiang University, Hangzhou, China, and
Alain Pinsonneault
Desautels Faculty of Management, McGill University, Montreal, Canada
Abstract
Purpose –Nowadays, an increasing number of firms choose to develop proprietary software, instead of
buying packaged software. What factors will affect different types of software investments? According to the
environment-strategy alignment research, environment should be an influential factor. However,
environment’s role has received scarce attention in the literature. The authors’study addresses this
research gap by investigating how industry environment affects different types of software investments. The
study identifies three types of software investments (software insourcing, outsourcing, and buying) and
examines how the characteristics of the industry environment (including industry munificence, dynamism,and
concentration) influence each software investment.
Design/methodology/approach–The generalized least squares (GLS) model and the ordinary least squares
with panel-corrected standard errors (OLS-PCSE) model are applied to test the hypotheses,based on industry-
level panel data from the US Bureau of Economic Analysis (BEA).
Findings –The analysis shows that industry munificence, dynamism, and concentration have different
impacts on software insourcing, outsourcing, and buying, respectively.
Originality/value –This study classifies software investment into three types –software insourcing,
outsourcing, and buying and investigates how the industry environment affects them. The findings suggest
that research should distinguish among software insourcing, outsourcing, and buying due to their different
characteristics.
Keywords Industry munificence, Industry dynamism, Industry concentration, Software insourcing,
Software outsourcing, Software buying
Paper type Research paper
1. Introduction
Firms nowadays use software not only to improve their business processes but also to
improve their core products or services (Bharadwaj et al., 2013;Branstetter et al., 2019). An
increasing number of firms choose to develop their own proprietary software, instead of
buying packaged software because the strategic importance of software to business has
continued to increase in recent years (Branstetter et al., 2019;Chung et al., 2019). For instance,
GE CEO Jeffrey Immelt stated in an interview: “We believe that every industrial company will
become a software company”(Lohr, 2016).
One important issue concerning software in the literature is what factors drive firms to
make(buy) their software (Tsai et al., 2013;Sledgianowski et al., 2008;Daneshgar et al., 2013;
Fang et al., 2020). Information systems (IS) scholars have suggested that many factors
influence a firm’s software making or buying decision, and these factors can be categorized
into three groups: organizational, technological, and environmental factors. Among these
Industry
environment
and software
investments
1541
Funding: This research was supported by the National Natural Science Foundation of China (No.
71572180).
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0263-5577.htm
Received 28 August 2021
Revised 28 February 2022
24 March 2022
Accepted 24 March 2022
Industrial Management & Data
Systems
Vol. 122 No. 7, 2022
pp. 1541-1559
© Emerald Publishing Limited
0263-5577
DOI 10.1108/IMDS-08-2021-0511
factors, organizational factors such as cost/risks, business capabilities, and organizational
considerations (e.g. Nelson et al., 1996;Hung and Low, 2008;Tsai et al., 2013) and
technological factors such as maturity of internal technology, organizational IS expertise, and
software properties (e.g. Welch and Nayak, 1992;Nelson et al., 1996;Tsai et al., 2013) have
received adequate attention, whereas studies of environmental factors are relatively rare
(Buchowicz, 1991;Tsai et al., 2013).
We suggest that more research should be conducted to understand the effects of the
environment on the software investment decision. The research on environment-strategy
alignment theorizes that firms’strategic decisions must be in conjunction with the
environment so as to accommodate to the variability and uncertainty of the environment
(Porter, 1980;Mithas et al., 2013). Therefore, the external environment has a significant
influence on firms’strategic decisions. Due to the increasing importance of IT in business,
many firms have addressed the importance of different types of software acquisition;
therefore, we should further investigate the influence of the environment on firms’software
acquisition because such strategic IT decisions should be significantly influenced by the
environment, according to the environment-strategy alignment research (Porter, 1980;
Mithas et al., 2013). In fact, prior IS research has noted the role of the external environment in
other strategic IT decisions, such as IT investment and IT outsourcing (Kobelsky et al., 2008;
Mithas et al., 2013;Qu et al., 2011). Our study furthers this line of research by examining the
role of the environment in different types of software investments. Specifically, this study
employs a well-established conceptualization of the industry environment comprising three
dimensions (i.e. industry munificence, dynamism, and concentration) (Dess and Beard, 1984;
Barrales-Molina et al., 2010;Qu et al., 2011) and investigates how the industry environment
affects three types of software investments (i.e. software insourcing, outsourcing, and
buying).
This paper makes three contributions to IS research. First, we investigate the role of the
industry environment in firms’software investment. To our knowledge, this study is among
the first to investigate the relationships among the three key dimensions of the industry
environment and software investment. Therefore, the study could augment our
understanding of the environmental antecedents of firms’software investment. Second,
based on the previous framework of software investment (making vs buying), we further
divide the making approach into two types, insourcing and outsourcing, and establish a
three-dimensional framework: software insourcing, outsourcing and buying. In the real
world, firms have widely made investments in software insourcing, outsourcing, and buying;
therefore, our new framework of software investment could offer new insights for research
and additional implications for managers. Third, to the best of our knowledge, the study is
among the first to use economic census data to measure the three types of software
investments and to provide empirical evidence for the impact of the industry environment on
the three types of software investments based on country-wide panel data.
2. Literature review
Studies have investigated the antecedents of firms’choice in making or buying software.
These antecedents can be categorized into three groups: organizational, technological, and
environmental factors. First, many organizational factors have been identified in the research
such as cost, business experience, business capabilities, software requirements, top-level
support, risk, and organizational considerations. Cost is consistently noted as a key factor
since the IT department is one of the most expensive departments to establish and maintain
(Hung and Low, 2008). Business experience and capabilities are also important influencing
factors. For instance, in the e-retail industry, firms with sufficient e-commerce experience
prefer the “make”strategy, while firms with insufficient e-commerce capabilities prefer the
IMDS
122,7
1542
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