ECIME 2011, Como, Italy © J. Devos 1

Small and Medium-sized Enterprises (SMEs) and IT:

A Market for Lemons?

Jan DevosGhent University Association

Department Howest

Prof. Dr. ir. Dirk DeschoolmeesterPromoter & co-author

ECIME 2011, Como, Italy © J. Devos 2

Problem

• acquisition of a Strategic IT artefact by SMEs

• Independent Software Vendors (ISV) selling ERP, CRM, SCM, ... packages

• However....

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Problem

SME ISV

INFORMATION ASYMMETRY

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Theory of Lemon Markets

= €1

= €0.1

IT

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Theory of Lemon Markets

?

?

€1

€0.1

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Theory of Lemon Markets

€0.55

€0.55 - €1 = -€45

€0.55 - €0.1 = €0.45

ECIME 2011, Como, Italy © J. Devos 7

Theory of Lemon Markets

€0.55

€0.55 - €0.1 = €0.45

€0.55 - €0.1 = €0.45

€0.55 - €0.1 = €0.45

ECIME 2011, Como, Italy © J. Devos 8

Theory of Lemon Markets

€0.23

€0.23- €0.1 = €0.13

€0.23 - €0.1 = €0.13

€0.23 - €0.1 = €0.13

ECIME 2011, Como, Italy © J. Devos 9

Research Question

Are there indications of a lemon market in a

setting where a SME-buyer buys a strategic

IT artefact (ERP, CRM) from an ISV-seller ?

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Theory of Lemon Markets • A market place: buyers and sellers von Neumann-

Morgenstein maximizers of Expected Utility• Information Asymmetry between transacting partners • Overall quality of goods and services offered is

reflected to the entire group of sellers rather than on individual sellers

• Lack of seller differentiation• There is incentive to market low quality (igniting

condition)

• High-quality sellers flee the market because their quality and reputation cannot be rewarded

• Complete Market Deterioration

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Prospect Theory

The value function

A person is risk averse for gains (concave function)

A person is risk seeking for losses (convex function)

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Prospect Theory

• A falsification of the EUT• Theory of decision under risk

A person is risk averse for gains and is risk seeking for losses

“Losses loom larger than gains”

• Propositions of the Prospect TheoryA decision about prospects is a two phase process consisting of:

(1) editing or framing phase (positive or negative framing)

identical information is edited out (often a simpler representation)

(2) evaluation phase

taken the decision on the highest “value”

ECIME 2011, Como, Italy © J. Devos 13

Framing a proposal

Prospect Theory

Müller-Lyer illusion

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Research Methodology

– Screening of websites of 484 (Belgian ISVs)

– Multiple case study (interviews with CIOs)

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Findings from the websites

Checkpoint Score 0Not Present

Score 1Minimally Present

Score 2Moderately

Present

Score 3Maximally Present

CP1Direct focus to SMEs

61.1% 12.7% 15.2% 11.0%

CP2 Positive framing 37.8% 40.3% 12.7% 9.2%

CP3 Negative framing 96.8% 2.5% 0.7% 0.0%

CP4 References 22.6% 28.6% 14.5% 34.3%

CP5Use of formal methodology

41.7% 20.5% 20.1% 17.7%

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Findings from the websites

• 77,4% reference selling• 34,6% make use of case studies• 38,9% of the ISV’s is targeting also an SME market

• 11,0% of the ISV’s is only targeting an SME market• Large ISVs are targeting LEs (and sometimes SMEs)• Small ISVs are targeting SMEs

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Findings from the SME-CIO interviews

• 4 of 6 not familiar with PPM• 1 of 6 uses a PPM• 6 of 6 had experiences with failed IT projects

– Erroneous proposal by the ISV (too optimistic)– Not keeping promises ex ante – Underestimating budget and timing– Lack of skills

• Importance of trust• Importance of real references

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Conclusions

• Elements of a lemon market are found• Lemons are small ISVs• Larger ISVs flea from the SME market• SME-customers are mainly served by SME-vendors• Self-cleaning mechanism of market

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Questions ?