1. Small and Medium-sized Enterprises
(SMEs) and IT:
A Market for Lemons?
Jan Devos
Ghent University Association
Department Howest
Prof. Dr. ir. Dirk Deschoolmeester
Promoter & co-author
ECIME 2011, Como, Italy © J. Devos 1

2. Problem
• acquisition of a Strategic IT artefact by SMEs
• Independent Software Vendors (ISV) selling
ERP, CRM, SCM, ... packages
• However....
ECIME 2011, Como, Italy © J. Devos 2

3. Problem
SME ISV
INFORMATION ASYMMETRY
ECIME 2011, Como, Italy © J. Devos 3

4. Theory of Lemon Markets
= €1
= €0.1
IT
ECIME 2011, Como, Italy © J. Devos 4

5. Theory of Lemon Markets
€1
?
€0.1
?
ECIME 2011, Como, Italy © J. Devos 5

6. Theory of Lemon Markets
€0.55 - €1 = -€45
€0.55
€0.55 - €0.1 = €0.45
ECIME 2011, Como, Italy © J. Devos 6

7. Theory of Lemon Markets
€0.55 - €0.1 = €0.45
€0.55
€0.55 - €0.1 = €0.45
€0.55 - €0.1 = €0.45
ECIME 2011, Como, Italy © J. Devos 7

8. Theory of Lemon Markets
€0.23- €0.1 = €0.13
€0.23
€0.23 - €0.1 = €0.13
€0.23 - €0.1 = €0.13
ECIME 2011, Como, Italy © J. Devos 8

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 ?
ECIME 2011, Como, Italy © J. Devos 9

10. 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
ECIME 2011, Como, Italy © J. Devos 10

11. Prospect Theory
The value function
A person is risk averse
for gains (concave
function)
A person is risk
seeking for losses
(convex function)
ECIME 2011, Como, Italy © J. Devos 11

12. 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 Theory
A 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 12

13. Prospect Theory
Framing a proposal
Müller-Lyer illusion
ECIME 2011, Como, Italy © J. Devos 13

14. Research Methodology
– Screening of websites of 484 (Belgian ISVs)
– Multiple case study (interviews with CIOs)
ECIME 2011, Como, Italy © J. Devos 14

15. Findings from the websites
Checkpoint Score 0 Score 1 Score 2 Score 3
Not Present Minimally Moderately Maximally
Present Present Present
Direct focus to
CP1 61.1% 12.7% 15.2% 11.0%
SMEs
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%
Use of formal
CP5 41.7% 20.5% 20.1% 17.7%
methodology
ECIME 2011, Como, Italy © J. Devos 15

16. 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
ECIME 2011, Como, Italy © J. Devos 16

17. 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
ECIME 2011, Como, Italy © J. Devos 17

18. 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
ECIME 2011, Como, Italy © J. Devos 18

19. Questions ?
ECIME 2011, Como, Italy © J. Devos 19