SMEs and IT: A Market for Lemons?

It is well known that Small- and Medium-sized Enterprises (SME) suffer from a lack of IT proficiency and therefore depend heavily on external IT expertise. The acquisition of a strategic IT artefact by an SME is mainly initiated in a market where Independent Software Vendors (ISV) and customers meet. This complex process is dominated by information asymmetry and leads to the 'lemons' problem, where low-quality vendors drive out high-quality vendors as predicted by the Lemon Market Theory (LMT). The diversity in quality makes it difficult for prospective buyers to evaluate a product or service with complete certainty and makes the decision to acquire risky. According to LMT, there is incentive for vendors selling poor quality, where quality of services is linked to an entire group rather than to an individual vendor. Although many scholars refer to this phenomenon in their work, empirical evidence is scarce. In this paper, we present the results of an enquiry into the 'lemon' problem within a group of 484 Belgium ISVs that target the SME market. A survey of the websites of the selected ISVs was conducted, in which we examined the way the products and services were presented. This was followed by six case studies, in which Chief Information Officers (CIOs) of SMEs were interviewed about the way they perceive the services of the ISVs. Our findings suggest that there are elements of a 'lemons' market present. However, there are also indications of a self-cleaning mechanism present in the market within the group of ISVs, leading to a globally higher degree of quality and leading to positive filtering from 'the buy side'. However, the strongest conclusion is that some SMEs are encouraged by ISVs to withdraw from progressing further with their software acquisition process due their inferior IT capabilities and practices.