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SOFTWARE OUTSOURCING AND CLOUD SERVICES

Today, many business firms continue to operate legacy systems that continue
to meet a business need and that would be extremely costly to replace. But they
will purchase or rent most of their new software applications from external
sources. Figure 5.12 illustrates the rapid growth in external sources of software
for U.S. firms.
There are three external sources for software: software packages from a
commercial software vendor, outsourcing custom application development
to an external vendor, (which may or may not be offshore), and cloud-based
software services and tools.

Software Packages and Enterprise Software
We have already described software packages for enterprise applications as one
of the major types of software components in contemporary IT infrastructures.
A software package is a prewritten commercially available set of software
programs that eliminates the need for a firm to write its own software programs
for certain functions, such as payroll processing or order handling.
Enterprise application software vendors such as SAP and Oracle-PeopleSoft
have developed powerful software packages that can support the primary
business processes of a firm worldwide from warehousing, customer
relationship management, and supply chain management, to finance and
human resources. These large-scale enterprise software systems provide a
single, integrated, worldwide software system for firms at a cost much less
than they would pay if they developed it themselves. Chapter 9 discusses
enterprise systems in detail.

FIGURE 5.12 CHANGING SOURCES OF FIRM SOFTWARE

In 2012, U.S. firms will spend over $279 billion on software. About 35 percent of that ($98 billion)
will originate outside the firm, either from enterprise software vendors selling firmwide applications
or individual application service providers leasing or selling software modules. Another 4 percent ($11
billion) will be provided by SaaS vendors as an online cloud-based service.
Sources: BEA National Income and Product Accounts, 2012; authors’ estimates.

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