Scale Economies in New Software Development

Two opposing views regarding the presence of economies or diseconomies of scale in new software development are reconciled in an approach that hypothesizes a production function model of software development. This model allows for both increasing and decreasing returns to scale and argues that local scale economies or diseconomies depend on a project's size. It is shown how to identify the most productive scale size (MPSS) through the use of the data envelopment analysis technique. The results have a number of useful implications. For example, managers could actively seek to identify the MPSS for their organization. This information could be used as input in the make or purchase decision. The results indicate that the MPSS varies widely across different application environments.