Most companies recognize the many advantages of buying software applications off the shelf rather than developing them in-house. By purchasing packaged applications (such as those from Microsoft, Oracle, SAP, and other vendors) or by using applications that vendors create, host, and make available over the Web (for example, those from SalesForce.com), companies can acquire effective business solutions with the benefits of standardization. In this way, they can keep up with of the innovations created by focused specialists.

In spite of those advantages, custom-built applications are still very much a part of the IT landscape. Companies in many sectors spend well over half their applications budgets on custom software, used largely to enhance, support, and operate customized systems. For large companies in competitive, fast-moving industries such as telecommunications, financial services, high tech, pharmaceuticals, and media, those outlays can run into hundreds of millions of dollars. Banks, for instance, frequently build custom applications to support new financial products or to manage risk. Pharmaceutical companies regularly build custom applications to support R&D and marketing activities.

Even when a company uses off-the-shelf applications, it frequently customizes them, typically by adding modules that provide a distinctive capability. A high-tech company, for example, installed a suite...