Business transactions can be decomposed into a series of activities along a vertical chain (Custom, 2017, ss. 90-127). Firms may decide to perform the activities by themselves or outsource them to a more specialized firm. Vertical integration is the action of increasing the number of activities along the vertical chain that the firm handles. Vertical integration is desirable when the value of an investment in the resources to perform an activity is higher when made by one rather than the other actor in the value chain (Custom, 2017, s. 126).
In the software domain, the decision about vertical integration applies to whether to develop own software, buy the development service, or subscribe to a standardized software solution. It also applies to whether to buy own hardware, handle the operations and support in-house, or to outsource it. Software suppliers may decide to vertically integrate forward and offer all these activities in a bundle. The investment in servers and support performed by the software supplier carries the potentiality for economies of scale since they provide the same services to multiple customers. Therefore, the value of the investment is higher when the software supplier makes the investment rather than the buyer. The configuration of the value chain therefore leads to the potentiality of greater profits for both the buyer and the seller.