Is Outsourcing And Application Service Provision 9781845446970, 9780861766826

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Logistics Information Management Volume 15, Number 3, 2002

ISSN 0957-6053

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IS outsourcing and application service provision Guest Editors: Wendy Currie and Philip Seltsikas

Contents 154 Access to Logistics Information Management online 155 Abstracts & keywords 157 Guest editorial 160 Application service providers: issues and challenges Sushil K. Sharma and Jatinder N.D. Gupta 170 Managing the ASP process: a resource-oriented taxonomy C. Bruce Kavan, Shaila M. Miranda and Margaret T. O’Hara 180 Managing IT outsourcing: a value-driven approach to outsourcing using application service providers Lei-da Chen and Khalid S. Soliman

192 Delivering enterprise resource planning systems through application service providers Yamaya Ekanayaka, Wendy L. Currie and Phil Seltsikas 204 Outsourcing opportunities for data warehousing business usage David Preston and Kathryn Brohman 212 Comparative analysis between the public and private sectors on the IS/IT outsourcing practices in a developing country: a field study Abdulwahed Khalfan and Tom G. Gough

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Managing the ASP process: a resource-oriented taxonomy

Abstracts & keywords

C. Bruce Kavan, Shaila M. Miranda and Margaret T. O’Hara Keywords Organizations, Service, Development, Outsourcing, Management Application service providers (ASPs) represent the new wave of business information technology delivery. However, there is little formal literature that helps us understand the distinctions among different ASP-client relationships and how they need to be managed. This paper adopts a sociotechnical perspective to distinguish among ASP relationships. This distinction is based on the levels of organizational change that the ASP relationship will evoke. This paper then proposes levels of resource allocation that best ‘‘fit’’ each type of relationship. Three specific resources important to ASP-client relationships are economic outlays, social networks, and knowledge. The model developed in this paper provides academics and practitioners with a tool with which to diagnose the capabilities of a prospective ASP and a model for making resource allocation decisions once the ASP is selected. It raises empirical questions for researchers with regard to resource allocations that best fit specific levels of organizational change following an ASP adoption.

Application service providers: issues and challenges

Managing IT outsourcing: a value-driven approach to outsourcing using application service providers

Sushil K. Sharma and Jatinder N.D. Gupta Keywords Service systems, Outsourcing, Internet, Business planning, Model

Lei-da Chen and Khalid S. Soliman

The distributed corporate networking technology environments of the 1970s and 1980s are gaining new life, only this time the move toward distributed networks is being led by upstart application service providers (ASPs). Organizations of the twenty-first century are going to be Web-centric and focus their objectives on agility and cost savings. Pressure to reduce overhead in information technology (IT) pushes these organizations to consider outsourcing. With the use of Internet technology, a new alternative for IT outsourcing has evolved. ASPs allow companies to access and run software applications over the Internet on a subscription basis. By using the Web as an application platform, an enterprise can quickly and easily deploy new systems in response to market changes as well as reap the savings of using a single, standard platform. Recently, there has been a tremendous growth in the number of ASPs. This growth in ASPs has raised several issues and challenges that need to be resolved to realize the potential benefits of ASPs. Discusses the developments in ASPs, outlines the activities of various kinds of ASPs, describes the ASP business models, and examines the issues and challenges facing ASPs for their future success. Logistics Information Management Volume 15 . Number 3 . 2002 . Abstracts & keywords # MCB UP Limited . ISSN 0957-6053

Keywords Service, Information technology, Decision making, Outsourcing Organizations, both large and small, are increasingly outsourcing their applications to application service providers (ASPs) for a variety of reasons such as cost reduction, shortened time-tomarket, lack of internal expertise, and risk reduction. However, the adoption of the ASP model has not been smooth sailing for many organizations, and only a few organizations have a formal approach to making ASP outsourcing decisions. Partially to fill this void, develops a value-driven approach to outsourcing using ASP based on outsourcing theories and the industry’s best practices. The value-driven approach is an adaptation and extension of Simon’s decisionmaking process. It is designed to guide IS managers systematically through the complex process of identifying outsourcing opportunities, evaluating the viability of using the ASP model, making outsourcing decisions, managing contractual and implementation issues, and assessing the service quality of ASP vendors. Provides important implications for research and practice. For researchers, identifies ample research opportunities in this new field. For practitioners, the value-driven approach gives them an invaluable tool to manage today’s complex information technology outsourcing.

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Delivering enterprise resource planning systems through application service providers

associated with data warehouse development as well as the scarcity of complex skills required to use the data warehouse. One way to lower costs and gain access to scarce human skills is to outsource through the use of an application service provider. This paper presents the results of a theoretical evaluation conducted to explore data warehouse outsourcing of business usage (i.e. reporting, ad hoc analysis, and data mining). Results of this theoretical evaluation are summarized in a conceptual model that will be tested using field studies in future research.

Yamaya Ekanayaka, Wendy L. Currie and Phil Seltsikas Keywords Service, Resources, Planning, Outsourcing This paper presents research findings from an indepth study on the global application service provider (ASP) industry. It explores the potential for Web-enabling enterprise resource planning (ERP) systems for small and medium-sized companies on a per-seat, per-month basis. Findings from field research suggest that, while the ASP business model offers many advantages for customers, few companies are prepared to outsource their mission-critical ERP systems to ASPs. This situation has led to many large and small ASP vendors to re-think their strategic business plans, with some high profile failures. Evaluating the situation from a market, organizational and technical analysis of the ASP industry, this paper argues that, while the ASP model is currently immature, the next three years will see the emergence of more clearly defined enterprise ASP offerings from key players in the software and computing services industry. Outsourcing opportunities for data warehousing business usage David Preston and Kathryn Brohman Keywords Data storage, Warehousing, Outsourcing, Model Introduces a conceptual model developed to explore outsourcing of data warehouse usage by organizations. Data warehouse business users rely on reporting, ad hoc analysis, and data-mining tools to support both operational and strategic decision making. Organizations have a vested interest in data warehousing; however, many organizations are constrained by the high costs

Comparative analysis between the public and private sectors on the IS/IT outsourcing practices in a developing country: a field study Abdulwahed Khalfan and Tom G. Gough Keywords Information services, Information technology, Outsourcing, Developing countries, Risk management This paper presents an overview of a national case study exploring the IS/IT outsourcing phenomenon in the public and private sectors of a developing country. Kuwait has been used as an example of a developing country and the data collection for this study was done there. The primary data on IS/IT outsourcing practices, obtained for the first time in Kuwait, were collected by means of survey questionnaires and semi-structured interviews supported by organisational documentation. Several public and private sector organisations were selected to participate in the investigation. The main findings of the study suggest that there are differences between the two sectors in their motivation and risk factors evaluation behind the adoption of an IS/IT outsourcing business strategy. The findings also provide an insight into how outsourcing practices, as an information system strategy, are motivated and managed in the context of a developing nation.

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Guest editorial

The guest editors Wendy Currie is Professor and Director of the Centre for Strategic Information Systems (CSIS), Department of Information Systems and Computing, Brunel University, UK. She currently holds two research grants from EPSRC and ESRC for a study on application service provisioning (ASP) and Web services. She has published several books and journal articles on IS management and strategy and holds a PhD from Henley Management College/Brunel University. Phil Seltsikas is a Lecturer in the Department of Information Systems and Computing, Brunel University, UK. He is currently co-ordinating an EU-funded research project on the emerging ASP industry. He holds a BSc (Hons) in Managerial and Administrative Studies from Aston University, UK, and an MSc by research in Business Management from the Aston Business School and a PhD in Management and Information Systems from the same institution.

Logistics Information Management Volume 15 . Number 3 . 2002 . pp. 157–159 # MCB UP Limited . ISSN 0957-6053

IS outsourcing has been a popular topic within the IS community over several decades. During the 1970s, the term ‘‘facilities management’’ was used and the emphasis was on service bureau contracts, where companies would rent space on a mainframe owned by the vendor. This simple form of outsourcing expanded during the 1980s and 1990s to encapsulate business systems, such as enterprise resource planning (ERP), supply chain management, financial and accounting and human resource systems. Large outsourcing vendors such as EDS and IBM Global Services significantly increased their revenues from outsourcing, with many large single customer contracts being signed. Throughout the 1990s, IS sourcing evolved into four distinct types: total outsourcing (where a company would outsource more than 70 per cent of its IS facility); selective sourcing (often using multiple suppliers); joint venture sourcing (where a company would set up or partner with another company to provide systems and applications); and insourcing (where a company procures, manages and develops its own IS function) (Currie and Willcocks, 1998). During this period, much of the research work on IS outsourcing concentrated on the client-side in terms of contracts management (Fitzgerald and Willcocks, 1994); achieving success in outsourcing decisions (Saunders et al., 1997); and managing the IT resources as a value center (Venkatraman, 1997). The IT infrastructure emerged from a closed mainframe environment to a distributed computing environment, and more recently towards a net-centric infrastructure, with the potential to link customers and suppliers. The convergence of software and IT infrastructure towards an Internet/net-centric environment has therefore enabled the application service provider (ASP) concept to emerge. Software has evolved from custom-coded, proprietary applications to pre-packaged, off-the-shelf offerings and now to the development of net-centric applications. ASPs are third-party service firms which deploy, manage and remotely host software applications through centrally-located services in a rental or lease agreement. During the last two years, the ASP phenomenon has grown considerably, with many established and start-up firms developing their ASP strategies. Forecasts for

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the growth of the ASP industry vary, with Ovum predicting that it will be $25 billion and Dataquest, $22.7 billion, by 2003 (Currie and Seltsikas, 2001). ASPs will have a significant impact on outsourcing policies and practices, if the business model successfully penetrates the under-exploited small and medium enterprise (SME) sector. In this special issue on ‘‘IS outsourcing and application service provision’’ for the Logistics Information Management, six theoretical and research papers are presented on a range of topics from identifying ASP business models to cross-national perspectives on outsourcing practice. The paper by Sharma and Gupta on ‘‘Application service providers: issues and challenges’’, provides an overview of the ASP business model, discussing its potential advantages and disadvantages. The authors discuss a taxonomy of ASPs, in the context of their viability to offer the customer costeffective and useful solutions. The authors further introduce the concept of the wireless ASP (WASP). The authors conclude by arguing that important issues and challenges will need to be overcome, if the ASP model is to succeed. The paper by Kavan et al. on ‘‘Managing the ASP process: a resource-oriented taxonomy’’ discusses the ASP concept as a new wave of business IT delivery. They adopt a socio-technical perspective and develop a model of three levels of organizational displacement following a technological implementation: Alpha change; Beta change; and Gamma change. The authors discuss different types of ASP offerings in the context of this model. Chen and Soliman continue the ASP theme in their paper, ‘‘Managing IT outsourcing: a value-driven approach to outsourcing using application service providers’’. These authors discuss some of the adoption problems facing the ASP model. By developing a value-driven approach to outsourcing using ASP from the literature and best-practice industrial scenarios, the authors link this to Simon’s seminal decision-making work. The approach adopted by the authors is to help IS managers through the complex process of decision making regarding outsourcing and ASPs. The paper by Ekanayaka et al. on ‘‘Delivering enterprise resource planning systems through application service providers’’ discusses the issue of how ERP vendors can provide Web-enabled software

applications to SMEs. The paper tracks the development of the ERP industry in the 1990s and the more recent attempts to offer vanilla ERP to companies. Through empirical research into the ASP industry, the authors conclude that ERP vendors will need to develop effective ways to educate the customer market, if they are to succeed in creating this market. Preston and Brohman, in their paper, ‘‘Outsourcing opportunities for data warehouse business usage’’, introduce a conceptual model to explore outsourcing of data warehouse usage by organizations. The authors argue that organizations have a vested interest in data warehousing, but are constrained by the high costs of data warehouse development and skill shortages. The authors contend that outsourcing is one way to alleviate these problems. The paper discusses the results from a theoretical evaluation of data warehouse outsourcing of business usage with the results presented in a conceptual model. The final paper by Khalfan and Gough, ‘‘Comparative analysis between the public and private sectors on the IS/IT outsourcing practices in a developing country: a field study’’, considers outsourcing in Kuwait. The authors argue that differences can be identified between the two sectors in their motivation and risk relating to the adoption of IS/IT outsourcing. This paper provides some interesting insights into outsourcing practice in a developing country; which can be contrasted with existing research studies on North America, Europe and Asia. While the concept of ASP is likely to evolve into something broader like ‘‘software-as-aservice’’, these papers offer some preliminary insights into application outsourcing. The initial hype surrounding the ASP industry will be replaced by a more measured approach where companies will need to offer potential customers clearly thought-through service offerings with identifiable benefits relating to cost, quality and functionality. While nonmission critical software applications will be easy to implement, the more complex ERP systems will take some time. As the selection of papers demonstrates, IS outsourcing continues to be a popular strategy for companies, although the ASP business model remains immature and unpredictable. It is, therefore, hoped that the papers in this issue of LIM can be used as some of the first to be published

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within the applications outsourcing arena, and may be compared with research findings within this domain over the next few years. Wendy Currie and Phil Seltsikas

Currie, W. and Willcocks, L. (1998), ‘‘Analysing four types of IT sourcing decisions in the context of scale, client/supplier interdependency and risk mitigation’’, Information Systems Journal, Vol. 8, pp. 119-43. Fitzgerald, G. and Willcocks, L. (1994), ‘‘The outsourcing of information technology: contracts and the client/ vendor relationship’’, British Academy of Management Conference, pp. 143-56. Saunders, C., Gebelt, M. and Hu, Q. (1997), ‘‘Achieving success in information systems outsourcing’’, California Management Review, Vol. 39 No. 2, Winter, pp. 63-79. Venkatraman, N. (1997), ‘‘Beyond outsourcing: managing the IT resources as a value center’’, Sloan Management Review, Spring, pp. 51-64.

References Currie, W.L. and Seltsikas, P. (2001), ‘‘Exploring the supply-side of IT outsourcing: evaluating the emerging role of application service providers’’, European Journal of Information Systems, Vol. 10, pp. 123-34.

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Application service providers: issues and challenges Sushil K. Sharma and Jatinder N.D. Gupta The authors Sushil K. Sharma is Assistant Professor, Department of Management, Ball State University, Muncie, Indiana, USA. Jatinder N.D. Gupta is based in the Department of Accounting and Information Systems, College of Administrative Science, The University of Alabama in Huntsville, Huntsville, Alabama, USA. Keywords Service systems, Outsourcing, Internet, Business planning, Model Abstract The distributed corporate networking technology environments of the 1970s and 1980s are gaining new life, only this time the move toward distributed networks is being led by upstart application service providers (ASPs). Organizations of the twenty-first century are going to be Web-centric and focus their objectives on agility and cost savings. Pressure to reduce overhead in information technology (IT) pushes these organizations to consider outsourcing. With the use of Internet technology, a new alternative for IT outsourcing has evolved. ASPs allow companies to access and run software applications over the Internet on a subscription basis. By using the Web as an application platform, an enterprise can quickly and easily deploy new systems in response to market changes as well as reap the savings of using a single, standard platform. Recently, there has been a tremendous growth in the number of ASPs. This growth in ASPs has raised several issues and challenges that need to be resolved to realize the potential benefits of ASPs. Discusses the developments in ASPs, outlines the activities of various kinds of ASPs, describes the ASP business models, and examines the issues and challenges facing ASPs for their future success. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0957-6053.htm Logistics Information Management Volume 15 . Number 3 . 2002 . pp. 160–169 # MCB UP Limited . ISSN 0957-6053 DOI 10.1108/09576050210426715

The Internet revolution has changed the business model for many organizations. They have to deliver products and services with speed, which requires them to utilize fastchanging technologies effectively for business processes. One way to do so is to use the emerging evolution and growth of the application service providers (ASPs). ASPs have come to symbolize a new way of delivering information technology services. ASPs provide business solutions to companies on a rental basis, i.e. enterprises rent applications instead of buying (Lande, 2000; Wittmann, 2000). Rather than spending millions of dollars on a new enterprise-wide software implementation, the organizations pay someone else on a per-transaction or permonth basis for hosting, running and managing the software. ASPs have complete responsibility for managing the infrastructure, hiring manpower, and helping to conduct business online. Today, every level of the IT infrastructure (network, data, messaging, or system management) can be selectively outsourced. With the ASP model, the software and its required infrastructure (including support) are provided by the application service provider, and the actual business process operations are handled by the organization (Dewire, 2000). ASPs provide an Internet connection that also allows employees to work from home and other remote locations (Russis, 2000). ASP solutions outweigh the in-house managed solutions mainly because of the shortage of skilled professionals, increasing complexity of network and systems management, rapid evolution of technology, and the need to monitor on a 24  7  365 basis. Because the ASP hosts the solution, the organization can be up and running quickly. This fast implementation contrasts sharply with the long implementation times required for an organization to host a solution in-house. The advantages of renting software applications over the Internet include relatively low capital expenses, quick upgrades, consistent costs, and versatility (Dewire, 2000; Castellani, 2000). Thus, an ASP reduces the risk associated with buying software. Organizations need not pay huge consulting fees, or make huge capital investment in hardware and software (enterprise resource planning (ERP) package

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software alone can cost well over $100,000). It allows organizations to focus on their core competencies of business and frees them from the need to manage the technology complexities involved in installing software, hardware, network, and related support functions (Dewire, 2000). Since ASPs lease their IT applications, the clients can access these services over the Internet or through a private network. Thus, the client no longer has to maintain or upgrade the software, hardware and networks that it uses (Bickers, 2000). Customers of ASPs are seeing cost savings in total cost of ownership and improved time to deployment (Dewire, 2000; Kuehn, 2000). The ASP vendors and applications are growing rapidly. ASPs offer solutions in such areas as ERP, customer relationship management (CRM), accounting, supplychain management (SCM), logistics, and data-warehousing software. According to a survey conducted by Inter@ctive Week magazine, the number of companies using ASP services increased from near zero in 1999 to 7.3 per cent in early 2000 (Greengard, 2000). The Gartner Group and Forrester Research predict that ASPs will be a $6 billion industry by the year 2003 (Castellani, 2000). The ASP market is expected to grow to $7.8 billion in 2004, compared with $296 million in 1999 (Greengard, 2000). However, in spite of such a rapid growth of ASPs, many organizations are still not sure whether an ASP is the right solution for them. These firms believe that a lot of hype has been created about ASPs. This paper aims to clarify the factors involved in deploying an ASP and dispel the myth surrounding ASPs. The rest of the paper is organized as follows. After briefly describing the types and categories of ASPs in the next section, we discuss the ASP business models and show that ASPs are moving towards wireless applications. The issues and challenges facing the ASPs are then discussed, which show that the future success of ASPs depends on our resolving these issues. Finally, we provide some conclusions and directions for future research to resolve these issues.

Types and categories of ASPs ASPs offer a wide variety and range of applications. Depending on the kind of

services offered, the types of the services offered by ASPs can be classified as: collaboration services, electronic commerce, content services, corporate systems/ knowledge management, interfaces, network smart products, and infrastructure outsourcing. The services provided by each type of ASPs are explained in Figure 1. Many ASPs offer solutions for business applications customized for a particular industry segment such as health care, telecommunications, or banking. Other ASPs are taking a more horizontal approach by offering hosted applications that are useful to businesses in a wide array of industries. ASPs can be categorized based on the types of applications they offer. Figure 2 shows four major categories of ASPs as enterprise, general business, specialists, and vertical (Dewire, 2000). Each of these is briefly described below. The enterprise ASPs usually offer high-end applications that require customization. This category of ASPs offers application solutions such as ERP, CRM, SCM, or workflow and imaging software services. The various ERP and SCM vendors like SAP, Baan, PeopleSoft, Oracle, and Siebel, etc. fall into this category. Corio, through partnerships with software giant Siebel Systems and other application developers, offers hosted customer relationship management components such as salesforce automation, customer service, and e-marketing applications to customers in numerous industries. The general business ASPs focus mainly on the needs of the small to mid-sized companies. Thus, they primarily deal with general business applications that require little or no customization. The specialist ASPs, on the other hand, focus on a particular type of application. The fourth category of ASPs is known as vertical ASPs. These ASPs provide packaged or specialized applications for a vertical market segment such as medical practice management software for medical practices or claims processing for insurance companies. In addition, there are hybrids of vertical-oriented and cross-industry ASPs. All categories of ASPs provide services such as managing the application environment, monitoring the application, network support, and providing upgrades, etc.

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Figure 1 ASP model – types of ASP services

Figure 2 Categories of ASPs

The ASP business model As the hype surrounding the ASP model begins to wane, more end users, particularly those involved in third-party warehousing and similar applications, are closely evaluating the model to determine whether it is the right path to follow. ASPs have progressed from traditional co-located, hosted offerings to include client/

server collaborative and enterprise solutions and have migrated to application-neutral, distributed models based on Web services. Today most ASPs provide ‘‘plug-and-play’’, type solutions and can offer solutions for all applications such as CRM, salesforce automation (SFA), and ERP, etc. (Gurin, 2001). ASPs develop, manage and deliver software application capabilities to multiple entities

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from a data center across the Internet (or other wide area network). ASPs can put the processing power of their software into virtually any personal computer (PC) that is hooked to the Internet. As mentioned before, instead of buying software, organizations essentially lease computer applications from ASPs. Figure 3 shows the ASP architecture. It has three layers: a back-bone service provider (BSP) layer, storage and Internet service provider layer, and a software layer. At the BSP layer, ASP has connectivity with backbone service providers. BSPs (back-bone) provide high-capacity, long-haul connectivity. The storage and Internet service provider layer is the alliances with Internet service providers (ISP), storage service providers (SSP) and commerce service providers (CSP) (Dewire, 2000). ISPs provide access to the

Internet gateways and the BSPs. SSPs provide remote data storage locations. CSPs provide delivery, Web design, and ISP service. MSPs are closely related to ASPs, offering system management services tailored for corporate IT departments. MSPs differ from traditional ASPs in that they deliver applications designed for technology management rather than applications used as business productivity tools. MSPs manage entire IT projects for their corporate customers. Some MSPs will even position themselves as complete outsourced IT departments for small and mid-sized businesses that elect not to staff an internal IT group (Fairchild, 2001). Partnerships are becoming common and ISPs, BSPs, CSPs and MSPs are becoming commodities that need strong coordination within themselves to provide better solutions through a single vendor.

Figure 3 ASP business model – Xservice providers companies (xSPs) and clients

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Usually, ASPs partner with other organizations to leverage expertise, as one partner might be providing data storage, another the Web hosting services, and another the application itself. The third layer in the ASP architecture is the software layer that forms the front (or the client end). The client organization rents the software to access the application via the Internet or leased lines. Any standard Web browser can be used to run the software application from the client end. Basically, there are two approaches to engage ASPs. In the first approach, ASPs own the software and allow the clients to use the software by paying a license or monthly subscription fees. Clients have to pay upfront contract license fee for a minimum of one year, after which they can pay a subscription fee on a monthly basis. There could be independent arrangements with MSPs, ISPs, etc. for Internet connectivity as well as for managing the entire IT set-up (Turner, 1999). In the second approach, the entire responsibility for running the applications as well as managing the entire IT infrastructure rests with the ASP vendor. In both the approaches, customers gain access to the environment without making investments in application license fees, hardware and staff. The application is managed from a central location (the ASP site) rather than the customer’s sites. The ASP is responsible for delivering on the customer’s contract regardless of its structure, e.g. sole provider or partnered (Dewire, 2000). Usually, organizations prefer the second approach in which the entire application from the beginning to the end is managed by a single vendor, who in turn has partnerships among several vendors. A single-source vendor controls everything from implementation to ongoing operations and maintenance of the application. Currently, wireless technologies are enabling consumers and businesspeople to shop, bank, close business deals, and even pay for vending machine goods with portable Internet devices. Because of these advances in the wireless technology, companies are eager to make key applications accessible via a host of wireless devices including handsets, personal digital assistants, and Internet appliances. As the world moves towards the wireless technology, the ASP model has to equip itself to deliver applications, which can

be accessed by wireless devices. Therefore, it is worthwhile to look at the emerging W-ASP model, which is shown in Figure 4. Architecturally, the W-ASP model has the following additional features in an ASP model to provide various services through wireless devices (Lewis, 2001): . Translation services. Porting or translating Web content to wireless networks including initial set-up and maintenance. . Wireless application services. Data applications delivered for a fee. . M-Services content. Internet content translated and delivered through the wireless network. . Wireless infrastructure technology and services. Including software, hardware, consulting and customer implementation delivered to the wireless carrier, content provider or wireless ASP. All ASPs have started to incorporate wireless applications protocols (WAP) features in their software to make their applications accessible through wireless devices. Therefore, W-ASP model features would become part of any ASP business model.

ASP-related issues and challenges The ASP market is still in its infancy. In order to reach its projected revenue levels, the market has many challenges to overcome and risks to manage. Although the ASP trend has created a new model for delivering applications to businesses, it also has raised a number of unresolved issues (Allen, 2000). Table I summarizes the most important issues and challenges related to the ASPs. In this section, each of these issues and challenges is discussed in detail. Data control and value The ASP model does not require an application to be run on an organization’s server or desktop. It can be run entirely on the ASP server and can be browsed using a standard browser at the organization end. This means that sensitive data of various organizations are stored on remote servers outside the organizations’ control. The organizations are therefore forced to rely on the ASP’s integrity and reconcile themselves to a loss of control over valuable data. Since the ASP will have control over the entire

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Figure 4 W-ASP business model

Table I Issues and challenges of ASPs Issues/challenges

Suggested measures for ASPs

Data control and value Pricing strategy Inter-alliances problem

Develop trust and confidence with organizations Change the pricing strategies, since the initial costs are high Create better coordination among ASP partners to have strong alliances Bundle several other services along with applications to lower costs Maintain strong alliance with partners to provide long-term viability Work with emerging high bandwidth-oriented technologies and encryption standards to take care of security and bandwidth concerns Improve services and support and provide strong customization tools Clarify the protection of private data, privacy and data collection policies, and the technological security concerns Develop solutions that can be integrated with ongoing applications – ERP as well as messaging technologies etc.

ASP offer bundled services approach vs software product approach Long-term viability Internet connectivity – security and bandwidth Services and support Security concerns Integration with all disparate systems

organization’s data, many organizations would be hesitant to let ASP have control over their transactions (Kearney, 2000). While some organizations are ready to trust ASPs, many firms are still wary of this phenomenon. Organizations also seek unique value from ASPs for their applications. Many organizations that have engaged ASPs believe that ASPs have failed to add value to their businesses. The problem becomes more serious when a firm’s competitors also use the same ASP to deliver business. The ASP will have quite a hold over the company’s data. Organizations using ASPs are demanding greater data privacy, so that the value of their data does not diminish, especially when a conflict arises.

There is also a fear that these ASPs may act like a new generation of aggregators (Web companies that combine contents or applications from several online sources), who resell a range of information to other Web sites and firms (Alexander, 2000). Pricing strategy Pricing is another key issue facing the ASP sector. Because ASPs are offering many applications in a hosted environment for the first time, they find it difficult to ascertain their fair market price. From a client organization’s perspective, it is believed that outsourcing to an ASP is much less expensive, especially in the short term. The reasons are obvious, since an organization need not have

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upfront capital investments in ERP consultants, licensing fees, hiring skilled manpower, and a costly implementation that often involves expensive hardware and software. Further, it is costly to maintain and upgrade in-house licensed systems (Kearney, 2000). ASP supporters continue to point to benefits including economies of scale and reduced pressure on IT staff. However, from the ASPs’ perspective, pricing strategies vary greatly from one ASP to the next depending on several variables such as application features, customizability, number of users, and transaction volumes. There may be even added implementation fees which depend on how much work the implementation process entails. Usually, ASPs ask customers to pay up-front for the first year of service and then ask customers for a monthly payment for succeeding years. Users are also asked to commit to ASPs for a longer-term contract, generally about five years. From the ASP point of view, this is to ensure the ASP’s viability in doing its business while carrying their customers’ costs. From a customer point of view, organizations complain that ASPs are demanding more up-front money (Torode, 2001). Inter-alliances problem An ASP delivers applications through its efficient client/server architecture. Users access the application via their browsers using a portal site. The ASP manages the browser application and the individual desktops. Client/server architectures typically consume large amounts of bandwidth between PCs and servers. Since remote run applications are fully dependent on telecommunication connectivity, an ASP has to partner with several other vendors to deliver solutions for broadband connectivity, e-commerce support, and storage of data. Such vendors include the telecommunications providers, commerce providers, and storage service providers. These alliances are to be managed effectively, because a break in any of these alliances can cause considerable loss to the ASP’s business. Because many ASP companies do not maintain their own data centers or network infrastructure, they often depend on outside vendors. Any mis-coordination can lead to gaps in response time.

Bundled services vs software product approach Historically, organizations have bought software solutions as products and then customize this software to their internal needs themselves or with the help of outside vendors. Now organizations are experiencing the shift from software as product to software as service. Organizations are interested in spending more of their time on their core competencies and are keen to outsource to get services. Organizations have also traditionally purchased IT products and services from different vendors. At times, organizations face a problem of system integration due to the involvement of multiple vendors. Today’s organizations look for an arrangement with ASPs for comprehensive management frameworks, providing the entire range of systems management functionality. For example, ASPs may offer services ranging from Web speed monitoring to commercial transaction tracking and usage analysis. This forces the ASPs to partner with other service providers to offer several bundled services. Such vendors may include the MSP, BSP or ISP. When software vendors and service providers compete for the same customers, services and products will converge and ASPs will have to bundle their services with the appropriate software products. The issue arising from this situation is whether ASPs are ready to offer application solutions as bundled services rather than individual products. Presently, both kinds of ASPs offer bundled solutions as well as offering ASP as a product. Therefore, organizations find it difficult to evaluate their solutions. Long-term viability Customers are looking for more than software; they are seeking a single-vendor managed application with the right kind of people and expertise. Hosting applications is the easy part but ASPs must have the resources and commitments to keep systems running smoothly (Kearney, 2000). Even though ASPs are growing in numbers rapidly, one has to assess whether all of these ASPs have the capacity to deliver. Most ASPs come from a field of practice and build applications around that knowledge base rather than the inverse. While many ASPs are experts on the applications, they do not have much expertise in technology. Many

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organizations that have gone for ASP solutions often express that ASPs have been good to provide ERP solutions and implemented seamless interfaces to ERP systems quite effectively but their technology support has been weak (Kearney, 2000). In order to overcome this weakness in technology support, ASPs need to partner with technology experts such as MSPs. Therefore, organizations believe that the viability of ASP on a long-term basis is suspect. As shown in the ASP business models, an ASP requires many alliances with various other players to offer single window, single vendor services (the second approach in the ASP model). If by chance these alliances run into trouble, ASP outsourcing can be very risky. Client organizations cannot afford to get caught in a feud between an ASP and its alliance partners. Any feud among ASP partners can cause heavy losses for a client firm, even if it is only for a day or two (Kearney, 2000). Internet connectivity – security and bandwidth Internet connectivity directly affects the way an ASP can provide access to the hosted application. Internet connections can vary from dial-up to T1 lines. ASP applications frequently work best with higher speed Internet connections. Many organizations that do not have higher bandwidth connectivity may find some ASP solutions inappropriate. Depending on the volume of data to be moved and the software functionality provided, ASP applications may function adequately at dial-up (usually too slow) or ISDN modem speeds. Others may require dedicated communications, T1 circuits, or even faster pipes to the Internet. Many organizations do not have high bandwidth Internet connectivity. These organizations view the Internet as low bandwidth, unsecured and unreliable without the capacity to send large files as fast as private communication lines. On the other hand, if these organizations use dedicated circuitry to run an application, it is secure and reliable but expensive. Also, using the Internet is cheaper than installing and maintaining private lines (Tieman, 2001). ASPs also have to resolve numerous technological issues, such as ensuring that customer data are kept secure in transit, creating billing infrastructures, and deploying

applications to match network bandwidth constraints. Many applications offered by ASPs to business customers and their remote workers are effective only when accessed through a broadband connection, be it a cable modem service or a T1 line (Fairchild, 2001). Potential customers must be convinced that their application and data will be available to them 24  7 and will be secure from outsiders. As Internet traffic continues to grow, potential customers must also be convinced that their access will not slow down. As mobile use escalates, ASPs must find a way to satisfy the needs of ‘‘out of the office’’ employees and the security requirements such mobile access demands. Services and support ASPs have a Herculean task to customize the applications. Some products are more seamless and customizable than others. Whenever possible, it is important for a client organization to display its brand, logo and identity as consistently as possible across all applications. The look and feel of applications should be consistent with the overall objectives of the organization. Customers should not feel that they are interacting through an ASP. Further, employees and clients should not think that the ASP is an outside company delivering products; rather, customers should get a feel that they are interacting with the organization directly without the intervention of ASPs. For the organizations offering products and services online, customer services and support are very important. However, ASPs’ track records vary widely in their willingness and ability to provide good customer support. A lack of good support can seriously affect the product’s effectiveness and member service. Market reports indicate that not many ASPs have the necessary capabilities to provide good service support. Gartner Group estimates that, of the 300 or so current ASPs, more than 80 per cent will disappear before the end of 2001 because of poor service or market consolidation. Security concerns Like most technological solutions, ASPs are subject to security issues involving data protection, privacy and communications. In many ways, modern Internet technology provides high levels of security. However, it does so in ways that are new and unfamiliar to

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many organizations. Even though the Internet can transmit data in a safe and secure way, there is no guarantee that every ASP uses proper security procedures and protocols (Tieman, 2001). Organizations often are reluctant to use the Internet to routinely transmit sensitive data or to allow Internetbased technology to interact with their inhouse systems. Organizations prefer interacting with the outside world for sensitive information via ‘‘dedicated’’ communications circuits (Jordan, 2001). Internet security technologies are well developed and reliable. Although encryption and encoding techniques implemented in the Internet environment should make organizations feel secure, due to traditional mindsets, the Internet is often viewed as a risky network for transmitting sensitive data. Organizations also have concerns for the physical security of servers and facilities, encryption of data communications, firewall hardware and software configurations, protection of private data, privacy and data collection policies, data preservation and back-up, disaster recovery, employee screening and hiring practices, and bonding and insurance coverage at the ASP end (Jordan, 2001). Integration with all disparate systems One of the challenges (for ASPs) is the ability to provide not just the application but the ability to integrate it with other applications on which the customer relies (Tieman, 2001). Organizations have legacy systems implemented in heterogeneous environments. Organizations expect the ASPs to integrate their solutions with their ongoing legacy systems that are in different formats and standards. The ability to integrate with other applications at the remote site may be one of several things that distinguish traditional remote computing solutions from those that fall under the ASP umbrella (Tieman, 2001). ASPs should not only provide an application suite but also monitor network performance and provide integration among disparate systems, such as registration, materials management, and supply procurement (Feurer et al., 2000). ASPs still lack technology infrastructure that will allow them to quickly and economically connect to any and all marketplaces regardless of data and format demands. Organizations conduct businesses

through messaging technologies. Unless messaging technologies are integrated with the back-end ERP systems, a company’s own existing business system, or their trading partners’ existing business systems, the solutions will not be holistic and complete (Meader and Maloni, 2000).

Conclusions Global companies need technology solutions that help to reduce costs and dedicate resources to strategies that grow the business and produce reliable returns for shareholders. Internet-based technology applications such as ASPs provide companies the flexibility and speed they need to compete. An ASP offers organizations business solutions. The ASP delivers the service, handling all aspects of the service: the hosting environment, the network infrastructure, the data center, and the application itself. Using an ASP allows an organization to reduce capital costs and implement applications in a timely fashion. While the market for ASPs is growing fast, their success depends on resolving several critical issues. ASPs have to work with ISPs to resolve the Internet bandwidth and security issues. Dedicated networks, new encryption technology, and dedicated secure connections should make ASPs as secure as client/server systems. As the ASP models continue to move forward, regular and constant evaluation of these systems will determine whether the market is stable enough to sustain growth. ASPs have to strike the right balance between service and technology. Before an organization decides to deploy an ASP for their IT applications, they need to check answers for many of the issues discussed in this paper. Unless the answers are sought for these unresolved issues, it would be difficult for the ASPs to meet the projected growth. Thus, more research is needed to ensure the success and potential benefits of ASPs.

References Alexander, S. (2000), Aggregators Computerworld, Vol. 34 No. 36, 4 September, p. 54. Allen, D. (2000), ‘‘Application service providers: should we get excited yet?’’, Network Magazine, Vol. 15 No. 10, pp. 148-54. Bickers, C. (2000), ‘‘Let IT outsiders’’, Far Eastern Economic Review, Vol. 163 No. 16, p. 62.

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Castellani, D.J. (2000), ‘‘ASPs: changing information technology delivery’’, Strategic Finance Magazine, Vol. 81 No. 9, pp. 34-7. Dewire, D.T. (2000), ‘‘Application service providers’’, Information Systems Management, Vol. 17 No. 4, pp. 14-19. Fairchild, D. (2001), ‘‘Who will come out swinging?’’, America’s Network, March, pp. 10-11. Feurer, S., Chaharbaghi, K. and Weber, M. (2000), ‘‘Aligning strategies, processes and IT: a case study’’, Information Systems Management, Vol. 17 No. 1, pp. 23-34. Greengard, S. (2000), ‘‘ASPs enter the mainstream’’, Industry Week, Vol. 249 No. 12, pp. 25-30. Gurin, R. (2001), ‘‘ASP reaches crossroads’’, Frontline Solutions, Vol. 2 No. 3, Duluth, p. 1. Jordan, J. (2001), ‘‘ASPs: real Internet power’’, Credit Union Executive Journal, Vol. 41 No. 2, pp. 10-14. Kearney, T. (2000), ‘‘Why outsourcing is in: application service providers (ASPs) are making it easier for companies to use outside services again’’, Strategic Finance Magazine, Vol. 81 No. 7, pp. 34-8.

Kuehn, R.A. (2000), ‘‘ASPs: your solution or anchor?’’, Business Communications Review, Vol. 30 No. 8, pp. 66, 64. Lande, L. (2000), ‘‘Software for rent: region is ripe for a new kind of online market’’, Asian Wall Street Journal Weekly, Vol. 22 No. 18, p. 6. Lewis, V. (2001), ‘‘W-ASPs’’, America’s Network, March, p. 8. Meader, C. and Maloni, M. (2000), ‘‘Enabling your e-commerce initiatives’’, Transportation and Distribution, Vol. 41 No. 8, pp. 19-22. Russis, M. (2000), ‘‘ASPs offering tech support: small businesses outsource to gain access to workers and software’’, Crain’s Chicago Business, Vol. 23 No. 34, p. SB10. Tieman, J. (2001), ‘‘The allure, limitations of ASPs’’, Modern Health Care, March 5, p. 24. Torode, C. (2001), ‘‘ASPs: more money up-front, Crn’’, Jericho, No. 937, March, p. 10. Turner, M.J. (1999), ‘‘Migrating to network-based application services’’, Business Communications Review, Vol. 29 No. 2, pp. 48-51. Wittmann, A. (2000), ‘‘Service providers and outsourcing’’, Network Computing, Vol. 11 No. 25, p. 103.

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Introduction

Managing the ASP process: a resourceoriented taxonomy C. Bruce Kavan Shaila M. Miranda and Margaret T. O’Hara The authors C. Bruce Kavan is Bank of American Professor of Information Technology, Management, Marketing & Logistics, College of Business Administration, University of North Florida, Jacksonville, Florida, USA. Shaila M. Miranda is Associate Professor in Information Technology, Information Technology & Operations Management, College of Business Administration, Florida Atlantic University, Boca Raton, Florida, USA. Margaret T. O’Hara is Assistant Professor of MIS, Decision Sciences, School of Business, East Carolina University, Greenville, North Carolina, USA. Keywords Organizations, Service, Development, Outsourcing, Management

An application service provider (ASP) is a ‘‘company that provides application functionality and associated services across a network to multiple customers’’ (Ambrose, 2000). For organizations that are too small, lacking in IT staff, or growing too rapidly to manage a full-scale information technology group, ASPs offer access to application services via a network – usually the Internet (Turisco, 2000). While they may be ‘‘the hottest three letters in technology, as a concept ASPs are still evolving’’ (The Practical Accountant, 2000). ASPs are not just for small organizations; larger ones are utilizing ASPs for a variety of reasons including: improving organizational flexibility, reducing currency investments, and improving customer service. While some industry pundits report that ASPs are dead primarily because of failure to provide significant value added, others decree, ‘‘Think ASPs make no sense? Think again’’ (Boyd, 2001, p. 1). In a recent statement CIO advisor, Clare Gillan, IDC Group vice-president, is quoted as indicating: . . . that while the press and financial communities have expressed doubt about the application service provider [ASP] model, its numbers beat IDC expectations. ASPs are expected to account for as much as $1 billion in revenues for 2000, as opposed to the $700 million anticipated (Gilmore, 2001).

Abstract Application service providers (ASPs) represent the new wave of business information technology delivery. However, there is little formal literature that helps us understand the distinctions among different ASP-client relationships and how they need to be managed. This paper adopts a sociotechnical perspective to distinguish among ASP relationships. This distinction is based on the levels of organizational change that the ASP relationship will evoke. This paper then proposes levels of resource allocation that best ‘‘fit’’ each type of relationship. Three specific resources important to ASP-client relationships are economic outlays, social networks, and knowledge. The model developed in this paper provides academics and practitioners with a tool with which to diagnose the capabilities of a prospective ASP and a model for making resource allocation decisions once the ASP is selected. It raises empirical questions for researchers with regard to resource allocations that best fit specific levels of organizational change following an ASP adoption. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters

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Further, the Gartner group estimates that the ASP market will grow to an estimated $25 billion by the end of 2005 (Correia, 2001). Despite all the potential and hype surrounding ASPs, at first glance there seems to be neither a clear nor an adequate research direction for examining this emergent business model. ASPs, however, can be thought of as a fundamentally new slant on IS outsourcing, and outsourcing-related research has been conducted for some time (e.g. Lacity and Willcocks, 1998). Research on IS outsourcing, however, has been focused on understanding why firms outsource (the adoption decision) and what factors make for a successful outsourcing episode (the contract process). Consequently, there has been little that addresses the comprehensive effects of outsourcing on the organizations involved in the decision. Moreover, research on outsourcing has focused largely on the outsourcer. A few studies have provided insight from the provider perspective; fewer

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studies have taken the more holistic perspective and focused on the outsourcing relationship. A relationship perspective is particularly critical in examining ASPs, since this arrangement represents a higher level of inter-organizational coupling than traditional outsourcing relationships. Several ASP taxonomies have been explored in the trade press. Some of these taxonomies are based on the nature of the ASP (e.g. pure-play ASPs, those formed specifically to exploit the ASP market), while others are based on the nature of services provided (e.g. network service providers, application vendors, etc.). These taxonomies, while useful to entrants and competitors in the ASP marketplace, offer little guidance to prospective ASP clients. In this article, we develop a taxonomy of ASPs based on their organizational impact and the corresponding resources that need to be allocated to the relationship. Our analysis of organizational impact is limited to users in the client organization. Since ASP adoption, by definition, will have a high level of impact on the clients’ IS groups, it will not be as beneficial to examine the impact of ASPs on clients’ internal IS departments. To examine the organizational impact and change that ensue following an ASP adoption, we employ a socio-technical system perspective. The taxonomy we propose will facilitate an understanding of the organizational consequences of ASP adoption. It also offers a model of resources (specifically economic, knowledge, and social networks) that are necessary to integrate ASPs fully. Such a resource-based perspective that focuses on understanding resource profiles of partner firms is useful in effectively leveraging interorganizational relationships (Das, 2000). Our analysis and proposed models, therefore, focus on the resource capabilities of the ASP as well as the resource allocations that need to be made by the client firm. This approach facilitates clients’ preliminary diagnosis of ASPs and later management of the relationship. This paper proceeds as follows: first, we present a discussion of the socio-technical perspective, followed by three cases illustrating the various levels of change. These same cases will then be used to examine decisions that need to be made with regard to resource allocations and their relationship to

the level of change, leading to a model of inter-organizational fit. The article concludes with implications for managing toward the magnitude of the planned ASP implementation (i.e. the degree of change) and a discussion of future research opportunities.

The socio-technical systems perspective ASPs represent a higher level of coupling between the service provider and the client firm than traditional outsourcing. An ASP essentially plugs into the outsourcing firm and extends its boundaries – sometimes temporarily, sometimes on an ongoing basis. In doing so, the ASP and client firm interact along both technical and social dimensions. Thus, it is particularly important to view these interactions from a socio-technical systems perspective. According to the socio-technical systems (STS) perspective, ‘‘a work system is made up of two jointly independent, but correlative interacting systems – the social and the technical’’ (Bostrom and Heinen, 1977, p. 17). The STS perspective focuses on the possibility of a reciprocal relationship between these technical and social systems. Technical systems comprise ‘‘processes, tasks, and technology needed to transform inputs to outputs’’; social systems refer to the ‘‘attributes of people (e.g. attitudes, skills, values), the relationships among people, reward systems, and authority structures’’ (Bostrom and Heinen, 1977, p. 17). It is, therefore, essential to examine both technical and social systems in order to gain a comprehensive insight into specific technologies. In the socio-technical model, presented in Figure 1, we see that a change in the technology necessarily implies a change in tasks. Such a change may also entail a change in people’s skills, attitudes, values, motivation, and in their relationships (i.e. intangible structures). Whether or not a change in technology necessitates changes in people and relationships is indicative of the extensiveness of systemic change instigated by the technology. This is captured in O’Hara et al.’s (1999) levels of change model.

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Figure 1 Socio-technical systems

Levels of organizational change: illustrative cases Based on the socio-technical perspective, O’Hara et al. (1999) develop a model of organizational change that accompanies technology intervention. They propose a model of three levels of organizational displacement following a technological implementation: Alpha change represents the lowest level of displacement. Such a change necessitates only a change in tasks as a consequence of the technological change. Beta change requires a change in both tasks and people, i.e. in what is done or the motivation for doing. Gamma change represents the highest level of organizational displacement, necessitating a change in the tasks, people and relationships. Higher levels of organizational displacement correspond with higher levels of interdependence across the two organizations. This occurs as more integral processes are now handled across the two organizations. Such interdependence necessitates a higher level of inter-organizational integration, as the ASP begins to substitute the core processes previously handled internally (Lawrence and Lorsch, 1967). The following three cases will illustrate varying levels of organizational change or displacement resulting from the ASP relationship. Alpha change With this level of change, the impact of the ASP adoption on the organization is minimal – only the nature of some of the tasks performed may change. Alpha level change is the lowest

and least disruptive organizational displacement. The level of inter-organizational interdependence is relatively low. Success metrics can easily be identified in terms of completion of specific tasks, and success (or failure) observed in a relatively short period of time. An example of an Alpha change following an ASP adoption is DoubleClick’s relationship with Concur (Paul, 2001a, b). DoubleClick, a company that offers Internet advertising solutions, was experiencing growing pains: in the fourth quarter of 1999 it had acquired three companies to augment its growing business. As with all advertising firms, travel and entertainment represent significant business expenses. Managing these expenses was therefore critical. DoubleClick had been using rudimentary Excel spreadsheets to manage the travel and entertainment expense reporting processes. In January 2000, DoubleClick began to use Concur’s Expense from the ASP’s eWorkplace office applications suite. With the outsourcing of these processes to Concur Expense, it became much easier for DoubleClick employees to enter, approve and track travel and entertainment reports, wherever they happened to be, and whenever it was convenient for them. In this case, DoubleClick’s relationship with Concur evoked only an Alpha level change in the organization. While it expedited the travel and entertainment management process, it required no personnel changes and left existing relationships largely intact. The level of interdependence was also fairly low in that DoubleClick simply procured an existing solution without customization. Beta change When a Beta level organizational change occurs, not only does the nature of the work change, but also attitudes, values and skill-sets associated with the work. Such change necessitates moderate levels of inter-organizational interdependence. We see evidence of this in First Union’s relationship with Xpede (e.g. Beidl, 2000; Koch, 2000). In the spring of 1999, First Union Mortgage Corporation (FUMC) contracted the development of its online mortgage presence to Xpede, then a fledgling ASP. The objective of the application was to provide the customer with flexibility, not to replace human interaction in the loan application

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process with the Internet application (Starita, 2000). While the amount of time loan officers spend with clients decreased from between 30-45 minutes to five minutes, the relationships between loan officers and clients still exist, and the loan process is still the responsibility of the loan officer (Koch, 2000). Thus, organizational relationships were not changed as a consequence of deployment. No change in organizational representation occurred, since Xpede was required to create an interface that matched that of the rest of the organization (Beidl, 2000). The project necessitated the integration of the Xpede application with First Union’s five back-end legacy systems (Starita, 2000; Beidl, 2000). As such, this was a fairly interdependent process, requiring the effort and contribution of both parties. The integration was achieved via the work of a large inter-organizational team (Beidl, 2000). Gamma change Gamma organizational change represents the highest level of organizational displacement. Here, a technological change instigates not only task changes, but also motivational and relational changes, i.e. changes in people and their relationships with one another. Reporting and management structures are reorganized in this level change. As more functional areas are turned over to the ASP, the relationship between the two firms deepens. Interdependence begins to emerge, not just between the client and the ASP, but also among multiple ASP and vendor organizations, all of whose services and products need to work together in order to fulfill client needs. Such a level of change is evident in Vertical Network’s relationship with Corio Intelligent Enterprise (e.g. Wainewright, 1999; Caldwell, 1999). Vertical Networks, Inc. is a leading developer of Integrated Communications Platforms, combining voice, data and applications support on to a single platform that can be managed remotely. In 1999, Vertical realized that it needed help in managing its processes along its supply chain. Its supply chain included manufacturing partner Flextronics, marketing partners AT&T and Telecom Italia, and distribution partners NCR and Setta. Vertical’s interorganizational processes were largely manual and lacked integration. They lacked basic

facilities such as inventory tracking and their legacy financial system was unable to enforce a single set of corporate rules regarding decisions such as expense write-offs. These deficiencies became more pressing as the company grew. Vertical approached Corio for a solution. Corio implemented an integrated solution within ten weeks, along with ongoing support at a 60 percent cost advantage to Vertical. While Corio led the implementation process, the solution required the interdependent efforts not just of Corio and Vertical, but also of Flextronic, a Corio strategic partner. This three-way interdependence is representative of the more complex interdependence patterns that characterize Gamma level change.

Allocating resources In managing intra- and inter-organizational relationships, managers need to make decisions with regard to resources that will be allocated to the relationship. Three types of resources may be allocated in inter-organizational relationships (e.g. Burt, 1992). Each allocation incurs risk. The most tangible resources are economic. Economic allocation opens up the possibility of gaining additional resources at the risk of losing the allocation. Knowledge is the second resource, and knowledge sharing is an investment. Knowledge sharing may also result in gains or losses. Sharing permits creative recombination of knowledge that enables knowledge growth and permits adaptation to complex environments (Nahapiet and Ghoshal, 1998). However, the accompanying risk is the absence of reciprocity in knowledge sharing: if one’s partner does not share knowledge in return, then one may have yielded competitive knowledge without any growth in knowledge. Social networks are the third resource. Network building (i.e. developing social ties, trust, and shared norms) is an investment. Such investment also requires expending effort and assuming risk (e.g. Wicks et al., 1999). Economic outlays Economic allocation in inter-organizational relationships enables the sharing of both costs and risks (e.g. Ohmae, 1989). Joint planning for allocating economic resources enables partner firms to develop complementary

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resources, which in turn facilitates competitive advantage for the firms (Dyer and Singh, 1998). Further, investment in relationship-specific assets signals a credible commitment to the relationship (Dyer and Singh, 1998). According to Uzzi (1997), trust emerges when efforts are volunteered and reciprocated. Thus, credible commitment leads to trust developing in the interorganizational relationship, thereby facilitating further investments. Knowledge sharing Knowledge-sharing routines in interorganizational relationships facilitate partner firms’ absorptive capacity, encourage transparency, and discourage free riding (Dyer and Singh, 1998). The supply-chain literature demonstrates that buyer firms’ direct involvement in supplier firms, by way of educational and developmental activities, has a positive effect on suppliers’ performance (Krause et al., 2000). Knowledge sharing permits the new knowledge development via creative recombination of existing knowledge. This process enables firms to adapt to complex environments (Moran and Ghoshal, 1999). Network building Social networks are an integral resource in organizations (e.g. Burt, 1992). A social network refers to relationships among organizational players (Burt, 1992). These relationships make available knowledge (Burt, 1992; Granovetter, 1973) and economic resources (Stark, forthcoming). Investment in social networks is both expensive and time-consuming. It requires developing social ties, trust, and shared norms.

low levels of interdependence coupled with high investments in trust or high levels of interdependence coupled with low levels of trust result in sub-optimal firm performance (Wicks et al., 1999). Optimizing firm performance within the ASP-client relationship requires that control resources be appropriately matched to the level of change. If you over-commit resources or under-develop the relationship, you have a less than optimal outcome or fit. Optimal resource allocations and the level of change can be mapped on to a two-dimensional model, as illustrated in Figure 2. As is noted in the Figure, firm performance is optimized when the resources allocated are appropriate to the level of change. The diagonal elements in Figure 2 represent a ‘‘fit’’, i.e. an optimal matching of resources to levels of change (see Venkatraman, 1989, for this concept of ‘‘fit’’). The off-diagonals represent an under- or over-commitment of resources. In the following section, we further discuss the levels of resource allocation suitable to each level of change. Alpha change Low levels of allocation in the interorganizational relationship are appropriate to the low level of organizational displacement characteristic of Alpha level change. In the case of DoubleClick’s adoption of Concur, we notice low levels of investment in the inter-organizational relationship. Since Concur provides DoubleClick with a product that is easily replaceable, there is little interdependence among the organizations and therefore limited need for resource Figure 2 Fitting resource allocations to levels of change

A model of inter-organizational fit Optimal investments of all three resources should be based on the level of investment needed. The level of investment needed will depend on the nature of the ASP-client relationship (i.e. the level of change). Optimal trust levels, for example, are related to interdependence levels (Wicks et al., 1999). High levels of investment in trust building are appropriate for high levels of interdependence; similarly, low levels of investment in trust building are appropriate for low levels of interdependence. Moreover, 174

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pooling, network building and knowledge sharing. There is no evidence of pooling of economic resources; in fact, the economic investment was probably small. Interorganizational contact in the deployment of the Concur Expense system was minimal; no extensive training or implementation sessions were needed. Since Concur provided a pre-packaged application with no indication of customization, there was little need for knowledge sharing and social network building across inter-organizational boundaries. Beta change This type of relationship requires some resource investments. In our illustrative example, the integration of the Xpede front-end application with First Union’s back-end legacy system was accomplished via the collaborative efforts of Xpede and First Union employees and resource sharing across organizations (Starita, 2000). The interorganizational network was significant; it involved up to 50 people from both organizations across the country (Beidl, 2000). ‘‘The e-commerce manager for the mortgage group required buy-in and collaboration from five distinct technology teams, which was not easy to achieve’’ (Starita, 2000, p. 2). This personnel involvement also meant that economic outlays were greater. In terms of the knowledge variable, Xpede had the technical capability and experience in the mortgage business, having created a mortgage engine for Fannie Mae (Koch, 2000). However, the project implementation necessitated the development of multiple interfaces to five FUMC back-end systems (pricing engine, secondary marketing, General Ledger, FiTech and Uniform LOS systems) and to other industry standard applications (e.g. Loan Prospector, credit repositories, title companies, mortgage insurance firms, automated valuation databases, and closing documentation providers). Thus, development of these additional capabilities required knowledge sharing by First Union and joint knowledge creation by First Union and Xpede. Gamma change Gamma change requires the allocation of considerable resources. When the ASP and

the client firm form an alliance, interdependency increases. The relationship is typically long-term and, as trust develops within the relationship, the ASP becomes more involved in determining processes. With a Gamma change, each firm must also commit to a higher level of economic outlay. Given the pervasive nature of the relationship, knowledge sharing and networking building must take place, if the alliance is to be successful. The client firm reveals more of its business practices; the ASP shares its functional expertise. Corio leveraged its relationship with Vertical partner Flextronics as well as its extensive network including Active Software, Netegrity, Oracle, PeopleSoft, Siebel, SAP, and Microsoft in our illustrative example. Corio’s strategy appears to be the creation of a supply-chain keiretsu for application hosting (Caldwell, 1999). Mismatching resource allocations with levels of change When change is not managed well (i.e. when resources are misallocated) the entire ASP-client relationship may be jeopardized. Consider the recent case of Intraware, an online marketer of software (Paul, 2001a, b). In 1999, Intraware was experiencing such rapid growth that tracking its sales leads and customer data became a major stumblingblock. ASP management decided to outsource its Siebel salesforce automation application through USInternetworking. The project was a dismal failure, eventually abandoned by Intraware. Among the reasons cited: inadequate modeling of the customer data, lack of training and change management, and unclear executive sponsorship. Intraware entered into a second relationship with Siebel and USInternetworking, but this time they agreed to commit more economic resources in the form of staffing for the project. The second project had twice the number of full-time personnel during roll-out. To ensure that knowledge was shared, one person at the client was the point of contact for the ASP team; salespeople (users) were involved with the configuration; and training was customized. To develop trust and the social network, the salesforce was an integral part of the roll-out. Moreover, a small pilot group became comfortable with the application and helped later users adjust to the system.

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Implications Companies considering ASP adoption need to understand the relationship between the anticipated level of change and ideal levels of resource allocation. Internal resource decisions need to be anticipated to ensure that the organization has the resources to initiate and sustain a successful ASP relationship. The prospective ASP’s resource allocations also need to be understood. The trade press has focused on examining the economic viability of ASPs following the demise of giants such as Pandesic (e.g. Anthes, 2000). Inherent in Pandesic’s failure was its parent companies’ failure to invest in it. Despite stellar associations with Intel and SAP, Pandesic was unable to leverage these associations to develop a network of paying clientele. ASPs that target the market for services calling for a Gamma change need to demonstrate their investments, or capability to invest, in economic assets, intellectual development, and the development of their networks. Client organizations can use the taxonomy to assess the magnitude of change and then orchestrate an appropriate resource allocation response. In this manner, many undesirable consequences of inadequately planned implementations may be eliminated. Managing toward the magnitude of change Although change may be thought of as a continuum, for the purposes of our illustrations, we have categorized ASP change as Alpha, Beta, or Gamma. For each level of change, specific resource allocation factors are logically critical to a successful implementation. The organization, the project manager, and the project team each contribute and dispense resources to the project. The organization decides what economic outlays will be made, who will participate in the project, and how problems will be handled. The project manager brings a management style, business acumen, and technical ability to the project. The project team contributes their knowledge (orientation) and manages communications. Such management resource decisions are outlined in Table I. To illustrate the concepts depicted in Table I, consider two hypothetical examples for the opposite ends of the change continuum (Alpha and Gamma change).

First, for Alpha change, consider an ASP that provides a bulk mail service. This is a vending relationship. The service may be commodity priced (economic outlay) and typically requires a high degree of interaction at the operational (supervisory) management level concerning regularly scheduled transactions or tasks. The social network is particularly important at the operational (supervisory) management level. The network sustains the relationship through problems that emerge. Operational managers need to be involved in the contract or adoption decision process as early as possible in order to begin developing the social network. In terms of successful management traits, such a relationship calls for a participatory (hands-on) management style and technical knowledge that produce rapid responses to problems. Thus, the project manager needs to possess a general understanding of the business, coupled with specialized technical expertise. Good communications (the foundation of trust necessary for developing a social network) may be developed through the use of regular project status reports and joint implementation planning. Of course, appropriate implementation plans and good project status reporting are important irrespective of the change level. At the opposite end of the spectrum is a Gamma change, where the ASP-client relationship becomes considerably more complex. This type of relationship is often viewed as an alliance or partnership. To illustrate a Gamma level change, consider an ERP implementation such as SAP, PeopleSoft or Oracle. ERP implementations usually require new work relationships and extensive knowledge sharing. Often, managers must make new types of business decisions in the ‘‘changed’’ organization. Alfred Grunwald, CEO of Deloitte & Touche Consulting Group/ICS, reports that about half of the ERP implementations fail, because the business managers significantly underestimate the amount of effort involved in managing change (Appleton, 1997). Consulting organizations are often called on in such implementations to help guide the process. Thus, there is considerable economic investment in the undertaking, and knowledge sharing and network building are much more critical for project success. Given the type of organizational realignment that occurs with an ERP implementation, the

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Table I Management resource allocation decisions

Organizational response Economic outlays: Nature of outlay Network building: Selection of players Knowledge sharing: Implementation training Problem handling Problem response

Project manager response Network building: Management style Knowledge sharing: Business acumen

Technical ability

Project team response Knowledge sharing: Orientation

Alpha

Magnitude of change Beta

Gamma

Purchase

Exchange

Investment

Operational (supervisory) management

Middle management

Senior (executive) management

Task-oriented Operational (supervisory) management Immediate

Role-oriented Middle management Methodical

Organizational-oriented Senior (executive) management Introspective

Participatory

Facilitating

Empowerment

General understanding

Specialist

Recognized specialized functional understanding but generalist Generalist

Recognized superior general and functional understanding Futurist

Technical specialist

Training specialist

Organizational design specialist Project status Implementation planning guide Workflow walk-through Job behavior changes defined and reward structures altered Organizational preparedness processes Early successes publicized

Levels of communications Project status Implementation planning guide

Project status Implementation planning guide Workflow walk-through Job behavior changes defined and reward structures altered

Source: Adapted from O’Hara et al. (1999)

network building begins at the top of the organization with the senior executive management team and the ASP provider. The knowledge sharing at this executive level tends to be organizationally-oriented. Both task and role knowledge sharing occurs at the operational level and middle management level networks with the ASP. Networks may be developed via formalized team building. This involves mobilizing individual resources, developing trusting relationships, defining roles, establishing ground rules (codes of conduct or shared norms) and having a shared definition of success. The project management style of the senior executive ‘‘project manager’’ needs to

be empowering – this person needs to provide a vision of the environment required to meet not only the current needs of the business, but also the future needs. Such an individual will have superior business acumen as well as detailed functional understanding. Since roles are being altered, the project team needs to have an organizational design orientation (i.e. how the organization will execute in the ‘‘new environment’’). Good project reporting and implementation planning are critical communications vehicles but, with organizational roles and workflow being altered, workflow walkthroughs are critical to communicate how work is being altered.

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Since jobs are being altered, new job behaviors need to be instilled into the organization. This requires new job descriptions with corresponding criteria for success reinforced with appropriate reward structures. Early successes (particularly teambased successes) need to be publicized. These activities help focus on the change and provide clear and consistent reinforcement of the new direction.

Research implications ASPs have found general acceptance in the practitioner arena, because the business practice addresses a very real need in today’s business world. However, academics have only recently shown an interest in understanding this business model. Therefore, numerous opportunities exist for empirical studies and theory creation. The taxonomy presented in this paper provides direction and guidance to such research by grounding future examination of the ASP phenomenon in a model relating levels of change, resource allocation, and interorganizational fit. Some exciting areas requiring further investigation include: . Value proposition. What is the range of value propositions for Alpha, Beta and Gamma-type ASPs (as defined based on the potential level of organizational impact)? What are the appropriate measures of value for each of these types of value propositions? How can these measurements be utilized to determine the corresponding best-demonstrated practices? . Economic outlays. What are ASPs’ and customers’ expectations with regard to mutual investments? What measures facilitate such investments and their effective deployment to the benefit of the relationship? . Network development. What measures do ASPs and customers take to ensure that they have the appropriate social contacts to leverage others’ economic and knowledge strengths, as well as to facilitate informal governance of the relationship? . Knowledge transfer. What are ASPs’ and customers’ expectations with regard to future innovation and knowledge transfer? What measures are necessary to

facilitate knowledge transfer? To what extent do ASPs rely on technical/business capabilities vs relationships in their representations to prospective clients?

Conclusions This paper developed a resource-oriented taxonomy of ASPs. This approach provides guidance to both practitioners and academics concerning maximizing the potential of an ASP implementation. Since under-estimating the level of change is the single most significant reason for failure in the more complex (Gamma) ASP implementations such as ERP, it is particularly appropriate to ground our taxonomy in the socio-technical (STS) perspective of organizational change. Conversely, over-estimating the level of change produces unnecessary complexity and expense. Thus, our model will enable organizations to identify correctly the resources necessary, based on the level of anticipated change that the ASP relationships would evoke. In addition to associating the resource allocation problem with the level of change, our paper raises some interesting questions for future researchers concerning the differentiation and linkage of the ASP value proposition with the magnitude of organizational change in the outsourcing organization. Building social networks, managing and transferring knowledge all become more critical as the level of change increases. The method by which we infuse these capabilities into the change process should impact the ultimate success of the project. Social networks, inter-organizational teams, knowledge management, knowledge sharing and knowledge transfer are usually defined in the rules of engagement or the contract with the ASP provider. These areas all require further examination. As General Yom Woon Sun said, ‘‘Strategy without tactics is the longest path to victory. Tactics without strategy is the noise before defeat’’ (Flock, 2001). It is important to understand the dynamics of the interorganizational relationships resulting from an ASP implementation in order to increase the opportunity for a successful implementation.

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References Ambrose, C. (2000), ‘‘ASPs: what does an effective ASP contract include? Update: 22 September 2000’’, Gartner Group, available at http://www.gartner. com/DisplayDocument?id=314294&acsFlg= accessBought, accessed 15 April 2001. Anthes, G.H. (2000), ‘‘Avoiding ASP Angst’’, Computerworld, 16 October, available at http:// www.computerworld.com/cwi/story/0,1199, NAV47_STO52410,00.html, accessed 20 March 2001. Appleton, E.L. (1997), ‘‘How to survive ERP’’, Datamation, Vol. 43, March, pp. 50-3. Beidl, R.A. (2000), ‘‘First Union Mortgage Corporation: moving at the Xpede of e-lending’’, TowerGroup Research Notes, TowerGroup, Needham, MA. Bostrom, R.P and Heinen, J.S. (1977), ‘‘MIS problems and failures: a socio-technical perspective’’, MIS Quarterly, September, pp. 17-31. Boyd, J. (2001), ‘‘Not dead yet: think ASPs make no sense? Think again’’, Internetweek Online, 13 April, available at http://www.internetweek.com/ newslead01/lead041301.htm, accessed 16 April 2001. Burt, R.S. (1992), Structural Holes, Harvard University Press, Cambridge, MA. Caldwell, B. (1999), ‘‘Services partnership: Corio, Flextronics to offer application services to small and mid-size companies’’, available at http://www. planetit.com/techcenters/docs/services/news/ PIT19990406S0043, accessed 5 April 2001. Correia, J. (2001), ‘‘Sanity check on the ASP opportunity update: 5 March 2001’’, Gartner Group, available at http://www.gartner.com/DisplayDocument?id= 325792&acsFlg=accessBought, accessed 15 April. Das, T.K. (2000), ‘‘A resource-based theory of strategic alliances’’, Journal of Management, Vol. 26 No. 1, pp. 31-61. Dyer, J.H. and Singh, H. (1998), ‘‘The relational view: cooperative strategy and sources of interorganizational competitive advantage’’, Academy of Management Review, Vol. 23 No. 4, pp. 660-79. Flock, M. (2001), ‘‘Creating global receivables management services’’, presentation to Executive Committee, International Payment Services, LLC, Atlanta, GA, March. Gilmore, T. (2001), ‘‘Crash test for the new economy’’, CIO ASP Advisor, available at http://subscribe.cio.com/ newsletter_text.cfm?ID=54, accessed 15 April. Granovetter, M. (1973), ‘‘The strength of weak ties’’, American Journal of Sociology, Vol. 78 No. 6, pp. 1360-80. Koch, C. (2000), ‘‘ASP and ye shall receive’’, CIO, May, pp. 94-106. Krause, D.R., Scannell, T.V. and Calantone, R.J. (2000), ‘‘A structural analysis of the effectiveness of buying

firms’ strategies to improve supplier performance’’, Decision Sciences, Vol. 31 No. 1, pp. 33-55. Lacity, M. and Willcocks, L. (1998), ‘‘An empirical investigation of information technology sourcing practices: lessons from experience’’, Management Information Systems Quarterly, Vol. 22 No. 3, pp. 363-408. Lawrence, P.R. and Lorsch, J.W. (1967), ‘‘Differentiation and integration in complex organizations’’, Administrative Science Quarterly, Vol. 12, June, pp. 1-47. Moran, P. and Ghoshal, S. (1999), ‘‘Markets, firms and the process of economic development’’, The Academy of Management Review, Vol. 24 No. 3, pp. 390-412. Nahapiet, J. and Ghoshal, S. (1998), ‘‘Social capital, intellectual capital, and the organizational advantage’’, The Academy of Management Review, Vol. 23 No. 2, pp. 242-66. O’Hara, M., Watson, R. and Kavan, C. (1999), ‘‘Managing the three levels of change’’, Information Systems Management, Vol. 16 No. 3, pp. 63-70. Ohmae, K. (1989), ‘‘The global logic of strategic alliances’’, Harvard Business Review, Vol. 67, pp. 143-54. Paul, L. (2001a), ‘‘Delayed gratification’’, Network World, Vol. 18 No. 4, p. 59. Paul, L. (2001b), ‘‘DoubleClick’’, available at http://www. aspisland.com/success/doubleclick2.asp, accessed 20 March. (The) Practical Accountant (2000), ‘‘ASP guide from consortium’’, The Practical Accountant, Boston, MA, September. Starita, L. (2000), ‘‘First Union launches high-touch mortgage e-business’’, GartnerGroup Case Studies, CS-10-3138. Stark, D. (forthcoming), ‘‘Ambiguous assets for uncertain environments: heterarchy in post-socialist firms’’, in DiMaggio, P., Powell, W., Stark, D. and Westney, E. (Eds), The Future of the Firm: The Social Organization of Business, Princeton University Press, Princeton, NJ. Turisco, F. (2000), ‘‘Evaluating ASP pricing models and contract terms’’, Health-care Financial Management, Westchester, August. Uzzi, B.(1997), ‘‘Social structure and competition in interfirm networks: the paradox of embeddedness’’, Administrative Science Quarterly, Vol. 42, pp. 35-67. Venkatraman, N. (1989), ‘‘The concept of fit in strategy research: toward a verbal and statistical correspondence’’, Academy of Management Review, Vol. 14 No. 3, pp. 423-44. Wainewright, P. (1999), ‘‘Corio hosts Flextronics supply chain’’, available at http://www.aspnews.com/news/ article/0,,4191_373421,00.html, accesssed 29 March. Wicks, A.C., Berman, S.L. and Jones, T.M. (1999), ‘‘The structure of optimal trust: moral and strategic implications’’, Academy of Management Review, Vol. 24 No. 1, pp. 99-116.

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Managing IT outsourcing: a value-driven approach to outsourcing using application service providers Lei-da Chen and Khalid S. Soliman The authors Lei-da Chen is Assistant Professor, College of Business Administration, Creighton University, Omaha, Nebraska, USA. Khalid S. Soliman is Assistant Professor, Frank G. Zarb School of Business, Hofstra University, Hempstead, New York, USA. Keywords Service, Information technology, Decision making, Outsourcing Abstract Organizations, both large and small, are increasingly outsourcing their applications to application service providers (ASPs) for a variety of reasons such as cost reduction, shortened time-to-market, lack of internal expertise, and risk reduction. However, the adoption of the ASP model has not been smooth sailing for many organizations, and only a few organizations have a formal approach to making ASP outsourcing decisions. Partially to fill this void, develops a value-driven approach to outsourcing using ASP based on outsourcing theories and the industry’s best practices. The value-driven approach is an adaptation and extension of Simon’s decision-making process. It is designed to guide IS managers systematically through the complex process of identifying outsourcing opportunities, evaluating the viability of using the ASP model, making outsourcing decisions, managing contractual and implementation issues, and assessing the service quality of ASP vendors. Provides important implications for research and practice. For researchers, identifies ample research opportunities in this new field. For practitioners, the valuedriven approach gives them an invaluable tool to manage today’s complex information technology outsourcing. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0957-6053.htm Logistics Information Management Volume 15 . Number 3 . 2002 . pp. 180–191 # MCB UP Limited . ISSN 0957-6053 DOI 10.1108/09576050210426733

Introduction In the current dynamic business and technological environment, it is imperative for organizations to stay competitive through the use of new information technologies (IT) and tools. However, the development and maintenance of these new technological infrastructures are both costly and timeconsuming (Holohan, 2000). The shortage in the IT labor market is also putting pressure on organizations, which are aggressively expanding their technological infrastructure. The increasing popularity of enterprise resource planning (ERP) and e-commerce technologies in the last few years is presenting new challenges to the IT departments. While the businesses are eager to take advantage of these new technologies to create new business value and stay competitive, IT departments are finding it more and more difficult to manage the increasing number of new technologies effectively. Given the limited internal resources, outsourcing applications have become a viable option. As McFarlan and Nolan (1995) predicted, organizations are increasingly dependent on outside expertise to provide and maintain organizational data-processing resources. Delivering information services over the Internet, application service providers (ASPs) have become the answer to many organizations when it comes to outsourcing applications. The growth of the Internet and its acceptance among both organizations and end users have paved the way to the rise of ASP vendors. Coffman (2000) defines ASP vendors as companies that ‘‘deliver and manage applications and computer services from remote data centers to multiple users via the Internet.’’ A general ASP model of IT service delivery is depicted in Figure 1. ASP vendors provide a host of services to a wide range of industries. The major service categories dominating the ASP market include business application hosting, ERP, e-commerce, customer relationship management (CRM), supply chain management (SCM), digital content storage, and wireless applications (Butler, 2000; Cox, 2000; Holohan, 2000; Pappalardo, 2000). ASP vendors make these applications available to be accessed by their clients via the Internet or the dedicated communication networks. The ASP service delivery model

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Figure 1 A general model of an application service provider

allows ASP vendors to reduce the cost of services through the economy of scale and, at the same time, the valuable resources of the ASP clients can be freed up to focus on their core competencies (Dilger, 2000). The ASP model has numerous advantages over the traditional internal IT service delivery mode. Outsourcing applications eliminates, to a great extent, the money and time involved in purchasing, installing, upgrading, and maintaining hardware and software (Grandinetti, 2000). The ASP model also ensures that the client has access to the technical expertise that is too costly to employ in-house with a fraction of the costs at any time. In addition to the reduction in support costs, organizations are able to avoid new investments in hardware and software that might become out-dated quickly (Reed, 2000). Instead of investing in costly and complex servers, organizations now can have access to necessary business applications through less expensive computer terminals or ‘‘thin clients’’. The ASP model also provides organizations with faster and cheaper upgrades when the existing software and hardware become obsolete. More importantly, it reduces time-to-market despite internal IT limitations (Booker, 2000a). Furthermore, utilizing the Internet as an application platform facilitates the deployment of new systems in response to

market changes and allows the application to be accessed from anywhere using a wide range of devices (Beale and Lindquist, 2000; Dewire, 2000). Finally, ASP vendors provide organizations with the scalability they need to meet business growth, while maintaining their focus on their core competencies (Curtis and Alphonso, 2000). Initially, the target market for ASP services is small and mid-sized businesses (Wexler, 2000). Companies in these categories in particular need to utilize their limited resources to focus on their core competences. Today, many ASP vendors are servicing large companies as well. A recent survey shows that 65 percent and 72 percent of large enterprises plan to use ASP services for their internal applications and e-commerce applications, respectively (Wittmann, 2000). According to Gartner Group, the ASP market will reach $25 billion by 2004 compared with $3.5 billion in the year 2000 (Fortune, 2001). The services of ASPs are being utilized by a wide range of industries including manufacturing, banking, health care and transportation, whose information systems play vital roles in their competitive advantages (Basso, 2000; Booker, 2000b; Gurin, 2000; Health Management Technology, 2000). It is evident that outsourcing using ASP vendors will soon become a mainstream solution in the corporate IT environment.

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Nevertheless, many of the companies that adopted ASP vendors as their outsourcing partners have experienced various problems in the areas of service quality, security, costs and control, and the implementation of the ASP model has not been smooth sailing (Beckman and Hirsch, 2000; Gittlen, 2000; Torode, 2000). Only a few organizations have a formal approach to making ASP outsourcing decisions. These new challenges that organizations are facing indicate that outsourcing using ASP vendors warrants formal study in order to provide businesses with viable strategies for establishing more profitable relationships with their service providers. Although a number of practitioners attempted to provide strategies in choosing ASP vendors, their recommendations were often conflicting and inclusive. The reasons for this may be their lack of solid theoretical foundation and a broader picture of the ASP marketplace. To leverage organizational resources better, a formal approach to making ASP outsourcing decisions is imperative. Instead of focusing solely on costs, the approach should focus on seeking solutions that will provide organizations with the greatest overall value. While ASP vendors are different from the traditional outsourcing services, the fundamental theories and research findings in traditional outsourcing can still be borrowed to guide the research in this area. Based on these theories and the industry’s best practices, this study proposes a value-driven approach to outsourcing using ASP. The approach is designed to guide IS managers systematically through the complex process of identifying outsourcing opportunities, evaluating the viability of using ASP services, making outsourcing decisions, managing contractual and implementation issues, and assessing the service quality of ASP vendors. .

ASP vs traditional outsourcing In looking at the phenomenon, we find it useful to understand the fundamental differences between the ASP model and traditional outsourcing. The differences lie in two main areas. First, the allocation of ASP revenues shows a clear demand for e-commerce, CRM, and ERP applications (Dilger, 2000). Traditional IT outsourcing often focuses on the areas of software

development and IT operational activities (McFarlan and Nolan, 1995). Previous research has warned IS managers that functions with high strategic implications to organizations are poor candidates for outsourcing. However, e-commerce, CRM, and ERP, all of which are strategically important to an organization, are the major areas in which the expertise of ASP vendors are solicited. Some of the reasons for this phenomenon are the dynamic nature of the IT landscape in the last few years, the requirements for rapid deployment of mission-critical systems, and the need to minimize risks in making large IT investments. Second, in traditional outsourcing, applications are installed on the client’s in-house servers; in an ASP arrangement, the products and services of ASP vendors are delivered over the Internet or dedicated communication networks. Thus a seamless integration between the services and the functions of the client organization is required to achieve a fast speed of service. Owing to these two differences, several trends in utilizing the ASP model are emerging. First, more and more organizations are turning to ASP vendors for their missioncritical IT functions for the reasons discussed above. Second, classic research in outsourcing suggests that a company’s size is negatively correlated with its tendency to outsource. However, as the ASP market has clearly shown, large companies are those that are driving up the demand for ASP service (Wittmann, 2000). Therefore, a diminishing effect of company size on the outsourcing decision is demonstrated. Third, the Internet or the dedicated communication networks via which ASP vendors deliver their products and services are raising the client-vendor relationship to a new level. Modern telecommunication technologies allow organizations to have access to the expertise and services that are not locally available by outsourcing to remote ASPs. Although the connection between the ASP and its client exists in the virtual world, their relationship is often at a very high level. The services provided by ASP vendors are often inseparable parts of their clients’ business; hence ASP vendors are becoming an extension of the client organization rather than merely an outside service provider. This creates a closer relationship between ASP vendors and their clients. In many cases, the

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ASP vendor and its client work so seamlessly that they become an extended enterprise together. Finally, the seamless integration among ASP vendors is also critical. The partnership among ASP vendors becomes a crucial success factor for ASP vendors, as few ASP vendors can provide every component in an ASP value chain. As a result, ASP aggregators, which bundle services from various ASPs and offer them to clients as integrated packages, have made it easy for organizations to shop for technical solutions.

A value-driven approach to outsourcing using ASP Given the distinctions between the ASP model and traditional outsourcing, organizations find themselves in uncharted territory, especially for small businesses that have little or no experience of IT service providers. To assist IS managers in this area, this study developed a value-driven approach to outsourcing using ASP based on previous research and the industry’s best practices. The value-driven approach is an adaptation and extension of Simon’s decision-making process (Simon, 1977), which was designed for making managerial decisions. The approach is designed to help IS managers make effective ASP outsourcing decisions based on the overall value that the selected ASP vendors and implementation methods can generate for the organization; while avoiding common mistakes such as cost domination. Hence, it is labeled ‘‘a valuedriven approach’’. The approach is discussed in detail in the forthcoming sections. Simon’s decision-making process Nobel Prize winner, Professor Herbert Simon, coined the term ‘‘bounded rational’’ to describe his view of human decision making. His theory suggests that, in today’s complex world, individuals cannot possibly process or even obtain all the information for making a fully rational decision. Instead, individuals make decisions that are reasonable or acceptable based on limited information. The same theory can be applied to the information systems field. Rather than evaluating every factor that impacts information systems outcomes, IS managers make their decisions based on a number of well-established critical factors. Simon also

proposed in his book the processes of management decision. His decision-making model (see Figure 2) consists of four phases: intelligence, design, choice, and review. The intelligence phase involves the search for conditions calling for decision from the environment; the design phase includes activities for inventing, developing and analyzing possible courses of action; the choice phase entails the selection of a particular course of action; and finally, in the review phase, managers evaluate the past choices. Most of Simon’s research focuses on the first three phases of the process. Simon’s decision-making model was widely used as the basis for many creative problem-solving strategies (McNurlin and Sprague 1998, p. 119). A value-driven approach to outsourcing using ASPs The value-driven approach is an adaptation and extension of Simon’s decision-making model. The approach has five phases: identification, analysis, design, implementation, and assessment. Figure 3 depicts the value-driven approach to outsourcing using ASP. The five phases correspond to the four phases in Simon’s decision-making model, as IS managers should make ASP outsourcing decisions in a systematic manner. The labels for the phases are modified to better describe the domain under study. While each phase is equally important, a large fraction of the time should be spent in the analysis phase to study the critical factors that influence an organization’s propensity to outsource using ASP vendors. The implementation phase is not one of the original phases in Simon’s decision-making model it is included here due to the complexity involved in today’s outsourcing arrangements. Each phase of the value-driven approach has specific activities and deliverables that are explicitly stated in Table I. All of the phases in the value-driven approach are in place to ensure that managers are focusing on the overall value that each possible alternative generates. The five phases are discussed in detail in the following sections. Identification Like Simon’s intelligence phase, identification activities entail searching the environment for conditions that call for decisions. In this

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Figure 2 Simon’s decision-making model

Figure 3 A value-driven approach to outsourcing using ASP

Table I A value-driven approach: activities and deliverables Phase

Activities

Deliverables

Identification

Identify information needs Define core competencies

Work request form Corporate and IT core competencies

Analysis

Determine decision criteria Evaluate alternative solutions Select the best alternative

Outsource decision criteria/decision tree Weighted scores for alternatives Make or buy decision

Design

Select a service provider Determine client-vendor relationship Prepare service contract

The selected service provider Detailed service contract and SLA

Implementation Prepare the technological infrastructure for ASP services Manage internal issues

Complete ASP value chain Prepared organization

Assessment

Service quality report User satisfaction report Continuation/termination decision

Monitor service quality Assess user satisfaction Value analysis

phase, IS managers search for areas of IT needs in which outsourcing using ASP vendors may have merits. This search can be either proactive or reactive. Using the proactive approach, IS managers start with analyzing the enterprise IT architecture and information systems plan (ISP) to identify areas of new development and support. The reactive approach, on the other hand, responds to the threats or problems encountered by the organization. Once a problem or need is identified, IS managers need to evaluate its strategic impact on the organization. Applications such as the e-commerce and ERP applications have profound strategic impact on business today, while desktop applications are important but have to do with operational level of IT activities. One important activity in this phase is to define the organization’s and its IT department’s core competencies. If the desired application is not within the organization’s or its IT department’s core competencies, then it becomes a good outsourcing candidate. The primary

deliverables of this phase are the service request form for the desired application and a list of corporate and IT core competencies. Analysis Is ASP a viable solution to outsource an organization’s IT functions? This is a question to be answered in the analysis phase. A large fraction of the time and effort should be expended in this phase. Some critics of the ASP model claim that ASP vendors cannot deliver customized, high quality and secured service (HRFocus, 2000a). While this statement may not be true for all ASP vendors, it does caution IS managers to evaluate carefully the viability of using ASP as an outsourcing method, especially for the mission-critical IT functions. While each organization may have its own list of criteria for making the make or buy decision, the critical function-specific criteria include production cost advantages, transaction costs, asset specificity, internal expertise, maturity/ newness of technology, and application media fit.

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Figure 4 displays the seven critical factors that will affect an organization’s propensity to outsource using ASP vendors. The emphasis here again is that the cost is not the only dominant factor. Rather, ASP vendors’ ability to create overall value that organizations cannot easily achieve themselves is the driving force behind the outsourcing decisions. Production cost advantages and transaction costs are the two traditional dimensions used to address the make or buy decision in software development. These two dimensions focus on the costs associated with outsourcing. Production cost advantages refer to the cost savings resulting from outsourcing rather than internalizing the IS function. According to neoclassical economics, firms are more likely to outsource if the production cost advantages are high (Williamson, 1981). Another type of cost associated with outsourcing is transaction cost, which refers to the effort, time and costs incurred in searching the outsourcing partners, reaching outsourcing agreements, and implementing the outsourcing. Previous studies have found that both production cost advantages and transaction costs influence a firm’s decision to outsource its IS functions. Ang and Straub (1998) found that production cost advantages played a dominant role in outsourcing decisions, while transaction costs played a secondary role. Asset specificity refers to how easily the asset can be used elsewhere by other users. Applications with low asset specificity, such as desktop applications and payroll systems, can be obtained from a large pool of ASP vendors

with relatively low costs. On the other hand, assets that are highly specific to an organization, such as a highly customized SCM application, are less available and more costly in the marketplace. To be profitable, ASP vendors must deliver the same application to many clients, and customization may not be possible in many cases (HRFocus, 2000b). Therefore, asset specificity adversely influences an organization’s decision to outsource (Nam et al., 1996). Internal expertise refers to an organization’s experience with the technologies involved in developing and maintaining an application. Today, the pace of changes in both the business and technological environment far exceeds IT departments’ ability to acquire expertise in new technologies. ASP vendors can provide such highly sought-after expertise to reduce significantly their clients’ time-tomarket and costs. Organizations are likely to outsource IT functions that require the deployment of new technologies for the following two reasons: (1) the internal IT staff lacks the expertise in the new technologies; and (2) the firm prefers to wait until the technology matures before making sizable investment to acquire the expertise internally. Today’s business environment requires firms to continuously deploy new technologies in order to stay competitive, and this is one of the reasons that are fueling the demands for ASP services that can bring these new technologies to firms without significant risks (Boyd, 2000).

Figure 4 Factors influencing outsourcing decisions

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IBM Global Services (2000) identified five components in an ASP value chain: software, hardware, implementation, data center/ hosting, and connectivity. It requires all five components to work seamlessly to ensure the success of application delivery. Depending on the type of ASP vendors that are chosen, ASP vendors often handle one or several of these components, and it is the job of the client or another third party to fill the void. Hence the availability and stability of the ASP value chain become one of the deciding factors for whether outsourcing with ASPs should be considered. Many companies rely on ASP aggregators such as Jamcracker and Aqiliti to locate all the ASP vendors that provide the necessary pieces for a complete solution for the companies’ IT needs. If such a value chain is not in place, then in-house development or certain types of hybrid solutions should be considered. Finally, the application media fit refers to the viability of delivering a particular application through a particular medium. In an ASP environment, applications are delivered via either the Internet or the dedicated communication networks. IS managers need to ask themselves whether the Internet has the security, reliability, scalability, responsiveness and bandwidth that the application demands. To safeguard clients’ critical data, ASP vendors can implement a number of security technologies such as virtual private networks, firewall and intrusion detection programs. Virtual private networks (VPN) have emerged as viable network solutions for ASPs to deliver their applications to clients in recent years. VPNs utilize the Internet back-bone to establish secured, high speed, low cost site-to-site connections. Using VPNs as the delivery medium for applications eases ASP clients’ security and performance concerns to some extent. However, in cases where data security is pivotal, then traditional outsourcing methods may be considered. The higher the application media fit, the more likely a firm will choose to outsource using ASP vendors. At the end of this phase, the firm will make a choice of developing in-house, using traditional outsourcing methods, or outsourcing using ASP vendors based on the information collected. The decision is not straightforward, as different organizations put different emphasis on each of these factors. A weighted approach that is often used to select the best design strategy in a system

development project can be used to compare several alternatives and make a rational decision (Hoffer et al., 1998). The first two phases are critical in making the make or buy decision. The decision can be modeled using a decision tree depicted in Figure 5. Design The objective of this phase is to design the appropriate outsourcing arrangement, so that the value for the organization can be maximized. The three tasks relevant to achieving this objective are selecting a service provider, determining client-vendor relationship, and preparing a contractual agreement with the selected service provider. For an organization to select the ASP vendor that will create the greatest synergy, several critical factors are to be considered. Cost is usually an important factor, yet it should not be treated as the only factor. Overall service quality, security and vendor stability are often cited as the primary concerns of ASP users (IBM Global Services, 2000). In addition, it is important to choose an ASP that serves within your particular industry rather than serving a broad spectrum of industries (Holohan, 2000). Such an ASP would be more familiar with the dynamics, the concerns and requirements of your industry. The criteria for selecting the right ASP vendor for an organization vary from one industry to another (Korstad, 2000), but some of the common criteria include the ASP vendor’s platform expertise and flexibility, infrastructure and operational scalability, security, global support, level of service, and pricing structure (Meister and Fenner, 2000). Once a service provider is selected, the client-vendor relationship needs to be determined. Classic outsourcing literature suggests that outsourcing relationships be defined based on two dimensions: the extent of substitution by vendors and strategic impact of IS applications. Based on this rationale, four types of outsourcing relationships can be derived (Nam et al., 1996). Figure 6 displays the four types of outsourcing relationships: support, reliance, alignment, and alliance. Support refers to the most primitive form of outsourcing arrangement. When this relationship is formed, the organization outsources a small fraction of non-critical IS functions to the service provider. Reliance relationship is

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Figure 5 Make or buy decision tree

N

Figure 6 Four types of outsourcing relationships

formed when a firm reaches a long-term contractual agreement with a service provider to provide non-critical IS functions. In both of these two relationships, cost reduction is often the main reason for outsourcing. If a service provider provides consulting services to the firm on various strategic IS functions but is not significantly involved in the IS operations, then the outsourcing relationship is perceived to be alignment. The last type of outsourcing relationship, alliance, requires the client to entrust its service provider with strategically critical IS functions completely.

This type of outsourcing, while risky to some extent, is what is commonly seen in the ASP market. Strategically important applications, such as e-commerce, CRM, SCM, and ERP applications, account for a large portion of the ASP business. Organizations rely heavily on the expertise of ASP vendors in these areas. For this type of relationship to work, the organization needs to work closely with its service provider to achieve seamless integration between the organizations and their systems. Therefore, in many situations, instead of being a separate entity, ASP vendors act as an extended part of their client organizations. Treating ASP vendors as strategic alliance partners is an effective way to ensure the long-term quality and corporation that will benefit both the ASP vendors and their clients in the long run. Once the client-vendor relationship is determined, a contractual agreement is required to define the responsibilities of both the ASP vendor and the client and establish accountability measures. Melby and Klauder (2000) outlined four crucial components of an ASP outsourcing contract: the type of the contractual agreement, responsibilities, data security, and liabilities. The contractual agreement between the client organization

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and an ASP vendor can be of standardized or negotiated terms. The type of terms depends on the maturity of the ASP market, the disparateness of the client organization, and the size of the ASP firm. The responsibilities of the contracted ASP should be clear with regard to performance failure, integration and compatibility with internal applications, upgrading and maintaining new technologies, and technical support provided to end users. Data security is a critical factor when contracting with an ASP. Client organizations should be assured that their data are safe and that the ASP vendor’s security policies are enforced. Finally, the contractual agreement should clearly identify the ASP’s liability in case of damage resulting from security breaches or systems failures. A detailed service level agreement (SLA), which defines what level of services is acceptable, should be a part of every ASP outsourcing contract. Fee-for-service contracts are commonly used in IT outsourcing. They allow a client to pay a fee in exchange for specific IT services. Research has found that fee-for-service contracts work the best when the client can clearly define its IT needs. However, when the technology is ‘‘ill-defined, immature or unstable’’, this type of contract is often difficult to enforce and may cause the outsourcing relationships to deteriorate (Lacity and Willcocks, 1998). The current failures in some of the ASP outsourcing cases are partly due to IS managers’ inability to define their needs clearly, especially in the e-commerce and ERP areas. Therefore, it is imperative for IS managers to be able to define their requirements clearly and precisely in great detail. For example, IS managers need to determine whether the availability is measured end-to-end or just within the ASP vendor’s proprietary network and the cost implications of 0.1 per cent difference in downtime to the organization (Jones, 2001). When the needs are difficult to define, the organization may consider entering a strategic alliance or partnership relationship with the ASP vendors rather than the traditional feefor-service contractual agreements. Performance-based contracts and risk-sharing contracts may also be considered to minimize the risks to which an organization is exposed (Moran, 1996; HRFocus, 2000a).

Implementation Implementing the application using ASPs is a complex process. Besides preparing the technological infrastructure required for application delivery, IS managers will also encounter several obstacles when implementing ASP solutions. Many organizations have invested heavily to build their own computing infrastructure. These investments were in the forms of building networks, acquiring hardware and software, training end-users, hiring IT professionals, and buying and/or building business applications. Accordingly, such investments make many of these organizations reluctant to outsource their internal applications (Holohan, 2000). In addition, outsourcing internal applications raises another type of concern within organizations. This concern comes from the organization’s workforce. Employees and IT specialists feel threatened by the new trend of assigning internal applications to ASP vendors (Booker, 2000b; Hall, 2000). These concerns could have a long-term effect employees’ performance in core, in-house operations. As the change management literature (e.g. Maglitta, 1994; Murray and Harding, 1991) suggests, gaining top management commitment and involving employees during the process are crucial to success. IS managers must play the roles of change agents and fully prepare the organization for the upcoming changes both technically and psychologically. Assessment Continuing assessment is the key to the longlasting success of outsourcing using ASP vendors. In this phase, the IS managers need to perform the following three tasks: monitoring the service quality of ASP vendors, assessing user satisfaction, and conducting periodical value analysis. The overall service and support quality is one of the most common concerns among ASP clients. One thing that IS managers need to keep in mind is that the service availability of an ASP vendor depends on the availability of each and every component in the ASP value chain. For example, the total service availability is the product of network availability, data center availability and application availability (IBM Global Services, 2000). Hence, the monitoring of the service quality needs to be extended to every component of the ASP value chain. The

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classic SERVQUAL literature suggests that IS managers evaluate the quality of services by looking at the tangibles, reliability, responsiveness, assurance and empathy of the service provider (Pitt et al., 1995). Besides these dimensions, another crucial aspect of the service quality specific to ASP vendors is how secured the services are. Security is always an issue especially when dealing with the Internet as an outsourcing platform (Melby and Klauder, 2000). The use of the ASP model results in having critical data outside the direct control of an organization’s management and IT staff. ASP users were quite alarmed when 30 ASP vendors were recently investigated for alleged selling of their customer data (Torode, 2000). Therefore, close monitoring of how security measurements are being enforced by ASP vendors should be given high priority. User satisfaction is an important indicator of IS success (DeLone and McLean, 1986). User satisfaction with the services provided can be combined with other objective measures such as service downtime to assess the service quality of an ASP vendor. Finally, as both the business and technological environment changes, the overall value of existing ASP outsourcing arrangements may vary in the future. Organizations need to conduct value analysis periodically to ensure that the value of outsourcing using ASP vendors is sustainable. Based on the new analysis, organizations will make the decision to continue the outsourcing arrangement, switch to another ASP vendor, internalize the IS function, or abandon the application. The contribution of the value-driven approach to outsourcing using ASP lies in that it allows IS managers systematically to make outsourcing decisions and manage outsourcing issues. By following this approach, organizations are expected to maximize the overall value of using ASP as an outsourcing method.

Conclusion and future research directions The ASP model has proven to be a promising solution to IT outsourcing, yet it is still in its infancy. The projected growth in the ASP market in the next few years will require IS managers to understand better the benefits of this service model as well as its pitfalls. This

study argues that a systematic approach needs to be adopted to amplify the overall value of outsourcing arrangements while minimizing the risks for organizations. The value-driven approach developed by this study gives IS managers an invaluable tool for managing today’s complex IT outsourcing options. This study has also identified ample opportunities for future research in ASP. Future researchers may pursue a number of directions. First, the viability of using ASP vendors as outsourcing partners for a variety of applications needs to be further investigated. Second, the different options for ASP contractual agreement and SLA and their implications from the longterm client-vendor relationship need to be explored. Finally, an empirically validated instrument for measuring the service quality of ASP vendors is urgently needed.

References Ang, S. and Straub, D.W. (1998), ‘‘Production and transaction economies and IS outsourcing: a study of the US banking industry’’, MIS Quarterly, Vol. 22 No. 4, December, pp. 535-52. Basso, P. (2000), ‘‘FNX releases eSierra, an ASP for trading’’, Wall Street & Technology, Vol. 18 No. 9, September, pp. 18-21. Beale, M. and Lindquist, C. (2000), ‘‘Office suite go online’’, CIO, Vol. 13 No. 25, 15 September, pp. 248-58. Beckman, D. and Hirsch, D. (2000), ‘‘Beware the sting of the ASP: application service providers are convenient, but control issues can be pain’’, ABA Journal, November, p. 72. Booker, E. (2000a), ‘‘What’s core, what’s not’’, B to B, Vol. 85 No. 12, 14 August, p. 10. Booker, E. (2000b), ‘‘ABCs of ASPs’’, B to B, Vol. 85 No. 12, 14 August, pp. 29-30. Boyd, J. (2000), ‘‘Enterprise app outsourcers evolve’’, Internetweek 842, 28 December, pp. 11, 86. Butler, J. (2000), ‘‘The management service provider option’’, Information Systems Management, Vol. 17 No. 4, Fall, pp. 8-13. Coffman, P. (2000), ‘‘ASPs ascendant’’, Oil & Gas Journal, Supplement – the New Energy Economy, Fall, pp. 30-1. Cox, J. (2000), ‘‘Wireless boom fuels application service providers’’, Network World, Vol. 17 No. 48, 27 November, pp. 95-6. Curtis, H.L. and Alphonso, R.J. (2000), ‘‘Pros and cons of ASPs’’, Strategic Finance, Vol. 82 No. 3, September, pp. 34-8. DeLone, W. and McLean, E. (1986), ‘‘Information systems success: the quest for the dependent variable’’, Information Systems Research, Vol. 3 No. 1, pp. 60-95. Dewire, D.T. (2000), ‘‘Application service providers’’, Information System Management, Vol. 17 No. 4, Fall, pp. 14-19.

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Dilger, K.A. (2000), ‘‘Application service providers: healthy growth foreseen for an already diverse solution model’’, Manufacturing Systems, December, pp. 76-8. Fortune (2001), ‘‘Apps on tap’’, Fortune, Vol. 142 No. 12, Winter, pp. 217-20. Gittlen, S. (2000), ‘‘The truth about outsourcing applications’’, Network World, Vol. 17 No. 37, 11 September, pp. 68-9. Grandinetti, D. (2000), ‘‘The good news – and bad – about Web-based EMRs’’, Medical Economics, Vol. 77 No. 17, 4 September, pp. 73-91. Gurin, R. (2000), ‘‘Many happy returns’’, Frontline Solutions, Vol. 1 No. 10, September, p. 61. Hall, M. (2000), ‘‘Pandesic users still in the dark’’, Computerworld, Vol. 34 No. 34, 21 August, pp. 1, 77. Health Management Technology (2000), ‘‘Improving efficiency without disrupting patient care’’, Health Management Technology, Vol. 21 No. 10, October, p. 58. Hoffer, J., George, J. and Valacich, J. (1998), Modern Systems Analysis and Design, 2nd ed., AddisonWesley Educational Publishers, Inc., Reading, MA. Holohan, M. (2000), ‘‘Application service providers’’, Computer World, Vol. 34 No. 37, 11 September, p. 70. HRFocus (2000a), ‘‘More pros and cons to Internet recruiting’’, HR Focus, Vol. 77 No. 5, May. HRFocus (2000b), ‘‘The A to Z of ASPs’’, HRFocus, December, p. 3. IBM Global Services (2000), ‘‘Building a solid e-business infrastructure for ASP service delivery’’, White Paper, International Business Machine Corporation. Jones, H.W. (2001), ‘‘The service game: learn the new rules before you compete’’, Web Technique, Vol. 6 No. 3, March, pp. 46-50. Korstad, B. (2000), ‘‘Ten steps in selecting an ASP time and attendance vendor’’, The American Salesman, Vol. 45 No. 12, December, pp. 18-22. Lacity, M.C. and Willcocks, L.P. (1998), ‘‘An empirical investigation of information technology sourcing practices: lessons from experience’’, MIS Quarterly, Vol. 22 No. 3, September, pp. 363-408. McFarlan, F.W. and Nolan, R.L. (1995), ‘‘How to manage an IT outsourcing alliance’’, Sloan Management Review, Vol. 36 No. 2, Winter, pp. 9-23. McNurlin, B.C. and Sprague, R.H. (1998), Information Systems Management in Practice, 4th ed., PrenticeHall, Englewood Cliffs, NJ. Maglitta, J. (1994), ‘‘Rocks in the gears: reengineering the workplace’’, Computerworld, Vol. 28 No. 40, pp. 94-7. Meister, F. and Fenner, J. (2000), ‘‘Identify the right ASP for your company’’, Informationweek, Vol. 814, 27 November, p. 80. Melby, B.M. and Klauder, N.J. (2000), ‘‘Mind your ASPs and Qs’’, CIO, Vol. 13 No. 25, 15 September, pp. 68-70. Moran, N. (1996), ‘‘Outsourcing begins’’, Chemical Week, Vol. 158 No. 32, 21 August, pp. 31-2. Murray, R. and Harding, R. (1991), ‘‘The IT organization of the future: rebuilding credibility today is key’’, Information Systems Management, Vol. 8 No. 4, pp. 68-72.

Nam, K., Rajagopalan, S., Rao, H.R. and Chaudhury, A. (1996), ‘‘A two-level investigation of information systems outsourcing’’, Communication of the ACM, Vol. 39 No. 7, July, pp. 36-44. Pappalardo, D. (2000), ‘‘Cable and wireless begins apps hosting’’, Network World, Vol. 17 No. 39, 25 September, pp. 55, 60. Pitt, L.F., Watson, R.T. and Kavan, C.B. (1995), ‘‘Service quality: a measure of information systems effectiveness’’, MIS Quarterly, Vol. 19 No. 2, June, pp. 173-87. Reed, G. (2000), ‘‘ASPs can assist compliance efforts’’, Health-care Financial Management, Vol. 54 No. 9, September, p. 72. Simon, H. (1977), The New Science of Management Decision, Prentice-Hall, Upper Saddle River, NJ. Torode, C. (2000), ‘‘Data hand-off’’, Computer Reseller News, No. 906, 7 August, pp. 14-18. Wexler, J. (2000), ‘‘ASPs: helpful or hype-ful?’’, Business Communication Review, Vol. 30 No. 9, September, pp. 32-8. Williamson, O.E. (1981), ‘‘The modern corporation: origins, evolution, attributes’’, Journal of Economic Literature, Vol. 19, December, pp. 1537-68. Wittmann, A. (2000), ‘‘Service providers and outsourcing’’, Network Computing, December, pp. 103-8.

Further reading Alexander, S. (2000), ‘‘Aggregators’’, Computerworld, Vol. 34 No. 36, 4 September, p. 54. Blozter, M. (2000), ‘‘Web-based training’’, Occupational Hazards, Vol. 62 No. 9, September, pp. 35-8. Chidi, G.A. (2000), ‘‘Lotus plants the flag on ASP turf, touts wares and partners’’, InfoWorld, Vol. 22 No. 38, 18 September, p. 26. Christopher, A. (2000), ‘‘The IT hot list: leading VCs say where the smart money is headed’’, Venture Capital Journal, 1 October, p. 1. Communications News (2000), ‘‘All-time high competition challenges the airlines’’, Communications News, Vol. 37 No. 9, September, p. 54. Cooke, J.A. (2000), ‘‘Logistics exchange and ASPs: on the evolutionary path’’, Logistics Management and Distribution Report, Supplement: e-logistics: ASPs and Exchange – Redefining Logistics, September, pp. E8,E9+. Copeland, L. (2000), ‘‘Merant opens online development service’’, Computerworld, Vol. 34 No. 39, 25 September, p. 24. Dunlap, C. (2000), ‘‘Servers and remote management’’, Computer Reseller News, No. 894, 15 May, pp. 51-2. Gene, R. (2000), ‘‘ASPs can assist compliance efforts’’, Health-care Financial Management, Vol. 54 No. 9, September, p. 72. Gillan, C. and McCarty, M. (1999), ‘‘ASPs are for real . . . but what’s right for you?’’, an IDC White Paper, International Data Corporation. Graphic Arts Monthly (2000), ‘‘ASP market set to explode’’, Graphic Arts Monthly, Vol. 72 No. 9, September, p. 120. Greco, J. (2000), ‘‘Giving it away’’, Computer-Aided Engineering, Vol. 19 No. 9, September, pp. 49-51.

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Hapgood, F. (2000), ‘‘Baby, it’s you’’, CIO, Vol. 13 No. 21, 15 August, pp. 236-42. Higgins, A. (2000), ‘‘Big IT workers crunch by renting software’’, The Associated Press, 3 May. Hill, M. (2000), ‘‘ASP model can power banks’ small business loan strategy’’, Bank System & Technology, Vol. 37 No. 7, July, pp. 56, 514. Kanderian, P. (2000), ‘‘All together now’’, CIO, Vol. 13 No. 22, September, pp. 144-52. Kashmeri, S. (2000), ‘‘Realistic ASPirations’’, Computerworld, Vol. 34 No. 32, 7 August, pp. 46-8. Large, J. (2000), ‘‘ASPs join the wrangle for your business’’, Corporate Finance, Supplement: Unlock Value with Integrated Systems, pp. 14-15. McCrea, B. (2000), ‘‘Want to get your catalog online? Try an ASP’’, Industrial Distribution, Vol. 89 No. 9, September, pp. E20-E21. Mack, A.M. (2000), ‘‘2Roam, iwon ink deal for wireless delivery’’, Adweek, Vol. 41 No. 37, p. 59. Marlin, S. (2000), ‘‘Huntington offers banks seamless integration’’, Bank Systems & Technology, Vol. 37 No. 7, July, pp. 22-4. Martin, M. (2000), ‘‘Don’t overlook security in ASP selection process’’, Network World, Vol. 17 No. 38, 18 September, p. 48.

Mayu, M. (2000), ‘‘Telecom turns ASP’’, American Printer, Vol. 225 No. 5, August, pp. 42-3. Messmer, E. (2000), ‘‘ASP aims to simplify hiring of temps, contractors’’, Network World, Vol. 17 No. 39, 25 September, p. 80. Passmore, D. (2000), ‘‘Whatever happened to QOS?’’, Business Communications Review, Vol. 30 No. 8, August, pp. 18-20. Pincince, T. (1998), ‘‘Head to head: are VPNs ready for prime time? – yes, for remote access . . .’’, Network World, Vol. 15 No. 21, 25 May, p. 43. Rogers, A. (2000), ‘‘Turning small bricks into big clicks’’, Computer Reseller News, No. 908, 21 August, pp. 70-4. Sullivan, T. (2000), ‘‘Merant takes ASP approach to application development’’, InfoWorld, Vol. 22 No. 38, 18 September, p. 22. Trembly, A.C. (2000), ‘‘Critical applications on the Net? Beam me up!’’, National Underwriter, Edition: Property and casualty/risk and benefits management, Vol. 104 No. 32, 7 August, pp. 9-10. Weil, M. (2000), ‘‘Beyond transactions’’, Manufacturing Systems, Vol. 18 No. 9, September, pp. 52-62. Young, D. (2000), ‘‘The information store’’, Wireless Review, Vol. 17 No. 18, 15 September, pp. 42-50.

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Delivering enterprise resource planning systems through application service providers Yamaya Ekanayaka Wendy L. Currie and Phil Seltsikas The authors Yamaya Ekanayaka is a Research Associate, Wendy L. Currie is a Professor and Director, and Phil Seltsikas is a Lecturer, all based at the Centre for Strategic Information Systems, Department of Information Systems and Computing, Brunel University, Uxbridge, UK. Keywords Service, Resources, Planning, Outsourcing Abstract This paper presents research findings from an in-depth study on the global application service provider (ASP) industry. It explores the potential for Web-enabling enterprise resource planning (ERP) systems for small and medium-sized companies on a per-seat, per-month basis. Findings from field research suggest that, while the ASP business model offers many advantages for customers, few companies are prepared to outsource their missioncritical ERP systems to ASPs. This situation has led to many large and small ASP vendors to re-think their strategic business plans, with some high profile failures. Evaluating the situation from a market, organizational and technical analysis of the ASP industry, this paper argues that, while the ASP model is currently immature, the next three years will see the emergence of more clearly defined enterprise ASP offerings from key players in the software and computing services industry. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0957-6053.htm

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The convergence of software and IT infrastructure toward an Internet/net-centric environment has enabled the application service provider (ASP) concept to emerge (Currie and Seltsikas, 2001a). In recent years software has evolved from custom-coded, proprietary applications to pre-packaged off-the-shelf offerings and now to the development of net-centric applications. Likewise, IT infrastructure has emerged from a closed mainframe environment to distributed computing and now towards a net-centric infrastructure with the potential to link customers and suppliers. ASPs are thirdparty service firms, which deploy, manage and remotely host software applications through centrally located services in a rental or lease agreement. ASPs are important for those researching into IT strategy and outsourcing practice, since they potentially offer a new value proposition to the customer, moving away from a product-based approach to software procurement to software-as-aservice. Thus, ‘‘in contrast with traditional outsourcing, the ASP model involves renting access to core business applications over the Internet or some other network – not simply handing over operational control of your existing data centre’’ (Lauchlan, 2000, p. 29). But, for the model to work, the ASP will need to achieve economies of scale by offering a ‘‘one-to-many’’ service rather than the one-toone relationship found in traditional outsourcing. ASPs currently procure and implement software systems for their customers, many of which are non-mission critical businessrelated packages (e-mail, calendaring, travel and expenses modules, etc.). However, ASPs have ambitions to provide customers with a comprehensive alternative to building and managing internal information technology operations through the provision of complex enterprise resource planning (ERP) systems. The main advantage for the vendor will be to develop new business opportunities with small and medium-sized companies. For the customer, access to enterprise software at an affordable rate will enhance efficiency through re-engineering business processes and operations. Applications outsourcing of ERP systems to ASPs is suggested by some pundits as the way forward for small and medium enterprises, although key questions

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arise as to whether this business model will succeed in the short to medium term, if at all. IT outsourcing is defined as a contract which calls for vendors to provide resources for a monetary fee, that are then deployed under the buyer’s management and control (Willcocks and Lester, 1996). Demand for IT outsourcing, systems consulting and integration services has increased in recent years due to the changes in deregulation, globalisation and mergers and acquisitions taking place in organizations (Currie, 2000). In the 1980s and 1990s, IT outsourcing tended to proliferate for a variety of complex political, economic and technical reasons (Loh and Venkatraman, 1992). As outsourcing continued to gain momentum, there were concerns that small and medium companies, with low IT budgets, were unable to reap the benefits afforded to their larger counterparts (McLellan et al., 1995). ERP systems were only affordable to customers with large IT budgets, who would purchase several modules on a company-wide scale (Holland and Light, 1999). But, as the Internet offers new possibilities for software companies, novel business opportunities are being presented to enable small and medium companies to participate in e-business (Siebel, 2001). This paper is divided into four sections. The first section discusses a five-year research programme on e-business, focusing in particular on the development of application outsourcing through ASPs. This research is funded by grants from the European Union, the Engineering and Physical Sciences Research Council (EPSRC) and the Economic and Social Research Council (ESRC). The second section gives an overview of the evolution of the ASP model. Here the authors present a taxonomy of different ASPs, though it is outside the scope of the project to discuss all of them. The third section focuses on implementing traditional (non-Web-enabled) ERP systems and some of the problems associated with this delivery method. The fourth section discusses the marketing strategies used by enterprise ASPs in reaching small and medium companies. Here, the challenges facing the enterprise ASPs are highlighted. The paper concludes by reflecting on the challenges facing major ERP companies and the third-party solutions that are competing in the enterprise market.

The research study Against a background of the changes in IT outsourcing in the last four decades, a research study was developed to compare and contrast traditional outsourcing practices with the recent phenomenon of application outsourcing via ASPs. While much of the previous academic research has focused on the client-side of IT outsourcing, with particular emphasis on identifying success and failure scenarios through case study analysis, this research study was designed to explore the supply-side of IT outsourcing, using ASPs for two reasons. First, the supplyside of IT outsourcing remains underresearched in the academic literature. Yet a deeper knowledge of client strategies and outcomes of IT outsourcing may only be gained through an understanding of how IT vendors, together with their channel partners, develop and define their IT outsourcing business. Second, the emerging ASP industry, currently vendor-driven with few customers adopting ASP solutions, is a phenomenon which may have significant implications for global IT outsourcing policy and practice, particularly as Web-enabled or remote outsourcing contracts may be more difficult to manage and control. While the use of ERP systems is not always placed within an outsourcing context, initial field research into the ASP industry showed that it comprised many different service offerings, from vanilla (de-scoped) ERP applications (from SAP, J.D. Edwards and others) to non-mission critical, businessfocused applications (e.g. accounting packages, travel and expenses, HR applications, etc.). In this paper, we focus on how the vendors are attempting to sell enterprise ASP solutions. Research methodology The research study is an empirical investigation into software and computing companies offering ASP services in the USA and Europe. An inductive-descriptive approach is used with fieldwork continuing over a five-year period, beginning in July 1999. The first phase of the fieldwork was conducted in Silicon Valley, California and in the UK. Fieldwork into a range of established and start-up companies elicited responses from key personnel responsible for developing an ASP strategy. A semi-structured

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questionnaire was used to elicit data and information on the three key themes outlined in Table I. The interviewees in most cases were founding members, CEOs and senior managers responsible for developing ASP strategies and services within their own organizations. Job titles of interviewees have included: CEO, CIO, COO, director of technology, business development director/ manager, chief operating officer, VP, European and Asian operations, marketing director, product marketing manager, technology strategist. Interviews lasted between one and three hours and were taperecorded. An ASP taxonomy was developed, as it became apparent that the scale and scope of ASP offerings were wide in terms of market opportunity, company size, applications requirements, complexity of solution, integration and security issues. However, even the sub-division of the ASP industry into a taxonomy (enterprise, horizontal, vertical, pure-play and enabler) was merely an exercise in classification rather than one designed to pin-point similarities or dissimilarities both between and within different types. Rather, the benefit of using the ASP taxonomy was to recognize the inherent complexity of the ASP model, with each type of ASP pursuing strategic alliances, channel partnering and market opportunities relevant to its own position within the ASP industry. The evaluation of different ASP business models was divided into four broad categories of delivery, integration, management and

operations and enablement which are used by the ASP Industry Consortium in their ASPire Awards programme. The performance criteria may vary across different ASP types, with data security being a major priority where ERP applications are delivered by enterprise ASPs, and time-to-market the major priority where e-mail and calendaring applications are delivered to start-ups by pure-play ASPs. Clearly, case studies were likely to generate data and information on varying quality and detail on each of the three themes, the types of ASP business models adopted, and the evaluation criteria. This was not seen as problematic, as the interviews with a range of companies were intended to generate rich and meaningful insights into the emerging ASP industry rather than provide definitive answers to complex questions.

ASP business model An ASP is a firm which ‘‘manages and delivers application capabilities to multiple entities from datacentres across a wide area network’’ (Currie and Seltsikas, 2001b). An ASP may be a commercial entity, providing a paid service to customers or, conversely, a not-for-profit or a government organization supporting end-users. To some extent, the ASP concept revisits the service bureau model of the 1960s and 1970s, which were preceded the large-scale IT outsourcing contracts of the 1980s and 1990s. But the service bureau

Table I Key themes in the emerging ASP business model Key themes

Types of ASP business models Evaluation of ASP business models

Three waves of IT outsourcing Traditional outsourcing Enterprise outsourcing Application outsourcing

Outsourcing versus insourcing Core competency debate Economics of IT outsourcing IT skill shortages

Taxonomy of ASPs

Strategic alliances Channel partnering Market opportunities (vertical and horizontal) Cross-national comparisons

Performance criteria for ASPs

Enterprise ASPs Pure-play ASPs Vertical ASPs Horizontal ASPs ASP enablers Delivery Integration Management and operations Enablement

Source: Currie and Seltsikas (2001a)

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Customer satisfaction, time-to-market Pricing models Reliability, availability and scalability Data security Service level monitoring Bandwidth requirements

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model was limited in the scale and scope of software applications it provided customers, and proved to be relatively expensive to small and medium companies with limited IT budgets and infrastructure capabilities. ASP solutions, on the other hand, are applicationscentric, which means that the core value of ASPs is to provide access to, and management of, an application that is commercially available. ASPs ‘‘sell’’ application access to customers. Through application hosting, ASPs claim to remove the burden of day-to-day IT management by assuming total responsibility for application delivery, updates and ongoing maintenance and support. This ‘‘third wave IT outsourcing’’ typically means that the end user organizations are charged a fixed, monthly fee based on application usage and services offered. These applications are managed in a central location rather than at the customer site. Customers, therefore, access the applications remotely through the Internet or via leased lines. The ASP offering is designed to be a oneto-many solution (limited or no customisation) to enable ASPs and their customers to achieve economies of scale, and thus cost savings. But the ASP solution in the context of ERP is potentially complex, since it requires the integration of a range of business processes in addition to the expertise from suppliers, such as the ASP vendor, an independent software vendor (ISV), a data centre or co-locator, a systems integrator, a management consultancy, a networking company, and possibly a telco (Seltsikas and Currie, 2002). So, in order to offer an end-toend solution, an ASP has to partner with other vendors who are able to provide the necessary resources and expertise. Having provided such a comprehensive solution, the ASP hopes to retain its position as the single point of contact beween itself and the customer. An overview of the ASP industry prior to the dot.com shake-out of 2000-2001 showed that there were many different types of ASPs. At the high end of the ASP market, enterprise ASPs were establishing relationships with ERP vendors to offer enterprise solutions. For example, Corio and USInternetworking (both based in the USA) were offering enterpriseclass software services to small and mediumsized organizations. This was in addition to the big-five ERP vendors (J.D. Edwards,

Baan, Oracle, Peoplesoft, and SAP) also offering Web-enabled ERP solutions. Other ASP carved out a specialist niche to offer software applications to vertical markets, such as education (e.g. Learningstation.com) or health care (Trizetto). Placing these offerings in the context of different market, business and technical drivers, suggests that benefits would be afforded to large, medium and small companies at varying degrees, and possibly dependent on size of investment in the ASP solution (see Table II). For example, it is unlikely that a small company would achieve total cost of ownership (TCO) benefits from an ASP, given that its investment in IT infrastructure and applications would be low anyway. This was found to be the case by one large ASP vendor, who subsequently found that it was inappropriate to justify the benefits of the ASP solution on the grounds of TCO reduction. As the business development manager said, ‘‘Most SMEs spend under £200,000 on their IT, so TCO is not appropriate’’. This company then moved to using flexibility and ease of use as two key ASP benefits, before subsequently closing its ASP business at the end of 2001 due to low customer up-take. Along with the hype surrounding the development and deployment of e-business solutions, ASP vendors initially promoted the above market, business, and technical drivers to help sell their solutions (Cherry Tree Spotlight Report, 2000). Gartner Group claimed that application outsourcing could reduce TCO by 50 percent or more (for large and medium-sized companies). But perhaps the most attractive potential benefit from ASP solutions was the rapid access to a range of different software applications at low cost. ASP vendors argued that, since most start-up companies, which were mostly dot-coms, did not have access to large financial resources, with little or no IT infrastructure, they would benefit from this one-stop-shop form of outsourcing. Yet the dot.com shake-out from 2000 onwards had a negative impact on the ASP industry, with many start-up ASPs going out of business due to thin business plans and the failure to secure second-round venture capital. Like the rhetoric supporting traditional IT Outsourcing, ASPs are perceived to allow the customer to focus on their core competencies (Prahalad and Hamel, 1990). As the vendors suggest, the provision of an end-to-end

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Table II Key drivers of the ASP market Market drivers

Business drivers

Technical drivers

Global competition Faster time to market Global IT skill shortage Deregulation, consolidation and standardisation

Focus on core competencies Minimise total cost of ownership (TCO) Predictability of cash-flow and lower up-front investment Agility and flexibility Improved efficiency in internal IT staff

Access to technical expertise Reduced technological obsolescence Utilisation of ‘‘best-of-breed’’ applications Accelerated deployment Turnkey solutions Ability to scale rapidly Easier upgrade cycles Viable solution for a mobile/distributed workforce

solution allows the customer to outsource the procurement of the software application, the licence, data centre maintenance, the management of the software implementation and some integration activities. Other benefits are linked to the global information technology skill shortage. Acquiring and retaining skilled IT employees is a problem for most companies, but more so for those small and medium which are unable to match high IT salary scales offered by large companies. The ASP solution suggests that companies will benefit from economies of skill, as ASPs provide a packaged solution to their customers on a pay-as-you-go basis. The current pricing-model of ASPs provides a predictable cash-flow, because the pricing is typically based on the number of users or seats per month. Reliability, scalability and availability (RAS) are also promoted by ASPs as key benefits, which align with other e-business solutions. The extent to which these market, business and technical drivers have penetrated the potential customer market for ASP solutions is an important dimension of this research programme.

Taxonomy of ASPs A taxonomy was developed to classify different types of ASP offering (see Figure 1). In general, four distinct types of ASPs emerged to provide enterprise, pure-play, vertical, and horizontal solutions to customers. Enterprise ASPs were usually start-up companies which were forging links with large ERP vendors such as SAP, Siebel, Peoplesoft, Baan (now Invensys) and J.D. Edwards. Two such ASPs are Corio and USInternetworking. A typical enterprise ASP offers an end-to-end solution which is integrated, built around applications

Figure 1 A taxonomy of ASPs

extending from front-end to back-end operations. This led to all the major ERP vendors setting up their own direct channel (e.g. mySAP.com from SAP, e-Center from Peoplesoft, and Oracle.com from Oracle). A second category of ASP is the pure play. These companies offer ASP solutions, which are Web-enabled. Pure play ASPs offer horizontal applications or point solutions to their customers, who are typically dot.coms or other high growth start-ups. Pure-play companies target customers, which have minimum legacy systems to avoid integration issues. In short, the pure-play solution is usually offered by an ASP start-up for a dot.com startup or at least a small company with little or no IT infrastructure. The pure-play ASP is often one which wants to explore wireless or remote solutions. As such, the term WASP or wirelessASP had emerged (e.g. Aspective). Vertical ASPs have created their solutions for a specific market sector, such as health care or high-tech manufacturing. Vertical solutions can be either an enterprise solution (e.g. Aristasoft, an ASP which offers end-toend ERP and customer care products for the

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high-tech manufacturing market) or a target product offering such as The LearningStation.com offerings, which include individual education software products or teacher-productivity solutions. As Figure 1 suggests, each type of ASP is attempting to move to a position where it can provide a full service or an end-to-end solution. To do this, ASPs in all categories will need to establish strong partnerships or strategic alliances with other companies, as well as offering an application outsourcing solution which is highly attractive to the customer on the basis of cost, quality and functionality. While the antecedents of some players fall outside the ASP industry, i.e. the large ERP vendors, large software companies (Microsoft), hardware companies and telcos, these companies will play a significant part in the ASP space in the future. For the purposes of this paper, we focus on enterprise ASPs. The following discussion gives a brief overview of ERP systems before moving on to the challenges of implementing ERP systems in an ASP context.

ERP systems ERP systems that automate corporate processing such as manufacturing, accounting, and human resource management were introduced to the market in the 1980s, gaining momentum in the 1990s with numerous implementations in large companies. ERP systems are ‘‘comprehensive packaged software solutions that integrate organizational processes through shared information and data flows’’ with a market forecast to grow to $21 billion by 2004 (Shanks and Seddon, 2000). The ability to reduce the costs of operational systems and the ability to integrate applications which inevitably allow for more efficiency are major justifications for adopting ERP systems (Sumner, 2000). Presently JBOPS[1] companies own major shares in the ERP market and in 1998 approximately 40 percent of companies with annual revenues over $1 billion had implemented ERP systems (Caldwell and Stein, 1998). However, the late 1990s saw a downturn in the global ERP marketplace, with revenues falling significantly. This was attributed to the Y2K problem, which led to companies spending vast amounts of their IT budgets

often to tackle often perceived rather than real problems. As such, IT budgets were re-focused away from ERP investment and upgrades (Markus et al., 2000). Other reasons saw a saturation in the high-end ERP market, coupled with many large ERP customers moving towards e-business solutions other than ERP systems (Kremers and Dissel, 2000). To some extent, ASPs were part of this distraction, as many formed to offer vanilla ERP solutions to the mid-sized market (Marti et al., 2000).

Problems associated ERP systems implementation Despite the advantages offered by ERP systems, empirical evidence suggests that there are many instances where organizations have abandoned the implementation process or eventually had to stop using the systems. For example, Dell Computer Corporation intended to implement SAP R/3 (an ERP application), but this was abandoned, as the CIO claimed that the software was unable to keep pace with Dell’s extraordinary growth rate (Slater, 1999). Other organizations have failed in their attempt to install ERP systems (Bulkeley, 1996). According to KPMG, many have failed to achieve the financial gains they expected. Implementing ERP systems involves huge costs. For example, SAP installation for a Fortune 500 company costs about $30 million in licence fees and $200 million in professional services (Marti et al., 2000). According to Berger (1998) the ERP implementation costs and related services (mainly consultancy) could incure around five to seven times the cost of the licence fee. Retaining experienced staff is another major issue encountered by some companies which have adopted ERP systems (Adam and O’Doherty, 2000; Sumner, 2000). This is because there is a tendency for staff with experience in using ERP systems to be poached by competitors. On the technical side, many companies have encountered problems related to integration. At the basic level, ERP software has to be integrated with the platform on which it will run. This process could be complex, since there might be problems due to incompatibilities with different systems. For example, the hardware and the operating system might not support

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the ERP software. Another major challenge is to integrate existing legacy systems and other applications with the ERP system to provide a common interface. Also, to a certain extent ERP software imposes its own logic on company strategy, organization and the culture (Davenport, 1998). In addition, the use of vendor-developed ‘‘best practices’’ could cause many mismatches and create considerable implementation and adaptation problems and customers have to change their business processes to fit with the ERP suite rather than the other way round (Kumar and Hillegersberg, 2000). Since many ERP vendors update the versions of software regularly, companies have to migrate to new systems prior to getting used to the existing version. Migrations are considered to be a timeconsuming and costly process and things could be worse, if organizations have made modifications to the existing software (AberdeenGroup, 2001). Taking all these factors into consideration, three questions arise regarding the development and deployment of ERP systems by ASPs. First, what are the target customer markets for enterprise ASP offerings? Second, how will existing ERP-related problems be overcome for customers adopting Web-enabled ERP solutions? Third, what are the significant benefits and risks from enterprise ASPs? These questions will be answered to some extent in the next section which explores the phenomenon of enterprise ASPs.

Enterprise ASPs In recent years, ERP systems have focused on areas like supply change management (SCM), customer relationship management (CRM) and electronic marketplace software (Shanks and Seddon, 2000). The thrust towards e-business has fuelled the growth of these applications, especially for the mid-market (Kumar and Hillegersberg, 2000). ERP vendors have all focused their attention on developing the ASP business model to provide enterprise solutions to the untapped SME market. Given that revenues from their large customers have been slowing down from the late 1990s into the twenty-first century, new customers are sought. However, the SME market is diverse in both scale and scope. Notwithstanding this, ERP vendors

have opined that vanilla ERP offerings will be attractive to SMEs, because they will gain access to best of breed ERP solutions without having to pay large up-front software licence, installation and maintenance costs. Throughout the late 1990s and early 2000s, the JBOPS companies launched a number of initiatives designed to capitalise on the application outsourcing model. Two distinct strategies emerged to enable ERP companies to enter the ASP market. First, ERP software would be delivered through third-party ASPs like USi, Corio, and Aristasoft. These companies would take an enterprise solution and offer it direct to customers. In the case of Aristasoft, the J.D. Edwards ERP software would be offered to customers in the hightech equipment manufacturing area. Aristasoft (a vertical ASP) would provide the market sector knowledge and, coupled with the ERP software, the customer would receive a powerful enterprise solution. Second, ERP companies began to host their own solutions. For example, PeopleSoft’s e-Center and Oracle’s Business Online which was launched in 2000[2]. Oracle also provides software through its ASP partners Agilera and Interliant. This is a major trend in Oracle’s ASP strategy, as it has moved away from serving its customers through third parties only, to hosting its own e-business suite. Oracle claims to provide a 100 per cent ASP solution with Oracle-managed infrastructure and Oracle applications through its internal service. Another major ERP vendor, SAP, offers SAP solutions through ASPs such as Corio, eOnline as well as hosting SAP solutions through its own mySAP.com, which was launched in 1999. It covers generic solutions, where it claims that customers can achieve usage in as few as ten days. Electronic Data Systems Corporation (EDS) and HewlettPackard (HP) are the preferred data centre providers for SAP hosting. They provide data centre operations, infrastructure services, telecommunications and a full range of complementary systems including the integration of legacy systems. PeopleSoft, another ERP company, which specialises in human resources applications, also launched its internal ASP offering eCenter, while also serving customers through third-party ASPs such as USi and Agilera. Even though some ERP companies deliver Internet-enabled applications, which are not specifically

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designed for the Web, e-Center offerings are developed specifically for Web delivery. PeopleSoft has partnered with Exodus for data centre operations. Table III gives a breakdown of the JBOPS companies in terms of their ERP market share, annual revenues and ASP offerings.

Third-party enterprise ASPs ASPs like USi, Corio, Interliant specialise in delivering best of breed applications for the customer. As mentioned earlier, these companies act as value added resellers (VARs) for the ERP companies. USi delivers applications of Siebel, Oracle, and PeopleSoft, while Corio delivers applications of PeopleSoft and SAP. Apart from delivering ERP software, they provide an array of offerings including e-business, e-procurement, desktop applications which belong to different vendors. Typically, these companies pay a licence fee in order to acquire software from the developers of software. Like most ASPs these companies have made several partnerships and acquisitions in recent months. The trend among best-ofbreed companies is to acquire companies with

domain expertise in implementing ERP applications and other applications delivered by them. For example, while Interliant acquired PeopleSoft integrator Soft Link, USi has acquired Conklin and Conklin, a system integration firm that specializes in implementing Lawson software (Cherry Tree Spotlight Report, 2000). These partnerships are seen as a primary way of acquiring the skills needed to compete in the ASP industry. Table IV represents some of the applications delivered by the best-of-breed solution providers.

Challenges for enterprise ASPs Research into the development and delivery of enterprise ASP offerings by ERP vendors and ASPs themselves has demonstrated some major problems (Seltsikas and Currie, 2002), which are not dissimilar from the challenges highlighted by other researchers (Sumner, 2000; Markus et al., 2000). Field research conducted with over 40 ASP suppliers and customers has shown that, whereas many customers are willing to adopt ASP solutions for non-mission-critical software applications, they are reluctant to invest in Web-enabled ERP solutions, especially for their mission-

Table III JBOPS companies’ ASP solutions J.D. Edwards Age 1977 ERP market share (%) – 1999 5 Annual revenue 1998 ($B) 1.1 ASP business (direct Formerly JDE.Sourcing hosting initiative)

BAANa

Oracle

PeopleSoft

SAP

1978

1977

1987

1972

3 0.743

14 2.1 Formerly Business Online(renamed Oracle.com) Internet procurement, supply chain management, sales, financials, business intelligence, human resource/PR, marketing

7 1.3 e-Center

30 5.1 MySAP.com

ASP solutions

Supply chain, ERP, CRM, supply knowledge chain, e-business, management, logistics procurement, enterprise management, trading, community support, interoperability tools

ASP partners

Agilera, Aristasoft, Aretech

Several third-party providers located throughout USA, Canada, Europe etc.

Interliant, Agilera, USI

6,000

7,000

7,100

Number of customers (1998/1999) a

Note: A business unit of Invensys plc from September 2000

199

Human resource management, business intelligence, supply chain applications, customer relationship management, B2B procurement solutions

Financial management, human resource, manufacturing functions, customer relationship management, online procurement, supply chain management Accenture, Agilera, USI Corio, eOnline, Qwest, Cyber Solutions

4,600

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Table IV Best of breed providers’ third-party solutions USInternetworking Years offering ASP services (as of February 2001) 1999 ASP revenue ($ million) No. of ASP customers Third-party solutions

Corio

Interlianta

3 21.7 187 Siebel – customer relationship management, Ariba – e-procurement, Broadbase – analytics product extensions, Broadvision – e-business, Lawson – HR, financials, SCM, e-procurement, e-commerce, Microsoft – e-commerce, exchange, site server and SQL server, Niku – professional services automation, Oracle – database, PeopleSoft – financials, HR, Sagent – data warehousing, Sielbe – CRM

2.5 0.7 72 PeopleSoft – financial management, HR, Distribution CommerceOne – e-procurement, Cognos – business intelligence, Broadvision – e-business, Siebel – customer relationship management, Flexitronics International – manufacturing, SAP – manufacturing and accelerated e-shop

5 11.3 900 PeopleSoft – HR, financial management, Oracle – e-business suite, ERP, CRM messaging – Microsoft Exchange, Hosting – IBM WebSphere commerce suite and WebSphere application server software solutions

Note: a Interliant recently merged with Resource Partner Source: Cherry Tree & Co., www.informationweek.com and company Web sites

critical business processes (see Table V). One IT director at a large chemical company, who recently investigated the prospect of adopting a CRM application, said: The vendors are playing all sorts of tricks right now. One vendor said that we could use an ASP solution, if we bought more software licences from them. This sounded attractive at first, but they told us that they wanted named users. This would mean that we would have to pay much more and I was not sure how useful the ASP solution would be anyway.

Notwithstanding the business case for remote delivery of applications as a business benefit,

many companies remained concerned about data security and availability of applications. Clearly, non-mission-critical data were not a major consideration. But important data relating to customer accounts and sales forecasts were a key concern of potential ASP customers (Ring, 2000). Many questions remain about the suitability of the ASP model regarding the hosting of mission-critical applications. So far, the targeting of SMEs has not met with as much success as some would have hoped. Delivering ERP applications is more difficult than other

Table V Key challenges and issues of the enterprise ASP market Theme

Challenges and issues

Market/cultural

Too few customer reference sites for enterprise ASPs Fears about data security ERP vendors have little experience of SME market Different selling approach to SMEs Confusing array of ASP offerings, creating channel conflicts

Organizational

SMEs have little or no experience of ERP systems Difficult to identify key ‘‘contact’’ person in SME (e.g. management accountant may run IT) Management do not understand ASP business model Technical/IT personnel Existing technical infrastructure adequate IT staff engaged in troubleshooting not strategy ERP too complex Cost

TCO not appropriate for SME Enterprise ASP too expensive Low IT budget Unwilling to upgrade existing IT infrastructure/applications

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applications. Some of these complications may be due to the delivery of applications, which are not developed purely for Web delivery. This is because most hosted ERP applications delivered by most ASPs are Web-enabled applications designed for client/ server systems. By setting up online ASP business, ERP vendors are developing Web-enabled software solutions for the SME marketplace. Empirical research conducted by the authors has shown that the mid-sized market (companies with over 500 employees) are more likely to adopt an ERP solution than their smaller counterparts. Moreover, little revenue will be acquired from serving the small company marketplace, especially since companies do require some level of customisation. Field research with potential customers has found that many require between 5 and 10 per cent of customisation, especially if they are to consider an ERP solution. Unfortunately, the ERP vendors wishing to serve the SME market are reluctant to customise software applications, as this would severely affect profit margins. There are a variety of issues facing the traditional ERP vendors in embracing the ASP concept, not least because moving to a rental or utility pricing model will significantly impact on the traditional pricing model (e.g. software + licence + maintenance + service, etc.). Such concerns are also shared by other software vendors, many of whom are currently evaluating whether the ASP model would be good for their own business. Even though large software vendors such as Oracle and PeopleSoft have decided to provide thirdparty service offerings (through USInternetworking, Corio) apart from having their own ASP offerings, how they would charge for licensing costs (which are very high) for the third-party providers is a concern of customers. If JBOPS software companies demanded high licensing costs from third-party enterprise ASPs, the economic advantage of using the service through these companies may be considerably reduced. Up to now, the take-up of ERP applications has not been as high as was expected. This was one of the reasons which led to the termination of JDE.Sourcing, which was the internal offering of J.D. Edwards. What appears to be lacking is a strategy for educating the target customer marketplace.

While targeting vertical industries may help to increase customer know-how about the ASP business model, the majority of SMEs with little or no history of outsourcing are reluctant to embrace a business model in which they neither understand nor can identify the business benefits. As we have discussed above, implementing ERP systems requires expertise and commitment from the vendors as well as the customers. It requires much expertise which ASPs can only acquire by developing partnerships with other companies. Therefore, successful partnership management is critical to ASPs. Enterprise ASPs ideally should have integration expertise or have partnerships with SIs in order to provide a viable end-to-end solution. Even though it is economical to offer noncustomised solutions, some level of customisation will be inevitable based on the diversity of target markets. Therefore, the challenge is to create the right balance between cost and customisation. This may lead to the value-added service provided to customers through vertical ASPs, which will create a massive opportunity for ASPs adopting this approach. For the ERP vendor, ASP creates a new channel to reach customers. However, this may lead to concerns regarding ownership of customers and losing brand recognition. Reaching customers through both methods internally as well as through third parties may lead to channel conflicts (Currie and Seltsikas, 2000). ASP business needs huge investment. Developing a strategic differentiation strategy is critical for enterprise ASPs, especially if they provide software from a large company which already sells direct to the customer.

Discussion and conclusion The ASP model brings many challenges to best of breed providers as well as ERP companies. Making a successful transition from the traditional model to the hosted model requires developing, deploying and managing software applications costeffectively. Determining the best pricing strategy for the ASP model, developing new delivery mechanisms to reach the end customer, surviving the market transition with brand strength, overcoming channel conflicts are some of the issues faced by ERP

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companies entering the ASP industry. However, ERP vendors need to develop strategies for entering the ASP market, which are different from those used to serve the larger customer. Developing and deploying an ASP solution requires the seamless integration of several skills and resources mostly acquired through external partners. Even though software companies have the capabilities of providing expertise related to the provision of software solutions, entry into the ASP market must convince the potential customer of the value added benefits which are over and above just another delivery mode for their software applications. Vendors should carefully consider the capabilities needed to host enterprise solutions. For a successful ASP strategy, partnership management is critical, as there are several partners who contribute to the seamless integration of the end delivery. ASPs should carefully evaluate the capabilities of companies before forming partnerships with them. The lessons of the early twenty-first century have been more about failure than success in the ASP model. Not only have many start-up ASPs gone out of business, but even large ERP vendors have changed their ASP business strategies almost overnight. Some have moved from using a channel approach to a direct approach, while others have opted for the reverse. Such actions have only further confused the customer marketplace, as high profile ASP failures have convinced many that the ASP business model is still too immature to be taken seriously. In addition, many of the customers of failed ASPs have been left pondering why they did not develop an appropriate ‘‘exit strategy’’ as a contingency, if/when their ASP supplier goes into liquidation. While this research study has found the enterprise ASP market deficient in many respects, the authors argue that part of the problem is market immaturity rather than a terminal problem with the ASP model itself. Like all new business models, the ASP model is in many way similar to its parent, the service bureau model of the 1970s. However, the potential scale and scope of the ASP model are more complex and challenging. Such challenges cannot simply be met with a ‘‘quick-fix’’ business or technical solution. Rather, to develop and deploy enterprise ASP solutions will take time and patience and will

be fraught with many difficulties. Much of the success will only occur when potential customers gradually migrate to the ASP business model rather than adopt a dual approach of trying to integrate legacy with Web-enabled systems. Over time, as companies adopt more remote software applications, notably for their non-missioncritical activities, and realise business benefits by so doing, they will then adopt more sophisticated software applications, largely from a vendor with some experience and credibility within the industry. At this stage, it is too early to predict the market conditions in three years’ time. However, suffice it to say that the ASP will continue to undergo a major shake-out, with many established ERP companies forming relationships and taking over other companies (e.g. vertical ASPs, VARs, SIs, etc.). While it is unlikely that many ASPs will survive, the large companies may be able to offer real economies of scale to SMEs, although this market will be restricted by the IT budgets, capabilities and requirements of the customer base rather than the business and technical advantages offered by the ASP model.

Notes 1 JBOPS is an acronym comprising the first letter of the following companies: J.D. Edwards, Baan, Oracle, Peoplesoft and SAP. 2 Business Online was renamed Oracle.com during the first quarter of 2001.

References AberdeenGroup (2001), ‘‘The perils of customisation in enterprise software: don’t let your desire to be unique damage your bottom line, White Paper, available at: www.oracle.com (accessed July). Adam, F. and O’Doherty, P. (2000), ‘‘Lessons from enterprise resource planning implementations in Ireland – towards smaller and shorter ERP projects’’, Journal of Information Technology, Vol. 15 No. 4, pp. 305-16. Berger, P. (1998), ‘‘PGI: les services valent cher’’, Le Monde Informatique, 25 September, pp. 760-79. Bulkeley, W.M. (1996), ‘‘A cautionary network tale: FoxMeyer’s high-tech gamble’’, Wall Street Journal Interactive Edition, 18 November. Caldwell, B. and Stein, T. (1998), ‘‘New IT agenda’’, Information Week, 30 November, pp. 30-8. Cherry Tree Spotlight Report (2000), ‘‘Framing the IT services industry: 2nd generation ASPs’’, September, available at: www.cherrytreeco.com

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Currie, W.L. (2000), ‘‘Expanding IS outsourcing services through application service providers’’, Executive Working Paper Series, Centre for Strategic Information Systems, Department of Information Systems, Brunel University, Bristol. Currie, W.L. and Seltsikas, P. (2000), ‘‘Evaluating the application service provider (ASP) business model’’, Executive Working Paper Series, Centre for Strategic Information Systems, Department of Information Systems, Brunel University, Bristol. Currie, W.L. and Seltsikas, P. (2001a), ‘‘Exploring the supply-side of IT outsourcing: evaluating the emerging role of application service providers’’, European Journal of Information Systems, Vol. 10, pp. 123-34. Currie, W.L. and Seltsikas, P. (2001b), ‘‘Delivering business-critical information systems through application service providers: the need for a market segmentation strategy’’, International Journal of Innovation Management, Vol. 5 No. 3, pp. 323-49. Davenport, T.H. (1998), ‘‘Putting the enterprise into the enterprise system’’, Harvard Business Review, July-August, pp. 121-31. Holland, C. and Light, B. (1999), ‘‘A critical success factors model for enterprise resource planning implementation’’, IEEE Software, Vol. 16 No. 3, May-June, pp. 30-5. Kremers, M. and Dissel, H. (2000), ‘‘ERP systems migrations’’, Communications of the ACM, Vol. 43 No. 4, pp. 53-6. Kumar, K. and Hillegersberg, J. (2000), ‘‘ERP experiences and evolution’’, Communications of the ACM, Vol. 43 No. 4, pp. 23-6. Lauchlan, S. (2000), ‘‘ASPs: are you ready to play?’’, Computing, 3 February, p. 29. Loh, L. and Venkatraman, N. (1992), ‘‘Diffusion of information technology outsourcing: influence sources and the Kodak effect’’, Information Systems Research, Vol. 4 No. 3, pp. 334-58. McLellan, K., Marcolin, B. and Beamish, P. (1995), ‘‘Financial and strategic motivations behind IS outsourcing’’, Journal of Information Technology, Vol. 10 No. 4, pp. 299-321. Markus, L., Axline, S., Petrie, D. and Tanis, C. (2000), ‘‘Learning from adopters’ experience with ERP: problems encountered and success achieved’’, Journal of Information Technology, Vol. 15 No. 4, pp. 245-65. Marti, E., Saloner, G. and Spence, M. (2000), SAP and the Online Procurement Market, Graduate School of Business, Stanford University Publication. Prahalad, C. and Hamel, G. (1990), ‘‘The core competencies of the corporation’’, Harvard Business Review, Vol. 68 No. 3, pp. 79-91. Ring. K. (2000), European Market Research: A Report to the ASP Industry Consortium, Ovum, March. Seltsikas, P. and Currie, W. (2002), ‘‘Application service provision: the challenge of integration’’, Hawaii

International Conference on Systems Sciences, Hawaii, 6-11 January. Shanks, G. and Seddon, P. (2000), ‘‘Enterprise resource planning (ERP) systems’’, Editorial, Journal of Information Technology, Vol. 15, pp. 243-4. Siebel, T.M. (2001), Taking Care of eBusiness, Doubleday Books. Slater, D. (1999), ‘‘An ERP package for you . . . and you . . . and . . . you . . . and even you’’, CIO Magazine, 15 February. Sumner, M. (2000), ‘‘Risk factors in enterprise-wide/ERP projects’’, Journal of Information Technology, Vol. 15 No. 4, pp. 317-27. Willcocks, L. and Lester, S. (1996), ‘‘Beyond the IT productivity paradox’’, European Management Journal, Vol. 14 No. 3, pp. 279-90.

Further reading Avital, M. and Vandenbosch, B. (2000), ‘‘SAP implementation and Metalica: an organizational drama in two acts’’, Journal of Information Technology, Vol. 15 No. 3, pp. 183-94. Currie, W.L. and Seltsikas, P. (2001c), ‘‘A market segmentation strategy for developing an ASP business’’, Proceedings of the International Conference of Information Systems, Bayreuth, Germany, 22-23 June. Gupta, A. (2000), ‘‘Enterprise resource planning: the emerging organizational value systems’’, Industrial & Management Data Systems, Vol. 100 No. 3, pp. 114-18. Leintz, B.P. and Swanson, E.B. (1980), Software Maintenance Management: A Study of the Maintenance of Computer Application Software in 487 Data-Processing Organizations, AddisonWesley, Reading, MA. McKenney, J.L., Copeland, D.C. and Mason, R.O. (1995), Waves of Change: Business Evolution through Information Technology, Harvard Business School Press, Boston, MA. Markus, L. and Tanis, C. (1999), ‘‘The enterprise systems experience – from adoption to success to appeared’’, in Zmud, R.W. (Ed.), Framing the domains of IT Research: Glimpsing the Future through the Past, Pinnaflex Educational Resources, Cincinnati, OH. Parr, A. and Shanks, G. (2000), ‘‘A model of ERP project implementation’’, Journal of Information Technology, Vol. 15, pp. 289-303. Scheer, A. and Habermann, F. (2000), Communications of the ACM, Vol. 43 No. 4, pp. 57-61. Sprott, D. (2000), ‘‘Componentizing the enterprise application packages’’, Communications of the ACM, Vol. 43 No. 4, pp. 63-9.

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Introduction

Outsourcing opportunities for data warehousing business usage David Preston and Kathryn Brohman

The authors David Preston is a PhD Candidate and Kathryn Brohman is Assistant Professor, both in the MIS Department, University of Georgia, Athens, Georgia, USA. Keywords Data storage, Warehousing, Outsourcing, Model Abstract IIntroduces a conceptual model developed to explore outsourcing of data warehouse usage by organizations. Data warehouse business users rely on reporting, ad hoc analysis, and data-mining tools to support both operational and strategic decision making. Organizations have a vested interest in data warehousing; however, many organizations are constrained by the high costs associated with data warehouse development as well as the scarcity of complex skills required to use the data warehouse. One way to lower costs and gain access to scarce human skills is to outsource through the use of an application service provider. This paper presents the results of a theoretical evaluation conducted to explore data warehouse outsourcing of business usage (i.e. reporting, ad hoc analysis, and data mining). Results of this theoretical evaluation are summarized in a conceptual model that will be tested using field studies in future research. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0957-6053.htm

Logistics Information Management Volume 15 . Number 3 . 2002 . pp. 204–211 # MCB UP Limited . ISSN 0957-6053 DOI 10.1108/09576050210426751

The use of application service providers (ASPs) for outsourcing has exploded recently for an array of industries. Durlacher Research has indicated that the ASP market was worth $14 million at the end of 1999 (Robinson, 2000). International Data Corp. (IDC) estimated that the ASP market was worth $770 million in 2000 (Mitchell, 2001) and that the market will grow to $7.7 billion by 2002 (Dewire, 2000) and to $24 billion by 2005 (Schwartz, 2001). Numerous ‘‘pureplay’’ ASPs have emerged to capitalize on this thriving market, such as USInterworking and Corio. In addition, software vendors (e.g. SAP, Oracle, and Ariba), information technology (IT) and infrastructure firms, and management consultancies (e.g. EDS, Qwest, Exodus Communications, and KPMG) have had the vision to develop capabilities to capitalize on the ASP marketplace. There are many reasons why firms outsource their information systems, some of which include: . to eliminate internal IS support and focus on the core competencies of their business; . to employ specific skills that cannot be readily developed within the client firm; . because of dissatisfaction with the internal IS department and the chief information officer; and . to reduce costs, generate cash, and replace capital outlays with periodic payments (Smith et al., 1998). A data warehouse is a technology that requires organizations to have specific technical and analytical skills to enable development and implementation, which can cost a firm a total of $5 million to over $30 million (Power, 1998). There is a dearth of talent for the development and usage of data warehouse applications. Human resources may be the most valuable asset and the most difficult to obtain. Hence, the incentive for organizations to outsource data warehouse functions exists. The purpose of this study is to develop a conceptual model to assist organizations in deciding which functions of data warehousing will be most effectively outsourced and which functions will be more effective if managed internally.

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Outsourcing and ASPs An ASP provides a contract-based service to supply and host software and computing applications, data storage, reporting tools, upgrades, and technical support to its clients using a Web platform via the Internet or an extranet. Applications are generally leased on monthly fixed rates ranging anywhere from $9.95 to $10,000 per month (Jacobs et al., 2000). ASPs can be classified into four categories, which include: enterprise ASPs, general business ASPs, specialist ASPs, and vertical ASPs (Dewire, 2000). In this categorization, enterprise ASPs offer high-end applications that require customization and may include data warehousing, customer relationship management (CRM), and enterprise resource planning (ERP) designed for several industries. General business ASPs are relatively simple applications that require little customization and can be used in the form of a modified template for standard business applications (e.g. word-processing and spreadsheet applications). Specialist ASPs focus on a particular application niche (e.g. payroll, human resources or video conferencing) and seek to provide only this narrow service scope across industries. Specialist ASPs would need to form partnerships, if required, to provide a greater breadth of services (Woollacott, 2000). Vertical ASPs provide packaged or specialized applications for a specific industry such as the health-care, insurance or retail industry and tailor their services for that particular industry. ASPs can also be divided into a twocategory classification (vertical ASPs and horizontal ASPs) based on the degree of industry specialization. Vertical ASPs concentrate on a specific industry with services developed specifically for that industry, while horizontal ASPs might provide services to several industries without customization of its services toward a particular industry (Cone, 2000). The ASP business model has provided irresistible outsourcing opportunities for firms in an array of industries. The growth of this market has been supported by the growth of the Internet, standardization of data delivery, and the development of high speed links to the Internet (Bielski, 2001). As the organizational benefits of integrated enterprise systems (i.e. ERP systems and data

warehousing) become more evident, organizations are expected to turn to outsourcing to minimize the investment required to gain the benefits and gain access to scarce human skills. However, there are also reasons that deter organizations from outsourcing to ASPs, including a lack of trust in the ASP and the Internet and the reluctance to release data that are strategic to the firm. In addition, some firms may believe that the internal management of information systems could provide that firm with a competitive advantage and thereby do not want to give up this advantage by turning information systems over to an ASP.

Data warehousing and business users In today’s competitive environment, organizations are evolving toward a greater dependence on data to drive the development of better products and services and make more effective business decisions. Increased investment in expensive, centralized, analytical database solutions, such as a data warehouse, has demonstrated this dependence. Better operational and strategic decision making can result in cost savings, more precise marketing, development of better products and services, and improved customer satisfaction (Haley, 1998). A data warehouse has become a critical enabler for conducting business in the new economy and is key to the execution of corporate strategy, e-commerce, CRM, integrating activities internal and external to the firm, and moving to real time decision making (Wixom and Watson, 2001). A data warehouse is more complex than previous decision systems (i.e. executive support systems, decision support systems), as it integrates historical and current data from multiple departments, is timevariant, non-volatile, and has enhanced data acquisition, storage, and access functionality (Watson and Gray, 1998). There are two types of data warehouse users: technical users and business users (Haley, 1998). Technical users are responsible for the maintenance of applications that utilize the data warehouse data. Business users are those individuals who use specific applications of the data warehouse and are most often from finance and marketing departments, as opposed to IS departments (Sakaguchi and Frolick, 1997).

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Business users typically use three types of data warehouse applications: reporting, ad hoc analysis, and data mining (Edelstein, 1998; Silver, 1991). Reporting applications are used to generate standard reports used to support day-to-day, operational decision making. Ad hoc analysis and data mining are used to support strategic decision making. Ad hoc analysis is deductive, since the user applies paradigm- or model-specific knowledge to analyze the data. Data mining is inductive, enabled by multi-dimensional query and intelligent algorithms used for bottom-up discovery-driven data extraction and analysis (Steiger, 1998). With two distinct types of users, organizations face the challenge of acquiring a broad range of skills to successfully implement a data warehouse solution. First, technical users need to possess advanced decision support application development (i.e. coding) and maintenance skills. Data warehouse end-users require three sets of skills: technical skills, system skills, and business skills (Brohman and Parent, 2001). These skills are defined in Table I. Business users vary in their skill requirements, based on the type of data warehouse application they most commonly use. For example, business users who utilize reporting applications are most dependent on technical skills. Business users who concentrate more on ad hoc analyses and data mining need to utilize a blend of technical, systems and business skills. They utilize technical skills to find unique associations in the data and depend on systems and business skills to explain how the associations relate to

the business problem (Brohman and Parent, 2001). Of these factors, only business IT skills are rare and firm-specific and, therefore, are likely to serve as sources of sustained competitive advantage (Mata and Fuerst, 1995). Business users who have the skills to conduct ad hoc analyses effectively and data mining are scarcer than business users who utilize reporting applications.

Opportunities for outsourcing in data warehousing As the majority of Fortune 500 companies have invested in data warehouse solutions to date, data warehouse vendors are now turning their attention to small and medium-sized companies as future prospects. However, small to medium-sized organizations are constrained by the large investment required to build a data warehouse and may lack the resources required to attract skilled business users with the capability to generate value from their investment. Based on insufficient financial resources and lack of internal skills, the opportunity for data warehouse outsourcing in small and medium-sized organizations is clear. A study by International Data Corporation indicates that fewer than 5 percent of all surveyed firms currently use an ASP for hosting data warehousing or data-mining tools; however, this is expected to grow to 15 percent of businesses by the year 2005 (Depompa, 2000). This growth will occur from organizations that outsource data warehouse development and maintenance as well as

Table I Summary of end-user data warehouse skills Technical skills

System skills

Business skills

Database skills Use query packages (e.g. Microsoft Access) Write structured query language (SQL) Analyses skills Organize, cleanse, and transform data for analyses Generate graphical and financial analyses Apply statistics to build models and complete analyses Use data-mining applications (e.g. Enterprise Miner)

Problem solving General problem solving Qualitative and logical abilities Creativity

Industry experience Understand business and department strategy Ability to analyze business problems Understanding of cost benefit analysis Ability to determine feasibility and effectiveness of operational and strategic ideas

Development methodology Programming logic Systems analysis and design Data modeling

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organizations that outsource business usage of the data warehouse to support better decision making. To date, ASPs that handle datawarehousing responsibilities generally collect data, perform all necessary data warehousing functions for data integration and consistency (extraction, scrubbing, etc.) and perform online analytical processing (OLAP) data analyses. Theoretical evaluation The fundamental purpose of the theoretical evaluation is to critically analyze whether or not small to medium-sized organizations can generate benefits from outsourcing data warehouse usage to an ASP. This is the first paper to complete a theoretical evaluation of future opportunities for data warehouse outsourcing. The evaluation explores economic theories that may explain the outsourcing behavior for both ad hoc/data mining analyses and standard reporting. It also evaluates the impact of both types of outsourced business usage on three categories of outsourcing success: technological benefits, economic benefits, and strategic benefits (Grover and Cheon, 1996). Historically, there has been a lack of theory used to analyze the option of outsourcing to an ASP (Kern and Kreijger, 2000). Previous literature has incorporated several theories to explain why firms outsource IT applications including agency cost theory, resource dependence theory, resource-based theory, and transaction cost economics theory (Cheon et al., 1995; Kern and Kreijger, 2000). To insure a complete theoretical evaluation, each of these four economic theories was considered. Agency cost theory examines the reason for principal-agent relationships and problems inherent in these relationships (Jenson and Meckling, 1976). An agency relationship can be defined as a contract under which one or more persons (principals) engage another person (agent) to perform some service on their behalf, which involves delegating some decision-making authority to the agent (Eisenhardt, 1988). Agency cost theory evaluates the efficiency of contracts that govern the relationship between the principal and the agent (Eisenhardt, 1988). The choice between what contract form will be employed is contingent on agency costs, which can be assessed as the discrepancies between the

objectives of the principal and the agent (Cheon et al., 1995). Resource dependence theory focuses on the environment external to the organization and the degree of dependence the organization has on elements within this external environment (Thompson, 1967). To obtain required resources that the firm cannot develop internally, the firm must go to the external market to obtain these resources. Therefore, the firm is to some degree dependent on its external environment and on another firm to which it outsources certain functions. The outsourcer is dependent on the contract firm with regard to the following factors: scarcity of the resource, number of potential suppliers, and the cost of switching suppliers (Pfeffer and Salancik, 1978). The resource-based view of the firm is based on two assumptions: (1) Resource heterogeneity. Firms have different resources and capabilities. (2) Resource immobility. Differences in resources and capabilities may be sustainable (Barney, 1991). A firm’s competitive advantage is contingent on both resource heterogeneity and resource immobility. Resource heterogeneity can be a competitive advantage, if a resource adds value to the firm and rival firms do not possess this resource. However, resource immobility is required for a firm to have a sustainable competitive advantage (Barney, 1991). The transaction cost approach to the study of organizations has been applied at three levels of analysis: (1) the overall structure of the enterprise; (2) which functions should be performed within the firm and which should be handled outside the firm; (3) the manner in which human assets are organized (Williamson, 1981). Only the aspects of the second and third issue are addressed in this paper. Transaction cost economics is derived from three areas of research literature including economics literature, organization theory literature, and contract law literature (Williamson, 1981).

Ad hoc analyses and data mining It is difficult for ASPs to effectively run multiple applications for different customers

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on the same hardware (Hall, 2000). Hence, ASPs tend to repackage their set methods of data analyses to a multitude of firms to maintain economies of scale. When considering outsourcing of ad hoc and datamining analyses, the value of a repackaged service is called into question. Effective ad hoc and data mining analyses require the business user to have business-specific skills. This unique capability may prevent the ASP from generating value from data warehouse analyses. However, it may be possible for the ASP to develop a relationship with the organization that will enable them to develop these business-specific skills. These theoretical perspectives are explained in greater detail in the context of economicbased theories. The resource-based theory of the firm is based on the assumption that firms depend on differences in resources and capabilities to build a competitive advantage (Barney, 1991). A firm’s resources and capabilities can include the ability of a firm to conceive, implement and exploit valuable IT applications. Hence, in the context of business usage of a data warehouse, a firm is more likely to develop a competitive advantage from its data warehouse investment, if it is able to develop the complex technical, systems and business skills and sustain them in-house. A second perspective is that the ASP could develop a strategic partnership with the organization and develop the business skills required for effective ad hoc and data-mining analyses. In fact, it is reported that the nature of outsourcing has evolved from a contract relationship between the service receiver and provider to a strategic partnership (McFarlan and Nolan, 1995). A contract relationship can be defined as a ubiquitous agency relationship, in which one party (the principal) delegates work to another (the agent), who performs that work (Eisenhardt, 1989). Partnership can be defined as an interorganizational relationship to achieve the participants’ shared goals (Lee and Kim, 1999). An effective partnership must have reduced agency costs and must foster mutual benefits to the firm and the vendor (Jenson and Meckling, 1976). To create value, the outsourcing relationship should reduce risk for both the firm and the vendor and lead to synergistic gains. The firm and vendor must have a high degree of trust and compatibility

and be able to work within the framework of the organizational culture of the other firm. Agency costs are expected to play a role in the relationship between the client firm and the external ASP in data warehouse business usage. Owing to the uncertain and subjective nature of the information derived by analyses, it may be difficult to monitor the contract of the ASP in providing the information. In addition, security issues can be addressed under the domain of agency theory. There have been documented cases where ASPs have sold data on the client firm to the client firm’s customers and third parties. Although contracts can be drafted that prohibit this practice, this behavior can still occur. Monitoring the behavior of the ASP can add additional complexities to the relationship between the client firm and the ASP. Regarding information analyses, the risk may be even greater than the situation where an ASP is hosting raw or partially integrated data for the client. Organizations need to consider that the more thorough the analyses being outsourced, the greater the consequences of its misuse. Finally, the evaluation of ad hoc and datamining analyses outsourcing opportunities from a resource dependence theory creates an additional perspective. It will be very challenging for ASPs to acquire resources capable of developing partnerships with client firms. Hence, the client will be very dependent on the outsourcer due to the low number of potential suppliers (Pfeffer and Salancik, 1978). This dependence generates business value for the outsourcer, but not necessarily for the client firm.

Reporting applications It would clearly be much easier for ASPs to repackage their set methods of reporting analyses to a multitude of firms to maintain economies of scale. The key question in this evaluation is whether or not there is an incentive for client organizations to seek outsourcing for reporting applications. To evaluate reporting opportunities, transaction cost theory was applied. Williamson (1981) defines three dimensions of transactions: (1) uncertainty; (2) asset specificity; (3) frequency with which transactions recur (Williamson, 1981).

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As reporting applications are more standard, transaction costs related to asset specificity and uncertainty are less likely to impact the outsourcing decision. However, frequency of transactions is the dimension that is critical in evaluating outsourcing opportunities. If an organization has a need for a large volume of standard reports, the transaction costs incurred due to monitoring outsourcer analyses may become too high, making in-house analyses more economical. On the other hand, organizations with fewer standard report requirements may incur minimal transaction costs and achieve other benefits outsourcing has to offer.

Benefits of outsourcing Technological benefits are innovative IT applications and processes that a firm can obtain to stay at the leading edge of technology. In data warehousing, organizations would achieve technological benefits from their decision to outsource data warehouse development. The technological benefits obtained from outsourcing business usage are less clear. Economic benefits are those benefits that can be obtained from a vendor that can more effectively produce IT competence through specialization and exploitation of economies of scale and scope in human and technological resources. Although resourcebased theory, agency theory, and resource dependence theory indicate that the organization may generate more value from data warehouse usage if analyses are conducted in-house, the fact remains that complex analytical skills are scarce. Hence, small and medium-sized organizations may need to outsource in order to acquire complex technical and system skills. The skill that would be difficult to acquire from an ASP is business skill. Vertical ASPs function within the domain of a specific industry and have knowledge of how that industry operates, as do divisions of management consulting firms that concentrate in a particular industry. Vertical ASPs claim to provide applications that are tailor-made for a particular industry; however, these ASPs do not necessarily provide solutions for the particular idiosyncrasies of a firm’s business processes. A vertical ASP might very well be suitable for providing applications to a firm; however, it is

debatable whether information analysis should be outsourced even to a vertical ASP. Organizations would need to develop a close relationship with the ASP in order to transfer business skills. Increased agency costs required to support this relationship might deter organizations from attempting to develop such a relationship. Hence, it is expected that ASPs will not be able to provide business skills used in ad hoc and data-mining analyses. The result is that ASP analyses will not address the business-specific problem and ASPs will not be able to infer businessspecific results of the analyses that would be valuable to the organization. For example, an ASP may be able to uncover a correlation in the data that indicates that bank customers under 30 years old are more likely to default on loan payments. They would be less skilled in determining business reasons why this correlation exists. A vertical ASP is likely to have the applications to uncover important data, but may not have the expertise to decipher rich information from the data. To compensate, organizations that decide to outsource complex analyses will need to make the business problem and analysis task clear to insure that the analyses received relate to the business problem. It is also imperative that organizations realize that ASPs may not possess business-specific skills in order to set appropriate expectations related to benefits gained from using an ASP. Strategic benefits are those benefits that allow a firm to focus on its core business and outsource ancillary IT processes. Although ad hoc and data-mining analyses generate more unique insight for an organization, standard reporting represents over 80 percent of data warehouse usage in large organizations (Brohman and Parent, 2001). Hence, outsourcing standard reporting may provide an opportunity for small and medium-sized organizations to better focus on ad hoc and data-mining analyses. Through outsourcing the bulk of the IT burden, a firm may be able to focus on ad hoc and data-mining analyses, which may provide both a strategic focus in the use of IT and operational effectiveness for the firm. On the other hand, organizations with frequent standard reporting requirements may not be able to justify the transaction costs against the strategic benefits of outsourcing.

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Figure 1 Conceptual outsourcing model

Conceptual model The theoretical evaluation does not provide a clear understanding of outsourcing opportunities and benefits for data warehouse usage. However, it clearly identifies the theories and relationships that organizations need to consider. The following conceptual model, presented as Figure 1, was developed based on the theoretical evaluation. Future research will examine the influence of these four theoretical foundations on the decision to outsource business usage of a data warehouse. It will also identify how outsourcing of both ad hoc/data-mining analyses and standard reporting will impact the strategic and economic benefits. Conclusions and directions for future research Two research questions provide the core for further research. The primary question is ‘‘How can small and medium-sized organizations generate value from a data warehouse investment?’’ As a first step in addressing this question, a research study has been designed to determine ‘‘What benefits can an organization expect to gain from outsourcing data warehouse usage?’’ The methodology for future research will consist of a series of interviews with executives from ten organizations in the southeastern USA. Five of the organizations will have in-house data warehouse business usage capability and the other five organizations will have outsourced ad hoc/data-mining analyses and/ or standard reporting. In each organization, multiple executives will be interviewed in order to develop a rich and complete understanding of factors that influence data warehouse usage outsourcing decisions and the impacts of outsourcing on the organization.

The presence of ASPs has led to a new approach for firms to outsource the usage of data warehouse applications. The ASP business model has exploded in recent years; however, the future impact on data warehousing is not yet understood. This theoretical evaluation provides the first critical step in understanding what opportunities exist for outsourcing business usage of a data warehouse.

References Barney, J.B. (1991), ‘‘Firm resources and sustained competitive advantage’’, Journal of Management Information Systems, Vol. 17, pp. 99-120. Bielski, L. (2001), ‘‘ASPs are getting vertical, offering ’downmarket’ solutions’’, ABA Banking Journal, Vol. 93 No. 2, pp. 54-8. Brohman, M.K. and Parent, M. (2001), ‘‘Gaining insight from the data warehouse: the competence maturity model’’, Hawaii International Conference on System Sciences, Maui, Hawaii. Cheon, N.J., Grover, V. and Teng, J.T.C. (1995), ‘‘Theoretical perspectives on the outsourcing of information systems’’, Journal of Information Technology, Vol. 10, pp. 209-19. Cone, E. (2000), ‘‘Vertical ASP advantage’’, Inter@ctiveweek, Vol. 7, pp. 58-61. Depompa, B. (2000), ‘‘Companies see gold in outside data analysis’’, Information Week, Vol. 778, pp. 86-9. Dewire, D.T. (2000), ‘‘Application service providers’’, Information Systems Management, Vol. 17 No. 4, pp. 14-20. Edelstein, H.A. (1998), ‘‘Data mining: the state of practice’’, Proceedings of the Annual Leadership Conference, The Data Warehousing Institute. Eisenhardt, K.M. (1988), ‘‘Agency and institutional theory explanations: the case of retail sales compensation’’, Academy of Management Journal, Vol. 31, pp. 488-511. Eisenhardt, K.M. (1989), ‘‘Agency theory: an assessment and review’’, Academy of Management Review, Vol. 14, pp. 57-74. Grover, V. and Cheon, N.J. (1996), ‘‘The effect of service quality and partnership on the outsourcing of

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information systems functions’’, Journal of Management Information Systems, Vol. 12 No. 4, pp. 89-96. Haley, B. (1998), ‘‘Implementing the decision support infrastructure: key success factors in data warehousing’’, Management Information Systems, University of Georgia, Athens, GA. Hall, M. (2000), ‘‘ASP to mine Web data’’, Computerworld, Vol. 34 No. 38, pp. 30-2. Jacobs, S., Warner, P.D. and Smith, L.M. (2000), ‘‘ASP-iring technology’’, CPA Journal, Vol. 70 No. 11, pp. 66-9. Jenson, M.C. and Meckling, W.H. (1976), ‘‘Theory of the firm: managerial behavior, agency costs and ownership structure’’, Journal of Financial Economics, Vol. 3, pp. 305-60. Kern, T. and Kreijger, J. (2000), An Exploration of the Application Service Provision Outsourcing Problem, ISIS. Lee, J. and Kim, Y. (1999), ‘‘Effect of partnership quality on IS outsourcing success: conceptual framework and empirical validation’’, Journal of Management Information Systems, Vol. 15 No. 4, pp. 29-62. McFarlan, F.W. and Nolan, R.L. (1995), ‘‘How to manage an IT outsourcing alliance’’, Sloan Management Review, pp. 9-23. Mata, F.J. and Fuerst, W.L. (1995), ‘‘Information technology and sustained competitive advantage: a resource-based analysis’’, MIS Quarterly, Vol. 19 No. 4, pp. 487-506. Mitchell, R.L. (2001), ‘‘ASP winners and losers’’, Computerworld, Vol. 35, pp. 42-4. Pfeffer, J. and Salancik, G.R. (1978), The External Control of Organizations: A Resource Dependence Perspective, Harper & Row, New York, NY.

Power, C. (1998), ‘‘Bisys belatedly launches a data warehouse service’’, American Banker, Vol. 48 No. 130, pp. 10-13. Robinson, D. (2000), ‘‘ASP: as soon as possible’’, People Management, Vol. 6 No. 8, pp. 51-2. Sakaguchi, T. and Frolick, M.N. (1997), ‘‘A review of the data warehouse literature’’, Journal of Data Warehousing, Vol. 2 No. 1, pp. 34-54. Schwartz, M. (2001), ‘‘Fewer ASPs, more services’’, Computerworld, Vol. 35, pp. 44-6. Silver, M.S. (1991), Systems that Support Decision Makers: Description and Analysis, John Wiley & Sons, New York, NY. Smith, M.A., Mitra, S. and Narasimhan, S. (1998), ‘‘Information systems outsourcing: a study of preevent firm characteristics’’, Journal of Management Information Systems, Vol. 15 No. 2, pp. 60-92. Steiger, D.M. (1998), ‘‘Enhancing user understanding in a decision support system: a theoretical basis and framework’’, Journal of Management Information Systems, Vol. 15 No. 2, pp. 199-220. Thompson, J.D. (1967), Organizations in Action, McGraw-Hill, New York, NY. Watson, H.J. and Gray, P. (1998), ‘‘New developments in data warehousing – 1998’’, Journal of Data Warehousing, Vol. 3 No. 2, pp. 8-11. Williamson, O. (1981), ‘‘The economics of organization: the transaction cost approach’’, American Journal of Sociology, Vol. 87, pp. 548-77. Wixom, B.H. and Watson, H.J. (2001), ‘‘Perspectives on data warehousing’’, Journal of Data Warehousing, Vol. 6 No. 1, pp. 2-8. Woollacott, M. (2000), ‘‘Broadening focus to increase ASP appeal’’, Infoworld, Vol. 22, pp. 5-9.

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Comparative analysis between the public and private sectors on the IS/IT outsourcing practices in a developing country: a field study Abdulwahed Khalfan and Tom G. Gough The authors Abdulwahed Khalfan is a PhD Research Student and Tom G. Gough is Senior Fellow, both at the School of Computing, University of Leeds, Leeds, UK. Keywords Information services, Information technology, Outsourcing, Developing countries, Risk management Abstract This paper presents an overview of a national case study exploring the IS/IT outsourcing phenomenon in the public and private sectors of a developing country. Kuwait has been used as an example of a developing country and the data collection for this study was done there. The primary data on IS/IT outsourcing practices, obtained for the first time in Kuwait, were collected by means of survey questionnaires and semi-structured interviews supported by organisational documentation. Several public and private sector organisations were selected to participate in the investigation. The main findings of the study suggest that there are differences between the two sectors in their motivation and risk factors evaluation behind the adoption of an IS/IT outsourcing business strategy. The findings also provide an insight into how outsourcing practices, as an information system strategy, are motivated and managed in the context of a developing nation. Electronic access The research register for this journal is available at http://www.emeraldinsight.com/researchregisters The current issue and full text archive of this journal is available at http://www.emeraldinsight.com/0957-6053.htm Logistics Information Management Volume 15 . Number 3 . 2002 . pp. 212–222 # MCB UP Limited . ISSN 0957-6053 DOI 10.1108/09576050210426760

Introduction Information systems (IS)/information technology (IT) outsourcing has emerged in recent years in both the private and the public sectors as a key method of managing the different aspects of IS/IT. IS/IT outsourcing is a term that encompasses a variety of approaches of contracting for IT services. IS/IT outsourcing leads to significant changes in the management processes of the IT organisation. The terminology of IS/IT outsourcing was perhaps first used in 1989, when Eastman Kodak made the decision to make total outsourcing agreements with three large IS external providers (Loh and Venkatraman, 1992; De Looff, 1995; Slaughter and Ang, 1996). Nevertheless, IT outsourcing is not a new concept, but has been evident throughout the data-processing era, as time-sharing, the use of contract programmers, and the purchase of packaged software (Currie, 1995; Hussain and Hussain, 1997). The global IT outsourcing market is experiencing significant growth, estimated to have been worth US$70 billion in 1998, and to have reached as high as US$121 billion by the end of the year 2000 (Gordon and Walsh, 1997). The paper is structured as follows. The next section sets out the research objectives and a review of the IS/IT outsourcing framework. The differences between the private and public sector are discussed next. The research methodology is then described and the results of the analysis of the data are presented. The final section presents the conclusions and an indication of future work.

Research objectives There is growing awareness of the need to understand MIS issues from a global perspective (Palvia et al., 1992). The aim of this research is to explore IS/IT outsourcing practices as an IS strategy in the context of Kuwait as a developing country. Attention will be focused on differences between Kuwait and the developed countries and their implications for outsourcing. Specific issues related to IS/IT outsourcing include motivation, the client/vendor relationship, types of outsourcing, risk analysis and evaluation, contractual and legal aspects, vendor selection criteria and post-

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implementation evaluation. However, the focus of this paper is on outsourcing motivation, and risk analysis and evaluation. Definition, types and scope According to Lacity and Hirschheim (1995, p. 4). IT outsourcing refers to the ‘‘ . . . thirdparty management of IS assets, people and/or activities required to meet pre-specified performance levels’’ and includes the operating of data centres, network and communication management, systems development and maintenance, and training. In recent years, IT outsourcing has been used increasingly in the public sector as a policy instrument for changing the way publicly funded services are provided. Governments have been outsourcing for decades under the term ‘‘contracting-out’’ (Dorsi, 1998). In fact, outsourcing is difficult to distinguish from contracting-out (Burgess and Macdonald, 1999), although the latter term tends to be more commonly used in the public sector. In this respect, outsourcing can be defined as ‘‘a distinct form of privatisation where particular functions of public institutions are transferred to the private sector’’ (Gordon and Walsh, 1997, p. 267). In the public sector of the UK government, the term IT outsourcing is now used interchangeably with other programmes: market testing, compulsory competitive tendering (CCT), and contracting-out (Currie, 1996). The outsourcing of IT services has grown apace and attracted much attention. In Europe, for example, public sector privatisation of IS/IT reached $24 billion in 1995 (Gordon and Walsh, 1997) and reached as high as £2 billion in the UK in 1996 (Willcocks et al., 1996). The total market size in 1998 of UK government IT outsourcing was £124 million, an increase of 15 per cent on the previous year (ITNet, 1999). State and local governments in the USA are projected to spend over $8 billion in the year 2000 on external IT services (Gordon and Walsh, 1997). The Canadian government utilised the trend to ‘‘IM/IT outsourcing’’ to outsource the entire provincial and territorial IS/IT function as well as that of the federal government. Riddle (1998, p. 7) notes that the Canadian government is placing ‘‘increasing emphasis on outsourcing IT services and relying less on its own internal services capacity.’’ Loh and Venkatraman (1992) explored IS/IT outsourcing as a

significant administrative innovation. Numerous motivations have been reported behind the adoption of IT outsourcing arrangements in the public sector. Willcocks and Currie (1997, p. 35) suggest that public sector IS/IT outsourcing has been driven by two main initiatives: cost containment and reduction; and a ‘‘political belief that private sector companies are more efficient’’. In addition O’Looney (1998) argues that US government officials have endorsed IT outsourcing for many reasons, including: lack of skills; downsizing; accessing new IT technology; a general belief among the public sector managers that the private sector does a better job; concentrating on ‘‘prime responsibilities’’. At the same time Lacity and Willcocks (1997, p. 86) note that the growth of privatisation in the USA may be attributed to ‘‘Americans’ increasing loss of faith in big government’’. In recent years there have been growing importance and interest in public sector IS outsourcing (Lacity and Willcocks, 1997). Moreover, many public sector organisations have considered outsourcing as a viable option (Currie, 1996; Lacity and Willcocks, 1997). The private sector, on the other hand, has seen a growing trend towards IS/IT outsourcing, which was driven by financial, business, technical, and micro-political factors (Lacity and Hirschheim, 1993, 1995; McLellan et al., 1995). Differences between public and private sector on IS/IT issues The distinct differences between the private and government organisations are the core of public administration theory and have been the topic of ongoing research. Many differences have been identified, for example, in decision-making process, personnel management, and the management of information systems (Rainey, 1983; Perry and Rainey, 1988; Bretschneider, 1990; Mohan et al., 1990; Bretschneider and Wittmer, 1993). Failing to address these differences clearly would be a mistake and managers working in the public sector must be cautious and careful, as they attempt to draw lessons from MIS literature (Bozeman and Bretschneider, 1986). At the same time, the public sector is particularly under-studied and underrepresented in terms of management prescription (Willcocks and Lacity, 1998).

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Additionally, the complexity of information systems in the public sector is often very high (De Looff, 1997), mainly because of the complexity of the legislation that underlies the organisational processes. Also, there are many stakeholders in the politics of the public sector who may have very different and perhaps conflicting perspectives. At the same time, the public sector organisations were not always attractive to IS/IT specialists. The fact that IT managers in the public sector were always having problems of recruiting and retaining good IS/IT professionals is due to the payment system (i.e. below-market salaries) (De Looff, 1997; Lacity and Willcocks, 1997). The risk of failure is especially troubling for government managers, who face an environment where technological innovation is perhaps difficult and errors are publicly reported (Borzo, 1999). It is not uncommon, though, for public institutions to respond to fiscal scarcity with technological solutions (Weikart and Carlson, 1998). Bretschneider’s (1990) study of differences in information systems management between public and private organisations uncovered an emphasis on procedures and accountability in governmental purchasing decisions, including hardware/software purchases. There are many differences between the two sectors in political, legal and structural terms. The trend which started in the 1990s is to seek privatisation of the IS/IT department in the public sector through IT outsourcing (Gordon and Walsh, 1997; Lacity and Willcocks, 1997). Indeed, a number of factors are pushing in that direction, mainly lowering the cost, adding value, lack of IT skills, joint IT management responsibility and more flexibility.

Research methodology This section outlines the research methodology used in this study. It covers the research approach, questionnaire design, semi-structured interviews, selection of respondents, and finally analytical tools. Research approach Case study research is an accepted research strategy in the IS discipline. Many researchers have used the case study approach as their research strategy (see, for example, Benbasat

et al., 1987; Kaplan and Duchon, 1988; Lee, 1989; Eisenhardt, 1989; Galliers, 1992; Gable, 1994; Yin, 1994; De Looff, 1995; Walsham, 1995; Cavaye, 1996). The case study approach refers to an in-depth study or investigation of a contemporary phenomenon using multiple sources of evidence within its real-life context (Yin, 1994). A case study methodology was selected for this research, as this approach lends itself to concentrated focus on the topic, and accommodates several data-gathering techniques. The strengths of the case study approach are in the degree of breadth and depth that can be obtained in complex realworld situations (Galliers, 1992; Shanks et al., 1993). According to Avison (1993), the strength of the case study is also in its use for examining natural situations and in the opportunity it provides for deep and comprehensive analysis. Guba (1981) suggests that the validity of this type of research is increased when different research methods are pitted against one another in order to cross-check data and interpretations. He suggests that different methodologies like ‘‘questionnaire, interviews and documentary analyses’’ should be used when possible. Questionnaire design The questionnaire was designed to obtain a comprehensive view of IS/IT outsourcing practices in Kuwait. It was designed to serve two primary purposes. The first was to identify the current framework of outsourcing practices in the different Kuwaiti sectors. The second purpose was to establish the level and sophistication of each sector. The survey questionnaire drew on previous studies of outsourcing practices and general IT (Lacity and Hirschheim, 1993, 1995; Currie, 1995; Tye and Chau, 1995; Lee and Kim, 1997). The questionnaire consisted of seven main categories with mainly closed questions. In addition, two final open-ended summary questions were used. The general structure of the questionnaire was as follows: organisational profile; information technology department profiles and plans; outsourcing terminology and issues; outsourcing decision process; training and educational issues; personal and job-related profile; general comments. Five possible responses were provided (strongly agree, agree, undecided, disagree, strongly disagree). This type of question was used, because it was deemed to

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be efficient, specific in measuring attitudes, and relatively easy to complete (Robson, 1993). The instrument was validated using the procedures recommended by Straub (1989), i.e. instrument review by an expert in the field, a pilot test, internal reliability, and statistical conclusion validation. In order to check the applicability of the questionnaire in context, it was pre-tested on a number of organisations in Kuwait. A revised survey questionnaire was then despatched to the organisational targets. Where previous organisational experience with IS/IT outsourcing was identified, further copies of the survey questionnaire were distributed to other key members of the IT department. Semi-structured interviews Interviews were conducted throughout the period of data collection. In total 20 people, selected in the light of their qualifications and involvement in their organisations, were interviewed including departmental heads and senior IT managers. The interviews were semi-structured. Interviews were recorded to free the interviewer from note-taking and to increase the accuracy of data collection. Interviews were conducted in both English and Arabic, because the interviewees were multi-cultural, originating from different nationalities. Recordings were later transcribed, and the data were organised and analysed in terms of the research model. The data from the survey questionnaires and semistructured interviews were supplemented by documentation from the participant organisations. Selection of respondents The research project covers all sectors of Kuwait’s economy, public, private and semiprivate. However, the focus of this paper is on the public and private sectors. The main public sector ministries, which may be described as IT intensive users, were selected to participate in the study. These include: Ministry of Planning, Ministry of the Interior, Ministry of Electricity and Water, Ministry of Trade and Commerce, Ministry of Finance, Ministry of Justice, and Ministry of Public Health. For the private sector organisations, the official Kuwaiti stock market index was used as a guideline for selecting the banking, insurance and investment industries as the main participants from the private sector in

the study. The participating organisations represent a wide cross-section of private sector organisations. The intention of the study was to target the highest possible level in the IT departments of each organisation, IT general managers, IT directors, heads of IT departments, or the equivalent. Unit of analysis The unit of analysis defines the boundaries of the case study research. The units of analysis can be individuals (e.g. employees or patients), events (e.g. decisions or programs), or finally entities (e.g. groups or organisations). In this study, the units of analysis were the IT functions within the selected Kuwaiti public and private sector organisations.

Discussion and analysis of the public sector Set out in this section are some findings from the data collected in the public sector of Kuwait. The key issues considered in this paper are: motivation, and risk analysis and evaluation. The percentages quoted in the following discussion indicate the number of respondents who agreed or strongly agreed with the relevant statement; the mean is a weighted calculation with greater weight given to strongly agree. The mean score and standard deviation for each factor were calculated. Then, the factors were ranked according to the mean score to identify the order of importance of each motivation and risk factor. The standard deviation value is used as a measure of the spread of opinions. At the outset of the questionnaire, the respondents were asked about the percentage of the annual budget spent on the IT department. Of the respondents, 65 per cent said that up to 5 per cent of the annual budget is spent on the IT department, the remaining 35 per cent said that up to 10 per cent of the annual budget is spent on the IT department. Motivation For a series of statements setting out the generally accepted advantages and disadvantages of IT outsourcing or reasons for outsourcing, respondents were asked to rate each statement on a five-point Likertscale, specifying the statement’s importance as they perceived it. Table I shows the mean

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Table I Motivations for IT outsourcing in the Kuwaiti public sector Std Rank Mean deviation Scale

Factor Resources are not available internally Gain access to leading-edge technology Faster application development Shortage of technical staff Rapid pace of technological change Reduce and control operating cost

1

4.46

0.52

1-5

2 3 4 5 6

4.23 4.15 4.08 4.00 3.85

1.01 0.69 0.64 0.82 1.34

1-5 1-5 1-5 1-5 1-5

and standard deviation, scale and the ranking of each motivating factor in the top six. Respondents were asked to rank the reasons most often quoted in the literature for IT outsourcing. It was notable that ‘‘resources are not available internally’’ was ranked the most prominent factor in motivating IT outsourcing in the Kuwaiti public sector. In fact, all the respondents (100 per cent) agreed that this factor is the most important. Organisations often outsource, because they do not have access to the required resources within the organisation, whether software, hardware or the manpower. Also important was ‘‘gain access to leading-edge technology’’, a prime motivation factor for outsourcing; it has attracted 76.9 per cent of the respondents’ views. Seeking an external vendor, therefore, would fulfil this demand by the acquisition of the most sophisticated IT technology. One probable explanation for this result is that the IT managers were scared of being left with old IT technology. They seek the newest technology without realising that there should be adequate IT strategic planning, especially considering the lack of sufficient computer knowledge among middle and top management in the public sector (Abdul-Gader, 1999). Another important dimension that captured a high level of agreement was ‘‘faster application development’’. Indeed an overwhelming majority (84.6 per cent) of the respondents agreed on that factor. It can be argued that IT service providers have the capability to produce computer software applications in a faster and more efficient way than in-house developers. With regard to the fourth factor, ‘‘shortage of technical staff’’, that was stimulating outsourcing, it was found that 84.6 per cent of the respondents have come to accept this finding. A similar difficulty was found in the US public

administration, as ‘‘government agencies had had trouble attracting and retaining IS professionals because of below-market salaries’’ (Lacity and Willcocks, 1997, p. 87). On the ground, this means that the public sector has been facing a mounting shortage in their technical workforce, which would adversely affect their performance. Clearly, this factor (shortage of technical skills) has a direct relationship with the first factor mentioned earlier. It is also worth noting here that during the interviews the IT managers were specifically pointing out that ‘‘shortage of IT skills’’ has increased at an unprecedented rate. With these considerations in mind, it is interesting to note that, in s study done by Currie (1996, p. 234), it was evident that skills shortages in UK government agencies and NHS trusts would ‘‘pose a problem for managers attempting to put in an in-house bid to run IT services’’. Although the most frequently cited factor in the IS/IT outsourcing literature is cost reduction (McLellan et al., 1995; Willcocks and Currie, 1997), yet it is shown to have been ranked sixth in this study, although it was evident that one of the main drivers of outsourcing was cost reduction, as the majority of managers (61.6 per cent) have recognised this fact with public sector ministries under tighter budget constraints, being required to cut costs, and yet increase the level of services and provide access to new IT technologies. In a similar case, Lacity and Willcocks (1997) found government officials in the USA seriously considering the outsourcing option because of the cost containment pressure. A conclusion can be drawn at this level that cost reduction was thought to be the most significant impetus for IS/IT outsourcing, but cost cutting is not the only motive. IT outsourcing can also ‘‘deliver business and IT service improvements as well’’ (Rothery and Robertson, 1995, p. 110). A number of other issues were also considered under motivation but the six discussed above were seen by the respondents as the most significant. Risk analysis and evaluation IT outsourcing, as a legitimate management strategy, has deficiencies and drawbacks as well as several advantages. This study has unveiled the main disadvantages of IS/IT outsourcing in the public sector of Kuwait. Table II shows the mean, standard deviation,

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of specialised skills in the government sector, downsizing of the government, and so on (Dorsi, 1998).

Table II Risk factors in IT outsourcing in the public sector Std Rank Mean deviation Scale

Factor Security issues (data confidentiality) Ability to operate or manage new systems Loss of key IT employees Hidden cost (unspecified in the contract) Inadequate planning and management Lack of prior outsourcing experience

1

3.77

1.09

1-5

2a 2a

3.46 3.46

0.97 1.27

1-5 1-5

4a

3.31

1.18

1-5

4a 4a

3.31 3.31

1.11 1.03

1-5 1-5

Discussion and analysis of the private sector

Notes: a Denotes a tie for risk factor

scale and the ranking of each risk factor in the top six for the Kuwaiti public sector. The security issue ranked first in studying risk factors in considering IT outsourcing. The figure of 62 per cent should come as no surprise, since data confidentiality always has very high priority in the region. The ‘‘ability to operate or manage new systems’’ was ranked as the second risk factor while considering outsourcing. It is a common perception that an internal IT department cannot manage effectively and soundly the transition to new technological platforms. One possible explanation is that the organisation, as discussed earlier, has no internal capability to handle or manage the new systems. On the same level, ‘‘loss of key IT employees’’ was recognised as a threat to IT outsourcing. It was also interesting to note that hidden cost (i.e. unspecified in the contract) is considered to be a major drawback. In addition, a serious concern is that vendors may charge excessive fees for ‘‘additional’’ services, services which would be thought to have been included in the scope of the contract (Lacity and Hirschheim, 1993). The respondents were also pointing to ‘‘inadequate planning and management’’ as the next pitfall of IT outsourcing. In a study of computer-based information systems (CBIS) in the Arabian Gulf countries by Abdul-Gader and Alangari (1994, p. 82) it was found that ‘‘lack of appropriate IT planning’’ was by far ‘‘the most significant obstacle to a successful CBIS diffusion’’. ‘‘Lack of prior outsourcing experience’’ is in the sixth place. It is also interesting to note that the public sector in Kuwait has been encountering the same difficulties as others in the developed nations are experiencing, tighter budgets, lack

Motivation Table III shows the mean, standard deviation, scale and the ranking of each motivating factor in the top six. Focusing on the top six key factors, the rationale behind each factor is set out below to put the findings in the context of the Kuwaiti business private setting based on additional information gained from the interviews. It should be noted, however, that many issues overlap or indirectly complement one another (Palvia and Basu, 1999). Respondents were asked to rank the reasons most often quoted in the literature for IS/IT outsourcing. It was notable that ‘‘shortage of technical staff’’ was ranked the most prominent factor in motivating IT outsourcing in the Kuwaiti private sector. Most of the respondents (71.4 per cent) agreed that this factor is the most important. This finding was supported previously by Collins and Millen (1995, p. 11), who found from their empirical research that the most cited benefits of IT outsourcing, according to the top American firms, was benefiting from the ‘‘skills of outside staff’’. There is a continuing difficulty of finding qualified and skilled IT manpower elsewhere (Apte, 1992; Yang and Huang, 2000). On the other hand, the demands for skilled human resources are rapidly increasing. Diromualdo and Gurbaxani (1998) also point out that IS/IT outsourcing is playing an important role in filling the gap in the wide disparity of skills Table III Ranking of motivating factors in the private sector Factor Shortage of technical staff Resources are not available internally Faster application development Gain access to leading-edge technology Rapid pace of technological change Avoiding risk of obsolescence

Std Rank Mean deviation Scale 1

3.83

1.27

1-5

2 3a

3.81 3.74

1.21 0.96

1-5 1-5

3a 5 6

3.74 3.69 3.55

1.01 1.02 1.04

1-5 1-5 1-5

Note: a Denotes a tie for motivating factor

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and capabilities necessary to realise the potential of IT. The second motivating factor was ‘‘resources are not available internally’’, which attracted 66.7 per cent of the respondents’ views. Organisations often outsource, because they do not have access to the required resources within the organisation, which can be software, hardware or the manpower. In fact, IS/IT outsourcing is seen as a panacea for many technological difficulties. This was discussed in depth during the interviews and the private sector complained of ‘‘lack of high level IT expertise and knowledge’’, which is available in the Kuwaiti pool. Another important dimension that captured a high level of agreement was faster application development. Indeed a similar majority (66.6 per cent) of the respondents agreed on this factor. It can be argued that IT service providers have the capability to produce computer software applications in a faster and more efficient way than in-house developers. This can be attributed to the economies of scale, where the overall impression gained was that the IT service providers could achieve significant savings through serving multiple users simultaneously. At the same time, the IT application can be developed in a much faster and more efficient way by the IT vendor for several reasons. First, the IT vendor may be able to retain very skilled personnel. Second, the vendor has a portfolio of development projects, so, in case one technical solution fails, it would be quite possible to offer an alternative. Third, the IT vendor may retain large IT resources and capabilities. Also important, as perceived by the participants of the study, was ‘‘gain access to leading-edge technology’’. This factor attracted 54.8 per cent of the respondents’ perceptions. Access to leading-edge technology is a persuasive argument for IT outsourcing in Western economies (Earl, 1991; Apte, 1992; Palvia, 1995; Clark et al., 1995). Outsourcing can provide immediate access to the most up-to-date technology, as the organisations can request to have the latest and most advanced technology. With regard to the fifth factor, it was found that ‘‘rapid pace of technological change’’ was attracting 66.6 per cent of the views of the respondents. It is widely believed that the IT environment causes problems because of its high rate of technological change. This kind

of change is also increasing the complexity of IS/IT requirements. It is often the case that organisations outsource their IT needs as a ‘‘safe-haven’’ to meet their complex IT requirements due to the uncertainty in the environment. ‘‘Avoiding risk of obsolescence’’ was placed sixth. It was very surprising that ‘‘reduce and control operating cost’’ was not one of the top key factors, according to mean scores. It was placed ninth in the list of motivating factors. However, this issue has received the highest standard deviation, indicating strong disagreements on its importance among respondents. A number of other issues were also considered under motivation but the six discussed above were seen by the respondents as the most significant. Risk analysis in the private sector IS/IT outsourcing, as a legitimate management strategy, has deficiencies and threats as well as advantages. This study has unveiled the main risk factors to IS/IT outsourcing in the private sector of Kuwait. Table IV shows the mean, standard deviation, scale and the ranking of each risk factor in the top six. The security issue ranked first in studying risk factors in considering IT outsourcing. In fact, the figure of 69 per cent should come as no surprise, since data confidentiality always has very high priority in the region. Indeed, this finding is consistent with that of Badri (1992); he found that IS/IT security has been a prominent and top priority issue in the Arab gulf region. As noted by Fink (1994), IS is an area often neglected in outsourcing arrangements. IS covers both data security and business recovery planning (Lee, 1995). Table IV Ranking of risk factors Factor Security issues (data confidentiality) Hidden cost (unspecified in the contract) Loss of flexibility/control Lack of prior outsourcing experience Ability to operate or manage new systems Loss of innovative ability Note: a Denotes a tie for risk factor

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Std Rank Mean deviation Scale 1

4.02

1.14

1-5

2 3 4a

3.55 3.48 3.45

1.04 0.94 0.97

1-5 1-5 1-5

4a 6

3.45 3.40

1.02 0.94

1-5 1-5

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When the IT function is outsourced to an external service provider, the organisation no longer retains full control of IS (Lee, 1995), whereas full control of the IS is retained when the IT function is provided in-house. According to Collins and Millen (1995), the ‘‘corporate security issue’’ was one of the most frequently cited reservations made by American firms. It was also interesting to note that hidden costs (i.e. unspecified in the contract) are considered to be a major drawback, which attracted 64.3 per cent of the respondents’ agreement. In addition, a serious concern is that vendors may charge excessive fees for ‘‘additional’’ services, services which would be thought to have been included in the scope of the contract (Lacity and Hirschheim, 1993). Lacity and Hirschheim (1993) call this ‘‘excess fees’’ and noted that it was a major concern expressed by many organisations. In a more recent study, Willcocks and Currie (1997) found that a major risk that materialised after initiation of outsourcing was hidden cost. It was also observed by Hendry (1995) that outsourcing can have hidden costs, especially in the longer term, arising from lack of awareness of the changing environment and technology and of user requirements. The respondents also pointed to ‘‘loss of flexibility/control’’ as the third important threat of IT outsourcing in the Kuwaiti environment. It was found that 52.4 per cent of the respondents have come to accept this finding. It can be argued that outsourcing may cause some loss of control in the client organisation, as the management of the IT function is shifted towards the vendor. Also loss of flexibility (Clark et al., 1995; Earl, 1996) has been found to be a risk factor in dealing with IT outsourcing. If an organisation is locked into long-term IS/IT outsourcing contracts, it can be very difficult to reverse the decision to outsource, as the organisation would have to rebuild its IT infrastructure. In addition, given the nature of the contractual relations, vendors may find it very difficult to increase/decrease or even to readjust priorities in the workload as a response to the client.

Conclusions and future work This research breaks new ground in that it attempts to explore and examine various facets of IS/IT outsourcing in the context of a developing country. It reports on a research study on IS/IT outsourcing practices in public and private sector information systems in Kuwait. As shown in the previous analysis, there are some differences between the two sectors in the two selected dimensions of IT outsourcing, namely, motivation and risk analysis. An early and continuing driver of the move to IS/IT outsourcing in the Western developed world is cost reduction/cost control. The initial analysis suggests that this is not a prime motivating factor in Kuwait, in either the public or the private sector. However, as noted earlier, the Kuwaiti public sector is under constant pressure to reduce costs, yet ‘‘reduce and control operating cost’’ was ranked sixth. Even more surprising, perhaps, is that this factor was ranked in ninth place in the Kuwaiti private sector. The explanation for this relative relegation of cost reduction, especially in the private sector, is perhaps to be found in a review of those factors which are seen as the prime drivers of IS/IT outsourcing in Kuwait. Although ordered differently, the top five motivating factors are the same for both the public and the private sectors. The emphasis is on the skills, development and technology. However, although both sectors share an appetite for ‘‘leading-edge technology’’ and an awareness of the ‘‘rapid pace of technological change’’, in the private sector a prime motivating factor, in sixth place, is ‘‘avoiding the risk of obsolescence’’, which may indicate a concern for the ongoing viability of systems but this concern is not shared by the public sector. The shared concerns over the non-availability of IS and ‘‘shortage of technical staff’’, however, suggest that the application of the latest technology may result in the acquisition, by both sectors, of systems which may prove unsustainable locally, if and when the IS/IT outsourcing contracts come to an end. On the other dimension, risk analysis, the top concern for both sectors, is ‘‘security issues (data confidentiality)’’, a result which was perhaps to be expected, given the already noted high priority accorded to data confidentiality in the Arab Gulf region.

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Within the remaining top five factors, three of which appear in both sets, in the public sector greater weight seems to be given to the availability and retention of IT skills, whereas in the private sector ‘‘hidden costs’’ and ‘‘loss of flexibility/control’’ are more prominent. In the public sector ‘‘inadequate planning and management’’ is placed fifth but not in the top six in the private sector. Conversely, ‘‘loss of innovative ability’’ is placed sixth in the private sector but not in the top six in the public sector. It seems likely that these differences in emphasis reflect the differences in management style within the two sectors. A further difference is to be found in the placing of ‘‘lack of prior outsourcing experience’’, in fourth place in the private sector, in sixth place in the public sector. Given the apparent concern in the public sector about the lack of IT/management expertise (and the low ‘‘score’’ given to cost reduction as a motivation), it is perhaps surprising that this ‘‘risk’’ is not placed much higher in the public sector list. The placing cannot be explained in terms of ‘‘equivalent’’ experience of market testing or compulsory competitive tendering as seen in the West, as these practices are not used in Kuwait. From the analysis to date and the interviews, including with a senior official in the Kuwaiti government, it is expected that the use of IS/IT outsourcing will continue to increase in the foreseeable future in both the public and the private sectors of Kuwait, as the survey respondents see the motivating factors as more potent than the perceived risks. However, the evaluation of risk seems largely to be focused on the short term and motivation seems primarily derived from the perceived need to keep abreast of technology. Insufficient attention is being paid to the longer-term consequences of current attitudes to IS/IT outsourcing. The continuing rapid growth of IS/IT outsourcing in Kuwait and the clear risks associated with current strategy in the public and private sectors argue the case of the development of better guidance on what might constitute ‘‘best practice’’ for IS/IT outsourcing in Kuwait. On the completion of the analysis of the data on all sectors in Kuwait, the research will then be directed to the generation of such guidance for use in Kuwait.

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