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.
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Logistics Information Management
Volume 15 . Number 3 . 2002 . pp. 204±211
# MCB UP Limited . ISSN 0957-6053
DOI 10.1108/09576050210426751
204
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 ``pure-
play'' 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.
 Outsourcing opportunities for data warehousing business usage
David Preston and Kathryn Brohman
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 two-
category 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
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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 time-
variant, 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).
 Outsourcing opportunities for data warehousing business usage
David Preston and Kathryn Brohman
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
Table I Summary of end-user data warehouse skills
Technical skills System skills
Database skills Problem solving
Use query packages General problem solving
(e.g. Microsoft Access) Qualitative and logical abilities
Write structured query language Creativity
(SQL)
Analyses skills Development methodology
Organize, cleanse, and transform Programming logic
data for analyses Systems analysis and design
Generate graphical and financial Data modeling
analyses
Apply statistics to build models
and complete analyses
Use data-mining applications
(e.g. Enterprise Miner)
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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
Business skills
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
 Outsourcing opportunities for data warehousing business usage
David Preston and Kathryn Brohman
organizations that outsource business usage of
the data warehouse to support better decision
making. To date, ASPs that handle data-
warehousing 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
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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
 Outsourcing opportunities for data warehousing business usage
David Preston and Kathryn Brohman
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 data-
mining 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 economic-
based 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 inter-
organizational 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
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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 data-
mining 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).
 Outsourcing opportunities for data warehousing business usage
David Preston and Kathryn Brohman
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 resource-
based 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
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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 business-
specific 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.
 Outsourcing opportunities for data warehousing business usage
David Preston and Kathryn Brohman
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.
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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.
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