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Outsourcing The use of application service providers

opportunities for data (ASPs) for outsourcing has exploded recently
warehousing business for an array of industries. Durlacher Research
has indicated that the ASP market was worth
usage $14 million at the end of 1999 (Robinson,
2000). International Data Corp. (IDC)
David Preston and estimated that the ASP market was worth
Kathryn Brohman $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.
The authors
SAP, Oracle, and Ariba), information
David Preston is a PhD Candidate and Kathryn
technology (IT) and infrastructure firms, and
Brohman is Assistant Professor, both in the MIS
management consultancies (e.g. EDS, Qwest,
Department, University of Georgia, Athens, Georgia, USA.
Exodus Communications, and KPMG) have
had the vision to develop capabilities to
capitalize on the ASP marketplace.
Data storage, Warehousing, Outsourcing, Model There are many reasons why firms
outsource their information systems, some of
Abstract which include:
IIntroduces a conceptual model developed to explore
. to eliminate internal IS support and focus
outsourcing of data warehouse usage by organizations. on the core competencies of their
Data warehouse business users rely on reporting, ad hoc business;
analysis, and data-mining tools to support both operational . to employ specific skills that cannot be
and strategic decision making. Organizations have a vested readily developed within the client firm;
interest in data warehousing; however, many organizations . because of dissatisfaction with the
are constrained by the high costs associated with data internal IS department and the chief
warehouse development as well as the scarcity of complex information officer; and
skills required to use the data warehouse. One way to . to reduce costs, generate cash, and
lower costs and gain access to scarce human skills is to replace capital outlays with periodic
outsource through the use of an application service payments (Smith et al., 1998).
provider. This paper presents the results of a theoretical
evaluation conducted to explore data warehouse A data warehouse is a technology that
outsourcing of business usage (i.e. reporting, ad hoc requires organizations to have specific
analysis, and data mining). Results of this theoretical technical and analytical skills to enable
evaluation are summarized in a conceptual model that will development and implementation, which can
be tested using field studies in future research. cost a firm a total of $5 million to over $30
million (Power, 1998). There is a dearth of
Electronic access talent for the development and usage of data
The research register for this journal is available at warehouse applications. Human resources may be the most valuable asset and the most
difficult to obtain. Hence, the incentive for
The current issue and full text archive of this journal is
organizations to outsource data warehouse
available at
functions exists. The purpose of this study is
to develop a conceptual model to assist
organizations in deciding which functions of
Logistics Information Management data warehousing will be most effectively
Volume 15 . Number 3 . 2002 . pp. 204±211
# MCB UP Limited . ISSN 0957-6053 outsourced and which functions will be more
DOI 10.1108/09576050210426751 effective if managed internally.
Outsourcing opportunities for data warehousing business usage Logistics Information Management
David Preston and Kathryn Brohman Volume 15 . Number 3 . 2002 . 204±211

Outsourcing and ASPs warehousing) become more evident,

organizations are expected to turn to
An ASP provides a contract-based service to outsourcing to minimize the investment
supply and host software and computing required to gain the benefits and gain access
applications, data storage, reporting tools, to scarce human skills. However, there are
upgrades, and technical support to its clients also reasons that deter organizations from
using a Web platform via the Internet or an outsourcing to ASPs, including a lack of trust
extranet. Applications are generally leased on in the ASP and the Internet and the
monthly fixed rates ranging anywhere from reluctance to release data that are strategic to
$9.95 to $10,000 per month (Jacobs et al., the firm. In addition, some firms may believe
2000). ASPs can be classified into four that the internal management of information
categories, which include: enterprise ASPs, systems could provide that firm with a
general business ASPs, specialist ASPs, and competitive advantage and thereby do not
vertical ASPs (Dewire, 2000). In this want to give up this advantage by turning
categorization, enterprise ASPs offer high-end information systems over to an ASP.
applications that require customization and
may include data warehousing, customer
relationship management (CRM), and
Data warehousing and business users
enterprise resource planning (ERP) designed
for several industries. General business ASPs In today's competitive environment,
are relatively simple applications that require organizations are evolving toward a greater
little customization and can be used in the dependence on data to drive the development
form of a modified template for standard of better products and services and make
business applications (e.g. word-processing more effective business decisions. Increased
and spreadsheet applications). Specialist investment in expensive, centralized,
ASPs focus on a particular application niche analytical database solutions, such as a data
(e.g. payroll, human resources or video warehouse, has demonstrated this
conferencing) and seek to provide only this dependence. Better operational and strategic
narrow service scope across industries. decision making can result in cost savings,
Specialist ASPs would need to form more precise marketing, development of
partnerships, if required, to provide a greater better products and services, and improved
breadth of services (Woollacott, 2000). customer satisfaction (Haley, 1998). A data
Vertical ASPs provide packaged or specialized warehouse has become a critical enabler for
applications for a specific industry such as the conducting business in the new economy and
health-care, insurance or retail industry and is key to the execution of corporate strategy,
tailor their services for that particular e-commerce, CRM, integrating activities
industry. internal and external to the firm, and moving
ASPs can also be divided into a two- to real time decision making (Wixom and
category classification (vertical ASPs and Watson, 2001). A data warehouse is more
horizontal ASPs) based on the degree of complex than previous decision systems (i.e.
industry specialization. Vertical ASPs executive support systems, decision support
concentrate on a specific industry with systems), as it integrates historical and current
services developed specifically for that data from multiple departments, is time-
industry, while horizontal ASPs might variant, non-volatile, and has enhanced data
provide services to several industries without acquisition, storage, and access functionality
customization of its services toward a (Watson and Gray, 1998).
particular industry (Cone, 2000). There are two types of data warehouse
The ASP business model has provided users: technical users and business users
irresistible outsourcing opportunities for firms (Haley, 1998). Technical users are
in an array of industries. The growth of this responsible for the maintenance of
market has been supported by the growth of applications that utilize the data warehouse
the Internet, standardization of data delivery, data. Business users are those individuals who
and the development of high speed links to use specific applications of the data
the Internet (Bielski, 2001). As the warehouse and are most often from finance
organizational benefits of integrated and marketing departments, as opposed to IS
enterprise systems (i.e. ERP systems and data departments (Sakaguchi and Frolick, 1997).
Outsourcing opportunities for data warehousing business usage Logistics Information Management
David Preston and Kathryn Brohman Volume 15 . Number 3 . 2002 . 204±211

Business users typically use three types of data the business problem (Brohman and Parent,
warehouse applications: reporting, ad hoc 2001). Of these factors, only business IT skills
analysis, and data mining (Edelstein, 1998; are rare and firm-specific and, therefore, are
Silver, 1991). Reporting applications are used likely to serve as sources of sustained
to generate standard reports used to support competitive advantage (Mata and Fuerst,
day-to-day, operational decision making. Ad 1995). Business users who have the skills to
hoc analysis and data mining are used to conduct ad hoc analyses effectively and data
support strategic decision making. Ad hoc mining are scarcer than business users who
analysis is deductive, since the user applies utilize reporting applications.
paradigm- or model-specific knowledge to
analyze the data. Data mining is inductive,
enabled by multi-dimensional query and Opportunities for outsourcing in data
intelligent algorithms used for bottom-up warehousing
discovery-driven data extraction and analysis
(Steiger, 1998). As the majority of Fortune 500 companies
With two distinct types of users, have invested in data warehouse solutions to
organizations face the challenge of acquiring a date, data warehouse vendors are now turning
broad range of skills to successfully their attention to small and medium-sized
implement a data warehouse solution. First, companies as future prospects. However,
technical users need to possess advanced small to medium-sized organizations are
decision support application development constrained by the large investment required
(i.e. coding) and maintenance skills. Data to build a data warehouse and may lack the
warehouse end-users require three sets of resources required to attract skilled business
skills: technical skills, system skills, and users with the capability to generate value
business skills (Brohman and Parent, 2001). from their investment. Based on insufficient
These skills are defined in Table I. financial resources and lack of internal skills,
Business users vary in their skill the opportunity for data warehouse
requirements, based on the type of data outsourcing in small and medium-sized
warehouse application they most commonly organizations is clear. A study by
use. For example, business users who utilize International Data Corporation indicates that
reporting applications are most dependent on fewer than 5 percent of all surveyed firms
technical skills. Business users who currently use an ASP for hosting data
concentrate more on ad hoc analyses and data warehousing or data-mining tools; however,
mining need to utilize a blend of technical, this is expected to grow to 15 percent of
systems and business skills. They utilize businesses by the year 2005 (Depompa,
technical skills to find unique associations in 2000). This growth will occur from
the data and depend on systems and business organizations that outsource data warehouse
skills to explain how the associations relate to development and maintenance as well as

Table I Summary of end-user data warehouse skills

Technical skills System skills Business skills
Database skills Problem solving Industry experience
Use query packages General problem solving Understand business and
(e.g. Microsoft Access) Qualitative and logical abilities department strategy
Write structured query language Creativity Ability to analyze business problems
(SQL) Understanding of cost benefit
Analyses skills Development methodology analysis
Organize, cleanse, and transform Programming logic Ability to determine feasibility and
data for analyses Systems analysis and design effectiveness of operational and
Generate graphical and financial Data modeling strategic ideas
Apply statistics to build models
and complete analyses
Use data-mining applications
(e.g. Enterprise Miner)

Outsourcing opportunities for data warehousing business usage Logistics Information Management
David Preston and Kathryn Brohman Volume 15 . Number 3 . 2002 . 204±211

organizations that outsource business usage of objectives of the principal and the agent
the data warehouse to support better decision (Cheon et al., 1995).
making. To date, ASPs that handle data- Resource dependence theory focuses on the
warehousing responsibilities generally collect environment external to the organization and
data, perform all necessary data warehousing the degree of dependence the organization has
functions for data integration and consistency on elements within this external environment
(extraction, scrubbing, etc.) and perform (Thompson, 1967). To obtain required
online analytical processing (OLAP) data resources that the firm cannot develop
analyses. internally, the firm must go to the external
market to obtain these resources. Therefore,
Theoretical evaluation the firm is to some degree dependent on its
The fundamental purpose of the theoretical external environment and on another firm to
evaluation is to critically analyze whether or which it outsources certain functions. The
not small to medium-sized organizations can outsourcer is dependent on the contract firm
generate benefits from outsourcing data with regard to the following factors: scarcity
warehouse usage to an ASP. This is the first of the resource, number of potential suppliers,
paper to complete a theoretical evaluation of and the cost of switching suppliers (Pfeffer
future opportunities for data warehouse and Salancik, 1978).
outsourcing. The evaluation explores The resource-based view of the firm is
economic theories that may explain the based on two assumptions:
outsourcing behavior for both ad hoc/data (1) Resource heterogeneity. Firms have
mining analyses and standard reporting. It different resources and capabilities.
also evaluates the impact of both types of (2) Resource immobility. Differences in
outsourced business usage on three categories resources and capabilities may be
sustainable (Barney, 1991). A firm's
of outsourcing success: technological benefits,
competitive advantage is contingent on
economic benefits, and strategic benefits
both resource heterogeneity and resource
(Grover and Cheon, 1996). Historically,
immobility. Resource heterogeneity can
there has been a lack of theory used to analyze
be a competitive advantage, if a resource
the option of outsourcing to an ASP (Kern
adds value to the firm and rival firms do
and Kreijger, 2000). Previous literature has
not possess this resource. However,
incorporated several theories to explain why
resource immobility is required for a firm
firms outsource IT applications including
to have a sustainable competitive
agency cost theory, resource dependence
advantage (Barney, 1991).
theory, resource-based theory, and
transaction cost economics theory (Cheon et The transaction cost approach to the study of
al., 1995; Kern and Kreijger, 2000). To organizations has been applied at three levels
insure a complete theoretical evaluation, each of analysis:
of these four economic theories was (1) the overall structure of the enterprise;
considered. (2) which functions should be performed
Agency cost theory examines the reason for within the firm and which should be
principal-agent relationships and problems handled outside the firm;
inherent in these relationships (Jenson and (3) the manner in which human assets are
Meckling, 1976). An agency relationship can organized (Williamson, 1981).
be defined as a contract under which one or Only the aspects of the second and third issue
more persons (principals) engage another are addressed in this paper. Transaction cost
person (agent) to perform some service on economics is derived from three areas of
their behalf, which involves delegating some research literature including economics
decision-making authority to the agent literature, organization theory literature, and
(Eisenhardt, 1988). Agency cost theory contract law literature (Williamson, 1981).
evaluates the efficiency of contracts that
govern the relationship between the principal
and the agent (Eisenhardt, 1988). The choice Ad hoc analyses and data mining
between what contract form will be employed
is contingent on agency costs, which can be It is difficult for ASPs to effectively run
assessed as the discrepancies between the multiple applications for different customers
Outsourcing opportunities for data warehousing business usage Logistics Information Management
David Preston and Kathryn Brohman Volume 15 . Number 3 . 2002 . 204±211

on the same hardware (Hall, 2000). Hence, and be able to work within the framework of
ASPs tend to repackage their set methods of the organizational culture of the other firm.
data analyses to a multitude of firms to Agency costs are expected to play a role in
maintain economies of scale. When the relationship between the client firm and
considering outsourcing of ad hoc and data- the external ASP in data warehouse business
mining analyses, the value of a repackaged usage. Owing to the uncertain and subjective
service is called into question. Effective ad hoc nature of the information derived by analyses,
and data mining analyses require the business it may be difficult to monitor the contract of
user to have business-specific skills. This the ASP in providing the information. In
unique capability may prevent the ASP from addition, security issues can be addressed
generating value from data warehouse under the domain of agency theory. There
analyses. However, it may be possible for the have been documented cases where ASPs
ASP to develop a relationship with the have sold data on the client firm to the client
organization that will enable them to develop firm's customers and third parties. Although
these business-specific skills. These contracts can be drafted that prohibit this
theoretical perspectives are explained in practice, this behavior can still occur.
greater detail in the context of economic- Monitoring the behavior of the ASP can add
based theories. additional complexities to the relationship
The resource-based theory of the firm is between the client firm and the ASP.
based on the assumption that firms depend on Regarding information analyses, the risk may
differences in resources and capabilities to be even greater than the situation where an
build a competitive advantage (Barney, ASP is hosting raw or partially integrated data
1991). A firm's resources and capabilities can for the client. Organizations need to consider
include the ability of a firm to conceive, that the more thorough the analyses being
implement and exploit valuable IT outsourced, the greater the consequences of
applications. Hence, in the context of its misuse.
business usage of a data warehouse, a firm is Finally, the evaluation of ad hoc and data-
more likely to develop a competitive mining analyses outsourcing opportunities
advantage from its data warehouse from a resource dependence theory creates an
investment, if it is able to develop the complex additional perspective. It will be very
technical, systems and business skills and challenging for ASPs to acquire resources
sustain them in-house. capable of developing partnerships with client
A second perspective is that the ASP could firms. Hence, the client will be very
develop a strategic partnership with the dependent on the outsourcer due to the low
organization and develop the business skills number of potential suppliers (Pfeffer and
required for effective ad hoc and data-mining Salancik, 1978). This dependence generates
analyses. In fact, it is reported that the nature business value for the outsourcer, but not
of outsourcing has evolved from a contract necessarily for the client firm.
relationship between the service receiver and
provider to a strategic partnership (McFarlan
and Nolan, 1995). A contract relationship can Reporting applications
be defined as a ubiquitous agency
relationship, in which one party (the It would clearly be much easier for ASPs to
principal) delegates work to another (the repackage their set methods of reporting
agent), who performs that work (Eisenhardt, analyses to a multitude of firms to maintain
1989). Partnership can be defined as an inter- economies of scale. The key question in this
organizational relationship to achieve the evaluation is whether or not there is an
participants' shared goals (Lee and Kim, incentive for client organizations to seek
1999). An effective partnership must have outsourcing for reporting applications. To
reduced agency costs and must foster mutual evaluate reporting opportunities, transaction
benefits to the firm and the vendor (Jenson cost theory was applied. Williamson (1981)
and Meckling, 1976). To create value, the defines three dimensions of transactions:
outsourcing relationship should reduce risk (1) uncertainty;
for both the firm and the vendor and lead to (2) asset specificity;
synergistic gains. The firm and vendor must (3) frequency with which transactions recur
have a high degree of trust and compatibility (Williamson, 1981).
Outsourcing opportunities for data warehousing business usage Logistics Information Management
David Preston and Kathryn Brohman Volume 15 . Number 3 . 2002 . 204±211

As reporting applications are more standard, debatable whether information analysis

transaction costs related to asset specificity should be outsourced even to a vertical ASP.
and uncertainty are less likely to impact the Organizations would need to develop a
outsourcing decision. However, frequency of close relationship with the ASP in order to
transactions is the dimension that is critical in transfer business skills. Increased agency costs
evaluating outsourcing opportunities. If an required to support this relationship might
organization has a need for a large volume of deter organizations from attempting to
standard reports, the transaction costs develop such a relationship. Hence, it is
incurred due to monitoring outsourcer expected that ASPs will not be able to provide
analyses may become too high, making business skills used in ad hoc and data-mining
in-house analyses more economical. On the analyses. The result is that ASP analyses will
other hand, organizations with fewer standard
not address the business-specific problem and
report requirements may incur minimal
ASPs will not be able to infer business-
transaction costs and achieve other benefits
specific results of the analyses that would be
outsourcing has to offer.
valuable to the organization. For example, an
ASP may be able to uncover a correlation in
the data that indicates that bank customers
Benefits of outsourcing under 30 years old are more likely to default
Technological benefits are innovative IT on loan payments. They would be less skilled
applications and processes that a firm can in determining business reasons why this
obtain to stay at the leading edge of correlation exists. A vertical ASP is likely to
technology. In data warehousing, have the applications to uncover important
organizations would achieve technological data, but may not have the expertise to
benefits from their decision to outsource data decipher rich information from the data. To
warehouse development. The technological compensate, organizations that decide to
benefits obtained from outsourcing business outsource complex analyses will need to make
usage are less clear. the business problem and analysis task clear
Economic benefits are those benefits that to insure that the analyses received relate to
can be obtained from a vendor that can more the business problem. It is also imperative
effectively produce IT competence through that organizations realize that ASPs may not
specialization and exploitation of economies possess business-specific skills in order to set
of scale and scope in human and appropriate expectations related to benefits
technological resources. Although resource- gained from using an ASP.
based theory, agency theory, and resource Strategic benefits are those benefits that
dependence theory indicate that the allow a firm to focus on its core business and
organization may generate more value from outsource ancillary IT processes. Although ad
data warehouse usage if analyses are hoc and data-mining analyses generate more
conducted in-house, the fact remains that unique insight for an organization, standard
complex analytical skills are scarce. Hence,
reporting represents over 80 percent of data
small and medium-sized organizations may
warehouse usage in large organizations
need to outsource in order to acquire complex
(Brohman and Parent, 2001). Hence,
technical and system skills. The skill that
outsourcing standard reporting may provide
would be difficult to acquire from an ASP is
an opportunity for small and medium-sized
business skill. Vertical ASPs function within
organizations to better focus on ad hoc and
the domain of a specific industry and have
knowledge of how that industry operates, as data-mining analyses. Through outsourcing
do divisions of management consulting firms the bulk of the IT burden, a firm may be able
that concentrate in a particular industry. to focus on ad hoc and data-mining analyses,
Vertical ASPs claim to provide applications which may provide both a strategic focus in
that are tailor-made for a particular industry; the use of IT and operational effectiveness for
however, these ASPs do not necessarily the firm. On the other hand, organizations
provide solutions for the particular with frequent standard reporting
idiosyncrasies of a firm's business processes. requirements may not be able to justify the
A vertical ASP might very well be suitable for transaction costs against the strategic benefits
providing applications to a firm; however, it is of outsourcing.
Outsourcing opportunities for data warehousing business usage Logistics Information Management
David Preston and Kathryn Brohman Volume 15 . Number 3 . 2002 . 204±211

Figure 1 Conceptual outsourcing model

Conceptual model The presence of ASPs has led to a new

The theoretical evaluation does not provide a approach for firms to outsource the usage of
clear understanding of outsourcing data warehouse applications. The ASP
opportunities and benefits for data warehouse business model has exploded in recent years;
usage. However, it clearly identifies the however, the future impact on data
theories and relationships that organizations warehousing is not yet understood. This
need to consider. The following conceptual theoretical evaluation provides the first
model, presented as Figure 1, was developed critical step in understanding what
based on the theoretical evaluation. Future opportunities exist for outsourcing business
research will examine the influence of these usage of a data warehouse.
four theoretical foundations on the decision
to outsource business usage of a data
warehouse. It will also identify how References
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