Client Relationship Development for Application Service Providers: A Research Model

Client Relationship Development for Application Service Providers: A Research Model Yurong Yao Louisiana State University yyao1@lsu.edu Lisa Murphy, Ph.D. Louisiana State University ldmurph@lsu.edu Abstract Application Service Provision emerged in the late 1990s as a viable method for remote delivery of software to multiple clients. This form of outsourcing differs from traditional outsourcing on aspects such as attributes of vendors and clients, contracts coverage and length, and functions and customization offered. Such differences are expected to result in a different pattern of relationships between Application Service Providers (ASPs) and their clients. This paper compares traditional outsourcing with ASP model, and proposes a research model and propositions on vendor-client relationship development based on prior empirical work, popular media, and theoretical perspectives from economic and marketing literature. A profile of an actual ASP is provided for illustration. In addition to providing insight into this growing form of outsourcing, this paper rectifies a prior client-centric bias in outsourcing research by considering both the vendor and the client s point of view on relationship development. 1. Introduction Application Service Provision is a form of outsourcing that emerged in the late 1990s. The widespread implementation of Internet connected in-house networks has made delivery of software applications from remote data centers technologically feasible and economically attractive. Application Services Providers (ASPs) exploit the economics of delivering commercial off-the-shelf (COTS) software over the Internet to many dispersed users. For example, Usinternetworking one the first ASPs--serves over 200 clients in financial services, chemicals, manufacturing, and other industries [11]. Information Systems (IS) research into ASPs falls under the general topic of outsourcing. Prior outsourcing research has addressed issues such as: What are the motivations for outsourcing? What are factors to be considered in outsourcing decisions? What are best practices? What are the reasons for outsourcing failures? Much outsourcing research has focused on the clients decision making on whether or not to outsource (e.g., [8; 12; 22]). Because the ASP model differs from traditional outsourcing (TO) in several respects including target markets, vendor characteristics, functions provided, resource ownership, and contract types, new questions may arise. In particular, the nature and development of the relationships ASPs have with their clients are likely to follow a different path from conventional outsourcing relationships. Not only are ASP clients smaller and less IT-savvy, the services provided can be both more focused and more generic, and the ASPs themselves are not the familiar boardroom TO vendors such as IBM or AT&T. 2. Prior Research Compared to the more numerous studies on the decision to outsource or not, fewer IS studies have looked at vendor-client relationships. Two prior studies related to this topic include Lasher, Ives and Jarvenpaa [24] and Klepper [19], both of which propose stage models for relationship development in TO settings. Lasher et al. [24] presented TO as a strategic partnership emerging around large scale, long duration projects with significant customization and many opportunities for mutual learning. Using the USAA-IBM Image Management project as an exemplar, they proposed five stages for TO vendor-client partnership development: establishing the purpose, finding a partner, defining, maintaining, and institutionalizing the partnership. Klepper [19] took a different approach and focused on the role of subprocesses in how commitment is created in TO partnerships by applying a model from marketing literature. Using Dwyer, Schurr, and Oh [5], Klepper identified four stages: awareness, exploration, expansion and commitment. Focusing on the last three stages of the process, he used two case studies to explore the importance of five subprocesses in effective relationship creation: attraction, communication and bargaining, power, norms, and expectations. These studies reflect the complexity of TO arrangements in that multiple stages are identified to achieve strong reciprocal commitments. Also, both studies approach the outsourcing setting as a single decision point followed by a relatively long mutual interaction stage. When considering how prior work informs our understanding of ASP-client relationships, we see some limitations. Unfortunately, neither study is based on a large 0-7695-1435-9/02 $17.00 (c) 2002 IEEE 1

sample that makes it difficult to judge their applicability. Both papers offer stage models, but the stages provided by the two sources differ and are not always distinct. In particular, Klepper s [19] stages have vague boundaries and the placement of the five subprocesses is inconsistent. Lasher et al. [24] reflects an alliance slant the commonly held premise that outsourcing relationships are appropriately characterized as more-or-less strategic partnerships. However, indications are that this may be an inappropriate assumption for the ASPs setting as even strong as ASP advocates seldom promote a strategic perspective [10]. Another concern is the focus on the client s point of view to the extent of excluding the voice of the vendor (cf. [36] where 11 out of 13 papers are from the vendor s perspective); it is not clear what insights may have been missed by this perspective. The growth of ASPs [33] and their focus on different clients warrants our attention. We seek to understand ASP-client relationships without emphasizing one point of view (either ASP or client) by asking: What is the nature of the ASP-client relationship and how might it differ from TO relationships? How do ASPs develop relationships with clients? What factors are important in ASP-client relationship development? This paper proceeds by defining and comparing the TO and ASP business models in regard to client-side interactions (cf. ASP-vendor side is not addressed here). We provide a profile of an actual ASP to illustrate the research model and propositions and identify potential contributions and implications. 3. Definitions Outsourcing is broad, ranging from complete take-over of the IS function and transfer of IT assets and personnel to narrowly focused contracts for telecommunication services or remote help-desk operations [27; 37]. While a wide range of contract types and relationships fall under the banner of outsourcing, our focus here is on comparing the model of traditional, large-scale, multi-function outsourcing with the most common ASP business model currently in practice. While this is a fluid area and later developments may suggest changes, we have used on the following definitions for this work. 3.1. Traditional Outsourcing Outsourcing, an important strategy for IS management for decades, took on a new face in 1989 when a Kodak signed a contract that effectively transferred all traditional IS functions, personnel, and IT assets to IBM [13]. This essentially total contracting-out of IS functions and assets is more than the subcontractor conception Gilbert offers: a third party -- the outsourcer -- the performances of certain services or the operation of certain equipment required for its internal operations [9: p.7]. Grover, Teng and Cheon [12] give a useful definition that doesn t assume or prohibit a strategic partnering; they define outsourcing as an: organizational decision to turn over part or all of an organization s IS functions to external service providers in order for an organization to be able to achieve its goals. [12: p.80] 3.2. Application Service Provision The ASP model emerged in the late 1990s, often as an expansion to the functions of Internet Service Providers (ISPs) The ASP Industry Consortium [2] defines an ASP as a company that manages and delivers application capabilities to multiple entities from a data center across a wide area network. CIO Magazine offers a similar definition: ASPs are companies that rent software functionality over the Internet or a private network [33]. Some have noted the correlation to the service bureau model more common before the rise of in-house IT departments [18]. As a new and emerging component of IT practice, ASP lacks a commonly agreed upon definition among IS researchers. Further, ASPs are not an exclusively US phenomenon; we prefer a description used by BT Small and Medium Enterprises in the UK because it reflects both client and ASP perceptions: ASPs provide an alternative to companies having to buy, install, manage and update software themselves. They do this by hosting and managing applications themselves so that companies can rent the applications they need and use them by access via the Internet. [26] 4. Examining Differences In this section, we examine how TO and ASP differ. A profile of an actual ASP company is used to illustrate comparisons on attributes such as clients, contract makeup, and service offerings. 4.1. ASP Profile: Technology Application Company The following profile of an ASP is offered to help anchor the theoretical aspects of the model to real life. (The information provided is from an actual company, but some details have been changed or otherwise disguised.) A privately owned technology service provider in a medium-sized US city, Technology Application Company (TAC) began providing on-site network maintenance for legal firms in 1989 and later offered both business and public ISP access. In 2000, TAC expanded its offerings to become a vertical ASP focused on its existing customer base in twenty states. Growing both internally and through acquisition, TAC s 30 or so employees offer an expanding suite of services beyond ASP including web site development and hosting, network design and implementation, and systems in- 0-7695-1435-9/02 $17.00 (c) 2002 IEEE 2

tegration. Their ASP clients, located primarily in the southern and western US, include small legal offices and multinational corporate in-house legal departments, with strong presence among mid-sized professional legal service corporations. TAC has partnered with hardware and software vendors such as Citrix, Microsoft, Novell, and Cisco and recently opened a tier-1 data center. While TAC s strong networking offerings reflect their origins as an ISP, the founder characterized his firm s movement toward an ASP model as a natural progression that exploits TAC s experience in professional services. [35] 4.2. Comparing Outsourcing Models TO arrangements have showed a wide range in both scale and scope while the ASP model continues to evolve [33]. We compare the models by six general categories-- target clients, vendor characteristics, contract types, functions provided, extent of customization, and resource ownership--derived from a review of popular and academic literature [e.g., 3; 10; 12; 16; 18; 21; 22; 24; 26; 33]. Key characteristics are summarized in Table 1 (at the end of the paper). 4.2.1. Target Clients Outsourcing vendors differ in services provided and therefore identify with different target markets. TO Model: Large Clients with IT Departments By-and-large, TO agreements are negotiated on a caseby-case basis between a large outsourcing vendor and a large client company. Lacity and Hirschheim [21] found that large companies perceived TO as a feasible way to reduce IS costs. Also, risk reduction is a significant motivation for TO even when clients have their own wellestablished IS departments, significant customization in IT, and large IT investments [12; 16]. Recent examples of large clients outsourcing significant internal IS functions include Enron (hired EDS for baseline maintenance) and Chase Manhattan Bank (contracted with AT&T for broad IT support) [22]. ASP Model: Small Clients with Low IT Expertise Typically, ASPs target smaller firms than TO vendors [26; 33]. The fit is a natural one, as smaller firms may be adequately supported by COTS applications from third party software companies running on standard desktop platforms [4]. Even mid-size firms find ASPs attractive as they struggle to keep pace with technology change and increasing workloads with small staff and minimal budgets [B2]; a recent study found that over three-quarters of UK firms have fewer than five IT staff [26]. TAC s clients include small legal firms where IT issues are handled by a local expert user (usually the most technological-oriented among the attorney partners), midsized legal corporations with one or two IS staff managed by a (non-technical) partner, and larger legal corporations with a dozen or less professional IS staff and a supervisor reporting to a non-technical partner. TAC s largest clients have little collective experience in the traditional IS domain of application development and operate on one technology platform (i.e., Wintel ). 4.2.2. Vendor Characteristics Although Garner Group predicts a major consolidation in the ASP industry by 2002 [33], distinctions are visible between typical TO and ASP vendors, especially for companies who source from regional markets. TO Model: Name Vendors TO vendors tend to be familiar names in IT industry (e.g., AT&T, EDS, IBM, Oracle) who have established reputations in both IS departments and non-is executive offices. Not only do these firms have global reach and undeniable competence in technology per se, for any given TO vendor, outsourcing services are only one part of a business which likely includes past and/or future relationships with those same customers. ASP Model: Entrepreneurs and Start-ups In general, ASPs are smaller firms lacking both the depth in management experience and breadth technology knowledge of TO vendors [33]; now, before the predicted shakeout, most ASPs do not yet serve national markets (much less global ones). Also, as the entrepreneurs of outsourcing, ASPs have developed niche markets less attractive to TO vendors but have shorter track records and shallower pockets. In addition to remote hosting of common business applications such as office suites and accounting, some ASPs have vertically targeted their markets by specializing in software for a specific industry such as medical practices [33]. An alternative form of ASP attractive to larger client firms is the horizontal specialist such as VIN.net who provides financial expense management applications of enhanced functionality with rapid multi-location deployment [18]. TAC has thirty employees and only began remote application serving in 2000; they are an example of the smaller, regional ASP fitting in a vertical target market classification due to their specialization in professional services, particularly legal firms. TAC serves only USbased operations, even for its multi-national corporate accounts. 4.2.3. Types Outsourcing contracts can vary significantly. TO Model: Long, Broad, Strategic TO contracts show great range, in part because they have historically been negotiated on a case-by-case basis [21]. Nearly ten years after the historic Xerox contract, Lacity and Willcocks [22] identified four TO contract types: loose, mixed, standard, and detailed. Loose contracts are based on a percent of client s baseline budget 0-7695-1435-9/02 $17.00 (c) 2002 IEEE 3

and do not specify performance metrics. Mixed contracts begin with detailed requirements and after three to five years, these requirements become loose ; the idea behind this is to allow for the contract to be longer term but also adapt to the changing needs of the client and exploit new efficiencies and technological capabilities. In the standard contracts category, the length and scope of the services can be broad but can be met with little customization to the vendors preferred contract. Detailed contracts have been the norm in TO, requiring extensive negotiations related to transfer of technology assets such as data centers and personnel, support of highly customized (and often competitively-sensitive) applications, and tortuous specification of quality-of-service levels, performance metrics, and penalties for non-performance. Some authors have proposed outsourcing relationships as strategic alliances or partnerships (e.g. [24]). A strategic alliance is an inter-organizational relationship to achieve some common goals [25]; critical to an alliance being strategic is that participants share risks and profits, contribute resources, and create mutual value. The length of TO contracts (typically ten years) is likely related to the arguments that outsourcing vendors and their clients should be partners. As their scope and length expanded (particularly after the Xerox-IBM deal), TO contracts took on a more strategic tone, but it is unclear how many qualify under a strict interpretation of strategic alliance. Determining prevalence of specific contract terms is difficult; yet, the longer time frames, broader service coverage, and more complex software licensing issues of TO are less likely to be satisfied by the terms of a standardized contract. ASP Model: Short, Usage-based, Non-strategic ASP contracts have a narrower scope and shorter term, typically one to three years. A common pricing approach is a minimum charge plus service fees based on time or user sign-ons [20]; one practitioner characterized acquiring ASP services as similar to buying voice mail services from a telephone company [18]. As such, ASP contracts function more like rental agreements (with no depreciation and a predictable cost range) without asset or personnel transfers or other of the more complicated aspects of TO agreements. While the market potential for ASPs has been studied, little data on ASP contract length could be located. Our data on length comes directly or indirectly from ASP vendors; to the extent that they benefit from being perceived as more stable and financially secure, ASP vendors may be motivated to overstate the length of their contracts. Our confidence is raised, however, by the practice of some ASPs to publish their standard contracts on their web sites. The typical ASP contract at TAC is two years long and is structured as a base fee plus usage. Most contracts are from one to three years with only slight modifications to a standard format. A few ASP customers are month-tomonth such as a new client unsure that the ASP model is effective for them or a few other clients in transition situations (e.g., mergers, location changes). TAC reviews such cases in three to six months with an eye to converting them to a standard (two year) contract. 4.2.4. Functions TO and ASP models differ in the functions offered. TO Model: Pick Your Services Since the Xerox-IBM case [13], outsourcing has covered a very broad scope of functions, but most TO vendors specialize to a greater or lesser extent. Cherry Tree & Co. [3] classifies TO functions into three types: Application outsourcing including application development and maintenance; Information utilities and business process outsourcing including complex or repetitive business process such as payroll processing; IT infrastructure operations including network, hardware, and data center functions. Name outsourcing vendors usually can be classified into these categories: EDS (information utilities and business process), Hewlett-Packard (infrastructure operation), and Accenture (application outsourcing); a few vendors are full-service providers such as IBM [3]. ASP Model: Web-based Application Services ASPs are characterized by their focus on web-enabled COTS application delivery, whether through the Internet or private networks such as VPNs. However, common additional services include secure data hosting, backup and recovery, virus scanning, and network connectivity (e.g. [18; 20; 33]). The emerging vertical ASP market represent specialized applications to specific industries such as healthcare (Siemens Medical Solutions Health Services Corporation), transportation (3Plex), loan processing (Appro Systems). In their ASP role, TAC delivers both generic office productivity packages such as Word Perfect Office and Microsoft Office and specialized legal applications such as Summation and Juris. Most contracts include ISP connectivity. Beyond ASP/ISP services, TAC also does projectbased consulting, such as, the design and installation of an in-house network or systems upgrade. 4.2.5. Extent of Customization TO and ASP differ in the nature and extent of customization available to clients. TO Model: Tailored to You TO contracts and therefore the functions delivered show a high degree of customization, regardless of the nature of the services provided (e.g., see cases examined in various papers in [22]). In particular, supporting (i.e., operating, maintaining, and upgrading) previously developed inhouse software for large, multi-location (or even global) 0-7695-1435-9/02 $17.00 (c) 2002 IEEE 4

firms (e.g., [24]) is a case of accommodation to the specific needs and interests of a client not seen in ASPs setting [31]. ASP Model: One Size Fits All At its core, ASP follows a one-to-many model to exploit economies of scale in application licensing, installation, operation, and upgrades [10]. As such, ASPs prefer to provide standard software packages with little or no customization and price their services with that in mind [3]. ASPs determine which optional functions to activate on the base software, when to upgrade, and when an application will no longer be supported. Clients can expect to pay for the development of any hooks to their own software, for special use software even when hosted at the ASP, and for custom configuration work for scheduled upgrades [18; 20]. On the flip side, vertical marketfocused ASPs may be able to offer their clients more sophisticated software than the clients could afford or support on their own [18]. TAC feels that their extensive experience in the field provides them with insights into best practices for legal software work. Their portal format determines functions available to the users by what is displayed at sign-on via a browser; they offer essentially no customization to the packages themselves. TAC has not yet experienced a major software upgrade and cannot report on the policies or practices in that regard. 4.2.6. Resource Ownership IT resources ownership differs between TO and ASP. TO Model: Mixed Bag The needs of the TO clients may result in full, partial, or no transfer of ownership of all or none of the client s IT resources [10; 21]. Full-scale TO agreements can involve the transfer of personnel as well as soft and hard assets [13]. Alternatively, TO clients may keep existing software licenses until expiration and retain control over internally developed software, particularly competitively important bespoke applications (e.g., [31]). Clients own all their data, even when the vendor processes it on their behalf from a custom mainframe database [27]. ASP Model: Vendor Application Ownership In the baseline model, ASPs negotiate licenses with the software makers and provide access to those licenses for clients under the contract [10]; they also own the servers and any related hardware and software. ASP client firms provide internet-capable client devices (although these may be acquired from some enterprising ASPs). The ASP assumes responsibility for (server-based) application operation and upgrades [10; 33]. As is true for TO, ASP clients own their data residing on vendor servers but this is typically user files and smaller COTS formats. TAC owns several data centers and negotiates directly with several vendors for software licenses; the clients do not own licenses themselves to any ASP-delivered software. TAC guarantees the security and accessibility of the data stored in its data center. 5. Vendor-Client Relationship Development While the ASP domain continues to evolve, the differences between it and the TO model are significant. These differences are likely to affect the nature and pattern of relationships between ASP vendors and their clients, especially in regard to the vertical ASP segment. Prior work from two theoretical streams introduce to our research model of ASP-client relationship development. 5.1. Theoretical Foundations Two general classes of theories are of interest there: economic factor models and behavior models. Economic factor models such as Agency Cost Theory (e.g., [15]) and Williamson s [37] Transaction Cost Economics focus on the advantages and limitations of different types of relationships (such as contracts) for achieving effective and efficient service delivery under uncertainty. The behavioral constructs come from marketing (e.g., [1; 23; 25; 34]) and look at the influence of communication, conflict resolution, and reputation, i.e., factors related to perceptions and behavior. While remaining conscious that other researchers have insights to offer for this topic, we have found these two approaches useful for this early state of research. 5.2. A Basic Outsourcing Relationship Model While Lasher et al. [24] and Klepper [19] both offer multi-part stage models of TO-client relationship development, their models are hard to compare and subject to disagreement over the definition of stages and the transitions between them. Indeed, the wide variation in practice makes generalization about TO relationships difficult. A basic model avoids disputes over definition of stages and boundaries by focusing on easily observable contract status (Figure 1). While clearly not reflecting the complexity of TO practice, this model has the benefit of simplicity while accommodating all four types of TO contracts identified by Lacity and Willcocks [22]. Pre-contract Experience Long-term Figure 1. A contract-transition based view of the traditional outsourcing vendor-client relationship The Pre- Experience stage runs from a firm beginning to explore the option of outsourcing and ends when negotiations are undertaken with a specific vendor. This stage is important for relationship development because it affects the expectations of both client and vendor about the processes and outcomes of the new relationship (e.g., [17; 24] identify the first stage as finding a partner). 0-7695-1435-9/02 $17.00 (c) 2002 IEEE 5

Clients and vendors have the potential for having interactions prior to outsourcing; indeed, it is no coincidence that IBM was chosen by Xerox for their groundbreaking full outsourcing agreement [13]. This prior experience may come in the form of transactions (e.g., selling/buying hardware, software, services, or consulting) or through near transactions (e.g., a client firm considered but did not buy a vendor s products). Another type of influence operating comes from diffuse and indirect sources called reputation. The Transition to Long-term (the arrow) may be short or long, simple or complex, reflecting the wide variation in TO agreements ranging from wholesale exporting of all IT functions, assets and personnel to selecting from a cafeteria-style menu of services. That, negotiations may be extensive or minor, correlating with the Lasher et al. [24] phase called defining the partnership. The information available to participants during this transition has the potential to change the relationship beginning to develop. Negotiations for a major outsourcing agreement may involve exchange of usage and performance data and analysis of that data according to a client s in-house metrics. Asset transfers may involve sharing cost and personnel information that would normally be considered proprietary to the firm [8]. Thus, both client and vendor obtain new information about the past and current performance of the other used to form expectations about future performance [19]. The baseline model for outsourcing is a Long-term written in terms of years; large, complex TO arrangements have been characterized by contracts of ten years or longer. As the contract is executed, both client and vendor test their understanding of the agreement and of each other s needs and capabilities. Lasher et al. [24] identify maintaining the partnership and institutionalizing the partnership as processes occurring after contract signing. Two of the four types of contracts identified by Lacity and Willcocks [22] aptly illustrate the potential for mutual learning during this period: the loose and the mixed model. 5.3. Basic ASP-Client Relationship Model Based on the differences between TO and ASP (Table 1), we believe that the ASP-client relationship is more appropriately represented by adding a intermediate contract state Short-term to the two proposed in Figure1; this results in a five stage model with three contract states and two transitions (Figure 2). Pre-contract Experience Short-term Figure 2. A basic ASP-client relationship model Long-term The Pre-contract Experience stage has the same boundaries as the baseline model: prior to negotiation over a contract between a specific vendor and a specific client. Clients may be researching their options, including soliciting proposals from ASPs. Again, parties may have prior experience with each other, for example, an ASP may have been ISP for the client. The Transition to Short-term (first arrow) is expected to be relatively short and characterized by clients providing more information to the specific vendor than vice versa. The trialability of a standardized service via short-term contract reduces the duration and intensity of negotiations. One of the effects of potential ASP clients having lower IT expertise is that the ASPs will know less about their client s needs than in the baseline TO setting. The Short-term stage covers terms of less than one year. This stage allows both vendors and clients to learn more about each other through the delivery of services, training, help desk operations, and especially through the experience of resolving conflicts. In the Transition to Long-term (second arrow), the clients have more information not only about the ASP (e.g., capabilities), but also about their own needs. This new information is important for assessing the match between the ASP s capabilities and the client s needs. The Long-term stage (two-three years) is not without uncertainties in the ASP model as clients and vendors are concerned with changes in technology and user demands and their effects on underlying economics. 5.3.1. Core ASP-Client Relationship Propositions Based on the model in Figure 2 and developed above, several propositions are assumed to be descriptive of the ASP-client context. These general propositions are provided without discussion and should be read as beginning with compared to traditional outsourcing vendor-client relationships, : P1a: ASP contracts are more likely to be usage-based and have shorter average terms. P1b: ASP relationships are less likely to be strategic alliances. P1c: ASPs and clients know less about client requirements prior to initial contract signing. P1d: ASP contracts are less likely to be customized. P1e: ASP clients are more likely to rely on the performance measures provided by the vendor. 5.3.2. Factors Affecting Relationship Development We discuss factors garnered from a review of prior literature [1; 25; 29; 30; 34] expected to mediate the transition between contract states (Figure 3). Credibility, Capability and Expectations Match We propose their influences are significant in the both transitions, credibility, capability and match between the client s expectation and the vendor s capabilities. 0-7695-1435-9/02 $17.00 (c) 2002 IEEE 6

Pre-contract Experience Credibility - Reputation - Previous Experience Capability Expectation Match Short-term Long-term Communication Trust Dependence Conflict Resolution Figure 3. Influences on ASP vendor-client relationship development Credibility Credibility is the extent to which the clients believe the vendor will supply the needed services [34], and as such, it primarily represents the client s perspective on the relationship. In a model of relationships between retailer and vendor, Shanker [34] presents reputation of the vendor and the client s experience with the vendor as critical factors influencing the client s perception of vendor s credibility. In our model, credibility derives from two factors: ASP s reputation and previous interactions between the client and the vendor (i.e., related to non-asp services such as ISP). Reputation: An ASP s reputation signals credibility by evidence received via indirect channels [34]. Through activities unrelated to the specific experience of a given client, such as an award or ranking, an ASP can build a reputation of fairness, reliability, or cost effectiveness used by clients in their decision-making [1]. Indeed, TAC seeks opportunities to increase their visibility such as issuing a press release about an award from the ASP Consortium [35]. Also, as smaller, more entrepreneurial firms, ASP s reputation may be significantly influenced by the personal reputation of executives than at TO firms. For example, the president of TAC worked in IT department of legal company for many years. Previous Experience: Prior research tells us that positive outcomes and equitable treatment in previous interactions increase the chances of developing longer relationships (e.g., [1; 34]), even when the experience is not directly related to the service being sought [17]. Larger clients have more opportunity for TO vendor interactions (e.g., buying hardware or software from IBM, Hewlett Packard, or Oracle). The generally larger firms who are TO vendors have a wider range of services and products with which to generate such exposure. While ASP clients may have had prior direct experience with the vendor for ISP connectivity, consulting, or integration projects, as smaller firms in general, their demand for and range of IT activities are less than typical TO clients. On the vendor side, because they engage in a smaller range of IT businesses and seldom have the national or global reach of TO vendors; typically, ASPs will have had fewer opportunities for prior business interactions with clients. Capability DiRomualdo and Gurbaxani [6] regard capability of ASP as a critical factor in the relationship between ASPs and client. Sufficiently powerful and secure servers, effective relationships with hardware and software vendors, and an experienced staff form the basis for an ASP to deliver on its promises [20]. A firm giving up its in-house technical capabilities, no matter how meager, is also concerned with the financial security of the vendor [14]. In the transition to short-term contract, we expect that prospective client firms who often lack extensive IT experience will rely heavily on non-specific indicators of the vendors capabilities such as endorsements by major vendors or metrics of size and coverage. In contrast, during the transition to long-term contract, the perceptions of capabilities can be revised based on experiences not known at the time of the initial contract. Materials TAC provides to prospects discuss its technology in extensive detail, with heavy reliance on jargon (e.g., tier 1 data center ) and visible logos from hardware vendors such as Cisco. Claims of 24x7 operation and toll free support suggest a firm with adequate resources. As a private firm, TAC does not provide financial statements, but implications of permanence and stability may be implied by description of TAC s geographic coverage and growth [35]. The following propositions reflect the expected effect of these factors on the transition between Pre- Experience and Short-term : P2a: An ASP with higher credibility is more likely to execute an initial contract. P2b: An ASP with a more established reputation (even if it is unrelated to ASP services) is more likely to execute an initial contract. P2c: An ASP having prior experience with a client is more likely to execute an initial contract. P2d: The greater the perceived capability of the ASP, the more likely it is to execute an initial contract. Matching ASP Capabilities & Client Expectations In addition to absolute levels of reputation and capability, the match between the offerings of the vendor and the needs of the client is significant. Grover [12] argues that a set of requirements -- software functions, problem response time, data security, transaction cost and agency cost -- form a client s expectations for outsourcing. A key motivation for seeking ASP outsourcing is to complement internal IT shortcomings [4]; a meet-or-exceed rule where the client sees the ASP as matching or exceeding their own capabilities is expected to be operating. Clients inexperienced with outsourcing or having low IT expertise are less likely to be able to clearly articulate their own requirements; thus, their expectations of the ASP may be formed in part by the provisions of the contract itself. The ASP is signaling their expectations for what constitutes a good fit with them by what they are comfortable putting 0-7695-1435-9/02 $17.00 (c) 2002 IEEE 7

in writing to a client. This suggests that the greater the detail in the contract, the more confident the client will be that they hold valid expectations. For the initial contract, only limited information is available about the needs of the client, so the standard terms are expected to have a significant influence on the perceptions of matching expectations. During the execution of the short-term contract, both ASP and client learn more about each other, with the potential for a mismatch to emerge between their mutual perceptions [23]. Changes to the standard contract terms may be conceived of as indicating both a better or worse match. The willingness to modify a contract for special terms may signal to a client that the ASP is supportive and flexible; this has been a significant factor in TO [21]. Yet, when the vendor can accommodate a client s needs within the terms of an existing contract, clients with lower IT expertise may be more comfortable that there is a fit (even when they may initially lack the experience to judge the quality of the services). Likewise, a vendor will perceive a customer who accepts a standard agreement as being a closer fit to their capabilities than a client who asks for contract changes. The following propositions relate to the implications of issues related to match in expectations: P2e: The greater the match between ASP and client expectations, the more likely it is that a contract will be executed. P2f: The more detailed the standard contract, the more convergent the expectations of the client and ASP. P2g: The fewer changes required to the standard contract, the greater the perception of fit on the part of both the client and the vendor. Experience-Driven Influences While credibility, capability, and expectations match continue to be important, whether or not the relationship moves to the next stage depends to a great extent on the delivery and experience of application serving. Especially, client s exposure to ASP s capability during the short-term contract state executes influences the decision to execute another, longer-term contact. ASP-client contracts are always detailed in Lacity and Willcock s [22] terms; thus the experience of delivering services (e.g., during the short-term contract state) is more likely to surface evidence of a lack of match between the needs of the client and the actual (vs. expected) capabilities of the vendor. Yet, having an option for a contract transition seems to provide the flexibility sought by TO clients who negotiate loose and mixed contracts [22]. In economic terms, the generally shorter terms common in ASP contracts may increase certainty of being specific (low production costs) but accommodate the uncertainty of a dynamic environment (e.g., due to changes in technology, clients, and vendors) by keeping switching and other transaction costs low (e.g., [37]). Four factors from practice and research [1; 2; 25; 28; 29] affected by initial term service delivery interactions are proposed to influence this important state of relationship development, the transition from short-term to longterm contract: communication, trust, conflict resolution, and dependency. Communication Anderson and Narus define communication in buyerseller relationships as informal sharing of meaningful and timely information between firms [1: p. 44]. In the short-term contract stage, communication includes faceto-face contacts, phone calls, and emails, serve primarily to exchange information about problems and solutions [28]. Communication, especially when it s timely [29], can serve to promote trust by clarifying misunderstanding and adjusting expectations [7]. While greater amounts of communication may be associated with problems between clients and vendors, a lack of communication may mean that the needs of the client aren t being signaled to the vendor or that the vendor s capabilities are not being used by the client. Trust Trust relates to a firm s belief that another company will perform actions that will result in positive outcomes [1: p. 45]. In this paper, trust from the client perspective refers to a belief that the ASP has both the intention and ability to provide quality services. Greater trust has a positive effect on developing relationships between clients and ASP [29]. A short initial contract (i.e., TAC s three month) allows clients to learn to trust not only the ability of the vendor to deliver services, but the mechanisms for resolving conflicts and the metrics of ASP performance monitoring. Conflict Resolution During short-term contract stage, conflicts often appear as deviations from client s expectations as well as incompatibilities [25; 30]. Conflict may serve more as productive discussion rather than argument [32]. Thus absence of conflict is not always positive as effective conflict handing relieves tensions and clears up misunderstandings [30]. Conflicts serve as a significant source of information to the vendor about the IT capabilities and needs of the client; these needs can then be considered in future contract offered to the client. Resolution of conflicts also serves to inform clients about capability and reliability of vendors. Conflicts do not have to be use-related to influence relationship development. As clients experience service quality and see it measured, they may shift expectations or create new ones. For example, clients are very sensitive to up-time and data security [2] but translating reliability commitments into practical outcomes may occur only after exposure to routine vendor performance reports alerts them to the experience of different levels of service. 0-7695-1435-9/02 $17.00 (c) 2002 IEEE 8

Trust and conflict resolution are related: Clients with higher trust may be more willing to engage in conflictrelated communication. In turn, communication about conflict may increase the chances that it is resolved, which can improve trust. While no information was available from the clients point of view, TAC personnel reported that account manager may request problem lists from clients during the short-term contract. This suggests that communication about problems may be perceived by TAC as a factor in successful conversion of clients to long-term contracts. Dependence Dependence in the context of ASP relationships is related to the need for one party to perform for the other to achieve their goals [34]. Dependence relations may be reflected in costs difference, e.g. clients with high switching costs are more dependent than those with lower switching costs. Research suggests that mutual dependence has a positive influence on relationship development [1; 25]. At initial contract, clients may be more dependent upon their ASP vendors due to their relatively lower level of IT expertise (cf. TO clients and vendors). As clients learn more about their own needs and about what to expect from ASPs, they become less dependent. While perhaps not equipped to in-source applications, they are a more savvy customer of ASP services, for which there is a growing number of suppliers [2]. Compared with TO, the cost of switching to another ASP is low; this may lead to a greater willingness to request changes to the standard terms of a long-term contract. TACs short tenure as an ASP has provided no insights into dependency. Perhaps the first product upgrade will make clients aware of their relative dependence on TAC. We offer the following speculative propositions related to the transition to long-term contract: P3a: Greater ASP capability increases the likelihood of executing long-term contract with little or no modification to standard terms. P3b: Greater communication during the short-term contract period increases the likelihood of executing a long-term contract. P3c: Greater conflict-related communication increases the likelihood of executing a long-term contract. P3d: Higher levels of client trust increase the likelihood of executing a long-term contract. P3e: Higher levels of conflict-related communication are associated with higher levels of trust. P3f: Greater ASP capability is positively associated with client dependency. P3g: Client dependency on ASPs is positively associated with greater customization of long-term contracts. 6. Contributions & Implications Due to differences from the traditional outsourcing model, ASP and client relationships are expected to follow a different development path. A five-stage model includes factors derived from both economic and behavioral research streams. By basing the stages on observable contractual status, the validity of the basic structure can be more easily established than prior stage models (e.g., [24; 19]). Nonetheless, complexities may hide in the simplicity as some propositions hint at pressures leading to divergent outcomes (e.g., P3a and P3g). Key questions to be explored include whether differences in the duration of contracts (e.g., two years vs. ten) and in the complexity of the services and agreement (e.g., extent of customization, functions offered) have the relationship development effects hypothesized. This model depends upon assumptions about both ASPs and their clients that may ultimately be invalidated or narrowly applicable (e.g., to vertical or pure ASPs only). As the ASP industry consolidates, the size of the typical vendor is likely to increase both by consolidation and by attracting new entrants (e.g., leading ERP vendors are setting up ASP operations). At the same time, penetration will continue in smaller client firms (due to the fundamental economics) and in larger corporate clients (due to the ability of the larger ASPs to scale-up). Such changes have implications for relationship development via effects on credibility and dependency regardless of the economics of remotely hosted application delivery. The primary contributions of this paper are to identify how ASP and TO differences may affect vendor-client relationship development while providing a balanced perspective neither privileging the client nor the vendor point of view on this complex process. The model is in the early stages of development. By attempting to capture issues operating dynamically in a fluid industry; it is likely an incomplete representation of the present and certainly an incomplete forecast of the future. 7. References [1] Anderson, J. C. & Narus, J., A model of distributor firm and manufacturer firm working partnerships, J Marketing (54), 1990, 42-58. [2] ASP Industry Consortium, Intelligent Enterprise (4:1), 2001, 8. [3] Cherry Tree & Co., Framing the IT Services Industry: Application Service Providers, Edina, MN, 2000. [4] Cleaver, J., Small business turning to ASPs to make life easier: the basics preferred over killer apps, Crain s New York Business (16), 2000, 27. [5] Dwyer, F., Schurr, P., & Oh, S., Developing buyer-seller relationships, J Marketing (51), 1987, 11-27. [6] DiRomualdo, A. & Gurbaxani, V., Strategic intent for IT outsourcing, Sloan Management Rev (39:4), 1998, 67-80. [7] Etgar, M, Sources and types of interchannel conflict, J Retailing (55), 1979, 77-78. [8] Finan, L., Konieczny, J., & Zadell, B., For better or for worse: Questions for HR professionals to ask a prospective outsourcing partner, Benefits Quarterly (3), 2000, 7-13. 0-7695-1435-9/02 $17.00 (c) 2002 IEEE 9

[9] Gilbert, F., Issues to consider before outsourcing, The National Law J (16:15), 1993. [10] Gillan, C., Graham, S., Levitt, M., McArthur, J., Murray, S., Turner, V., Villars, R., & Whalen, M., The ASP s Impact on the IT Industry, 2000, http://www.idc.com. [11] Greene, J., Software shakeout: Application service provider promised to transform the way business is done, what happened?, Business Week, March 5, 2001, 72. [12] Grover, V., Teng, J. & Cheon, M., Towards a theoretically-based contingency model of information systems outsourcing, In [36], 79-102. [13] Hovey, V. Untitled. Presentation to IRC at University of Houston, January 22, 1991. [14] The Phillips Group InfoTech, Network Hosted Applications: U.S. Market Demand And Segmentation Analysis, Parsippany, NJ, 2000. http://www.thephillipsgroup.net. [15] Jensen, M. & Meckling, W., Theory of the firm: Managerial behavior, agency costs and ownership structure, J Financial Economics (3:4), 1976, 305-360. [16] Jurison, J., A risk-return model for information technology outsourcing decisions, In [36], 187-206. [17] Kanter, R., Collaborative advantage: The art of alliances, Harvard Business Review, July-Aug, 1994, 96-108. [18] Kearney, T., Why outsourcing is in, Strategic Finance (81:7), 2000, 34-38. [19] Klepper, R, The management of partnering development, In [36], 305-326. [20] Koch, C. Monster in a box, CIO Magazine, May 1, 2000. [21] Lacity, M. & Hirschheim, R., Information Systems Outsourcing Myths, Metaphors, and Realities, New York, NY: John Wiley & Sons, Ltd., 1993. [22] Lacity, M. & Willcocks, L., An empirical investigation of information technology sourcing practices: Lessons from experience, MIS Quarterly (22), 1998, 363-408. [23] Landeros, R., Reck, R. & Plank R., Maintaining buyerseller partnerships, Int J Purchasing and Materials Management, Summer, 1995, 3-11.. [24] Lasher, D., Ives, B. & Jarvenpaa, S., USSA-IBM partnerships in information technology: Managing the Image Project, MIS Quarterly (15:4), 1991, 551-565. [25] Lee, J. & Kim, Y., Effect of partnership quality on IS outsourcing success: Conceptual framework and empirical validation, J Management Information Systems (15:4), 1999, 29-61. [26] M2 Communications. Bt: ASPs Bring Life Line for Mid- Sized Companies, 2000. http://www.asp.com/research_bt.html. [27] McLellan, K., Marcolin, B. & Beamish, P., Financial and strategic motivations behind IS outsourcing, In [36], 295-326. [28] Moore, K., Trust and relationship commitment in logistics alliances: A buyer perspective, Int J Purchasing & Materials Management (34), 1998, 24-37. [29] Moorman, C., Deshpande, R. & Zaltman, G., Factors affecting trust in market research relationships, J Marketing (57), 1993, 81-101. [30] Morgan, R. & Hunt, S., The commitment-trust theory of relationship marketing, J Marketing (58), 1994, 3-23. [31] Rajkumar, J. & Dawley, D., Problems and issues in offshore development of software, In [36], 369-386. [32] Robicheaux, R. & El-Ansary, A., A general model for understanding channel member behavior, J Retailing (52), 1976, 30-39. [33] Rutherford, E., ABCs of ASPs, CIO Magazine, June 26, 2000. [34] Shanker, G., Determinants of long-term orientation in buyer-seller relationship, J Marketing (58), 1994, 1-25. [35] TAC, 2001 (contact the authors for more information). [36] Willcocks, L.& Lacity, M., Strategic Sourcing of Information Systems: Perspectives and Practices, New York, NY: John Wiley & Sons, 1997. [37] Williamson, O., Markets and Hierarchies, New York, NY: The Free Press, 1975 Attribute Traditional Outsourcing Model Application Service Provision Model Target Clients Vendor Types Functions Provided Extent of Customization Resource Ownership large size with own IT departments large corporations potential global span familiar IT brands outsourcing is small part of business primarily individually negotiated detail contracts focus is on definition of service levels & penalties long terms (often ten+ years) strategic partnering application development information utilities and business processes IT infrastructure client-determined high degree of customization available, especially for application development clients may retain or transfer ownership of all or some hardware and /or software clients retain control over custom-developed software small or medium organizations without internal IT departments entrepreneurial, smaller firms local/regional focus not well known firms outsourcing is key revenue source standard application rental first payment and monthly usage fee short terms (one to three years) web-enabled application delivery application functions for specific industry deliver standard software packages with minimal change clients pay for customization vendors are responsible for server hardware clients provide client-side hardware vendors own application licenses Table 1. Summary of characteristics of traditional outsourcing vs. ASP model 0-7695-1435-9/02 $17.00 (c) 2002 IEEE 10