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The demise of first generation service models of application service providers (ASP) indicates that moving from individualized services (e.g. many outsourcing offerings) to fully standardised services (e.g. first generation ASP models) leaves many customer requirements unfilled. In our paper we argue that a possible solution for building innovative e-services is the use of modular service architectures. The paper introduces the characteristics of IT services, based on a case study with a leading German provider of application hosting services in the ERP market. We pay particular attention to the general composition of IT services, the role of external factors (how customers and their resources participate in service operations), and varying customer preferences. Referring to these considerations, the paper explains the concept of modularity and the application of the concept in the domain of IT services. We specifically …