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Host With The Most?
SalesLogix and IBM join forces in the emerging ASP market. That's a smart move...isn't it?
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SalesLogix and IBM are the latest technology companies to set their sites on a promising, yet uncertain market: Web hosting. The two recently followed in the footsteps of Siebel and USinternetworking by forming an application service provider (ASP) partnership that will deliver SalesLogix's front office applications to middle- and small-market companies through IBM's e-Business Services network.

Though questions about the viability and security of this type of service remain unanswered, these and other companies are forging ahead and attempting to establish a presence in what experts predict will soon be an enormous market. "We expect this to be a significant part of our business," says Doug Nicholas, vice president of Business Development at SalesLogix.

If predictions for this market come true, "significant" could be an understatement. According to Jeanne Schaaf, senior analyst at Forrester Research, the ASP market is expected to grow from its current size of $1.6 billion to $14.6 billion in 2003. "That is a compound annual growth of 76 percent over the next four years," says Schaaf.

What accounts for these rosy predictions? The ASPs' potential in the middle and small markets, where they provide companies whose resources are limited with access to best-of-breed applications. Usually, only large companies with big IT staffs can afford to implement and maintain the kinds of complex, front office solutions that are becoming standard operating tools in business. Though mid- and small-sized companies need these same tools to remain competitive, their budgets forbid it. That's where ASPs come in. For a fee-SL/IBM will charge an average of $200 per seat-they "host" users by providing Web-based access to these applications, assuming the responsibilities of an IT staff.

"Big companies can buy a PeopleSoft, for example, and roll it out in-house," explains Schaaf. "What's happening in the applications hosting market is that USinternetworking is taking that PeopleSoft capability and pushing it down-market so the small companies can have it."

Well, that's the plan, at least. In practice, Web hosting is a work in progress. "Users are a bit tenuous about the whole thing," says Schaaf. "When we talk to them, we get mixed reactions-half are happy, half are unhappy. Customer service issues top the list of unhappy things because many hosters can't keep up with demand. You find companies saying, `You are the experts, do it for me,' and the hosters are overwhelmed. This is a new undertaking for hosters as well as retailers."

Another common concern among users is security. Because hosted companies are turning their front offices over to someone else, who in turn puts it on the Web, their apprehension is understandable. "There are a lot of nervous Nellies out there who don't want company information going outside the company," says Schaaf, who adds, "We think in time people will overcome that."

But security issues are not limited to the possibility of some hacker weaseling in on your contact list. "People will have to be very mindful of security and terrorism," says Schaaf. "You start housing companies like GM and Citibank in the same location, pretty soon, you've got somebody's heart in your hand."

Finally, some see ASPs as a trend similar to the "timesharing" era in the 1970s, when multiple companies shared hardware resources. "Fads come and go in technology," says Brad Jones, general partner at Brentwood Venture Capital, a VC firm that invests in technology companies. "It used to be that when hardware was really expensive, timesharing was popular. But when prices came down, everybody realized it made sense to own your own. This is very similar to an ASP."

Schaaf points out, however, that the complexity of today's front office applications will always require a level of IT support that mid- and small-sized companies cannot afford. "It could well become more inexpensive as the costs of networking and hardware come down, but making all of this work together is no job for an amateur. I cannot see it as an in-house functionality for companies of this size, any more than you would run your own train or pave your own roads."

It is this opinion that is driving SalesLogix and IBM to enter the ASP arena. Both companies bring definite strengths to the partnership: SalesLogix is a highly respected, established mid-market CRM player; IBM has done exceedingly well as a service provider. However, it remains to be seen if any companies, even two as solid as these, can ultimately figure out such an ill-defined, unpredictable market. "Hosters aren't real clear what it's all about yet," says Schaaf. "They are trying to keep up and develop their business plans, but there's a lot of confusion in the market and it will probably be several years before it calms down."

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