Is it Time to Jump on the ASP Bandwagon?

The arrival of the Internet has changed the nature of the IT infrastructure from a closed client/server environment based on mainframes and dumb terminals to a distributed model in which multiple devices are linked to each other at all times. Wide area networks are now as fast and reliable as local area networks once were in sharing and distributing information and applications.

As a result, a new market for commercially available hosted applications has rapidly emerged. The range of available hosted business applications from Application Service Providers (ASPs) is growing at a phenomenal rate, including tools for human resources, sales, payroll and purchasing operations. The software comes from the top vendors in the enterprise application arena, including PeopleSoft, Siebel, Broadvision and many others.

According to Forrester Research's December 1999 report "Sizing App Hosting," CRM-related services will represent 64 percent of all hosting revenues, as companies begin to move their processes onto the Web. Overall, Forrester predicts that the ASP market will grow to $11.3 billion in annual revenue by 2003.

"As e-commerce becomes a part of people's business processes, companies are starting to realize that they don't have the necessary skills in-house," said Paula Hunter, VP of the ASP Industry Consortium. "It's more than just creating the look and feel, you need to be able to provide the hooks into the back-end architectures."

The trend toward outsourcing, she said, has been largely driven by a shortage of IT resources. This differs from the old time-sharing models where it was a shortage of infrastructure that drove adoption. But outsourcing has particular appeal to small businesses and Internet startups that may lack an IT infrastructure entirely.

Among the earliest adopters are travel, financial services, real estate and other industries that rely on a client/agent model of customer interaction, but there's no clear trend as to which industries will ultimately adopt the ASP model. Once the SFA and CRM applications that they rely on had been Web-enabled, hosting was the next logical step.

Major CRM applications, including Siebel Sales and Oracle's CRM 3i, are available as hosted applications. Pioneers such as USinternetworking and Corio have been joined in the ASP market by the largest providers of enterprise sofware, including Oracle and IBM. Conspicuously absent is Microsoft, which has yet to fully articulate its plans for hosting software. Expect largest ISPs, such as AOL, UUNet and Earthlink to get into the ASP act also.

Rent or buy?
In its purest form, an Application Service Provider (ASP) is an organization that hosts software applications over the Internet. Instead of residing on your company's servers, these applications are stored and managed off-site at a data center either owned or contracted for by an ASP and provided to your company through a pay-per-use model. The dominant pricing model is per user, per month. The ASP handles support, maintenance and upgrades. Over the long haul, an ASP solution can be less expensive than purchasing, deploying and supporting these applications yourself. ASP's are especially cost-effective for enterprise applications that require a high level of performance, reliability, security and scalability.

There are pure ASPs, such as USinternetworking, that just host other vendors' applications. Others, such as Oracle Business Online, are software companies that have discovered a new distribution model for their own applications. At the high end, you'll find full-service firms that go beyond hosting and maintaining applications to provide more extensive customization.

ASPs usually align with an Independent Software Vendor (ISV). The ISV supplies the application but the ASP manages it, providing implementation and integration, data center management, connectivity and support. In most implementations, the ASP performs little, if any, customization of the software, instead concentrating almost entirely on supporting the application.

ASPs provide your organization with all the necessary hardware and software, a secure network infrastructure, reliable data center facilities, and an on-call staff of IT experts to manage the solution.

As the trend toward hosted applications accelerates, we can expect to see even off-the-shelf productivity applications find their way onto the Internet. But the shift is occurring first in human resources, sales force automation, customer relationship management and enterprise resource planning; applications aimed at streamlining and improving internal business processes.

Web Delivery
Typically, ASP-based applications are written in HTML, XML and Java, and delivered to users through a Web browser. The Web as a means of distribution totally eliminates one of the long-standing headaches of IT: getting your entire organization to standardize on a single platform. The reliance on cross-platform standards means that these applications can be both platform and device independent. And giving your users remote access can be as simple as entering an IP address in a dialog box. In fact, the ability to access an enterprise application remotely is one of the key reasons for going with an ASP solution.

Entrusting your mission-critical applications to a third party may sound a bit like putting your life in the hands of a complete stranger. But, through adoption of Internet standards, strong partnerships and the sharing of best practices, the ASP industry is working hard to address customer concerns relating to security, availability and control. Comfort levels have been raised, says Hunter, by the increased use of remote services such as online banking by individuals. "These are the same concerns raised by anyone in regard to outsourcing," says Hunter. "But with more people storing their personal information and applications on a remote server, it's less of an issue."

Security concerns are easily addressed through the use of encryption and Virtual Private Networks (VPNs). VPNs make use of the public telecommunications infrastructure, maintaining privacy through the use of a tunneling protocol and additional security procedures. Data is encrypted before it is sent through the public network and decrypted as it is received. One example of this is the point-to-point-tunneling protocol, which is built into Microsoft's Windows NT Server product. Hunter advises a sensible approach to dealing with security concerns that includes a cost-benefit analysis.

New Paradigms
Full-service providers can be attractive because they run their own data centers, introducing one less variable into what is already a somewhat risky endeavor. But, cautions Hunter, it's important to remain nimble. Because an implementation can be complex and fraught with unforeseen challenges, you may want to consider the ASP's ability to move quickly and partner. "It's nearly impossible to do this on your own," she says. "ASPs do a good job of managing the customer relationship but still rely on the telcos for bandwidth, the ISVs for applications, and the operating system and hardware vendors."

still, an ASP can provide one-stop shopping for companies with a need to get a solution up and running as quickly as possible. "Web hosting is a pretty good fit for small business," says Robin Retallick, vice president of Zland.com's CRM-ERM Group. "It's a natural for companies that have different types of employees, running at different speeds, in different locations."

Even if you've already implemented CRM, the ability to outsource your applications may force you to rethink your strategy. Says Retallick, "The emergence of the Web may invalidate anything you were doing before to reach the customer."

The ASP model works less well for larger companies running complex applications that require customization. ASPs typically shy away from customization because they either lack the necessary programming talent, or because customization inhibits the ASPs ability to perform mass upgrades. If you're already doing CRM however, there's a good chance the applications you are already using are available from an ASP.

The Death of Shrinkwrap?
Microsoft, the first vendor to figure out that selling shrink-wrapped software into the enterprise was a numbers game, is treading lightly in the fledgling ASP market. While it's far too early to predict the abandonment of its traditional pricing model, Microsoft just announced it is testing the waters with a pilot program designed to explore the viability of the outsourcing model.

Dwight Krossa, a Microsoft Group Manager for Applications Hosting, said that Microsoft has been looking at this market for some time. "What's driving a lot of this is a desire on the part of a lot of companies to move to a subscription model and that's something we've been trying to get them to do for a long time." He says any subscription-based model would add to, not replace, any existing licensing programs.

In keeping with Hunter's assertion that a good ASP must be able to partner well, Microsoft announced it was working with many of the leading ASPs, including British Telecommunications; CenterBeam; Data Return; Electronic Data Systems (EDS); Equant; FutureLink; Hewlett-Packard; Mi8; Micron Technology; Netstore Group; MTT Mpowered, a division of Aliant; Qwest Communications; TeleComputing; United Messaging; and USinternetworking.

In the future these companies are expected to offer the improved functionality expected in Exchange 2000 and Office Online, software which allows Microsoft Office 2000 to be used over the Internet.

Gaining Access
The paranoid might suspect that Microsoft is responding to a threat from Sun Microsystems, whose purchase of star Office has given them a complete office suite that can be deployed on Sun's UNIX workstations and thin clients and run over a network. But no matter where you stand, one thing is clear: Microsoft's interest validates an emerging market for hosted applications.

"Small- to medium-sized businesses don't buy a lot of high-end applications today," notes Krossa. "The ASP market is enabling these small companies to gain access to these solutions through hosted applications." For larger companies, a hosted extranet can help extend the companies' reach to customers, suppliers and partners.

Indeed, the ability to provide a robust infrastructure for e-business is key to the acceptance of ASPs. A December 1999 International Data Corporation (IDC) report, "1999 Worldwide Market for Application Servers: Setting the Course for 2000," named Oracle the top application server vendor, largely on the strength of its lead in relational database. According to IDC, Oracle has a 15.4 percent market share in the application server market, followed by Forte Software (recently acquired by Sun Microsystems) with 9.7 percent. Although the ASP market has been largely pioneered by small startups such as USi, in the long run these companies may not be able to provide the kind of complete end-to-end e-business solutions that customers are demanding.

"As the hosting vendors add more services, there will be some consolidation in the marketplace," predicts Hunter. "There will be a smaller number of vendors doing the hosting and providing the IT infrastructure. You'll also see those players with a particular expertise moving into the ISP space."

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