But Usinternetworking's chief competitor, Corio Corp., of Redwood City, Calif., maintains that the more effective model is to outsource data center operations and concentrate instead on such issues as performance tuning and remote management. "We don't want to invest in building data centers--our focus should be on supporting customers" says Jonathan Lee, Corio's CEO.
Pricing is another area of differentiation. Most of the ASPs charge a flat, monthly, per-user fee for their software offerings, which the customer rents. Others, like the SAP/Electronic Data Systems (EDS) Corp. and J.D. Edwards & Co./IBM Global Services partnerships, offer more of a traditional outsourcing arrangement whereby customers pay per month and per user, but own the software at the end of the contract, giving the customer a bit more control over the application and the hosting environment.
| Best Practices |
| Before aligning with an ASP partner, keep these things in mind: |
(1) Since many ASPs are startups, check their financial stability and ability to deliver on key components of hosting, such as providing top-notch consulting services for enterprise applications and network management. If vendors call themselves ASPs but they lack IT solution providers or partnerships to help out, they've underestimated the task at hand.
(2) Make sure the ASP can grow your service to meet changing needs, whether that encompasses additional users, new sites, or new business requirements. Scalability is one of the key promises of the ASP model.
(3) Spend time up front making sure the ASP understands your business. If you want customization, make sure you get in writing the scope of the project and what specific customizations are critical to make your production deadline.
(4) Build an exit strategy into your contract.This way, if the model doesn't meet your business needs or your company decides to bring the systems in-house, you can make the switch without incurring harsh penalties. Also make sure that you own the data so if you decide to migrate, there are minimal conversion headaches.
Even SAP sees this type of offering as a stepping stone to Web-based application hosting. "We will have multiple offerings," says Tom Melchiore, director of outsourcing for SAP America Inc., in Newtown Square, Pa. SAP in May announced a lease option as part of its mySAP.com Internet strategy, and Melchiore says the company will make additional announcements about partners sometime later in the third quarter.
Startup BizTone.com, with U.S. headquarters in San Jose, Calif., is taking yet another approach. Officials are looking to price the company's Java-based component ERP suite, designed from the ground up for the ASP model, on a per-individual-business-transaction basis, rather than by the month or per user. "Over time, ASP packaging will become more standardized, but today, pricing is a big question," says Clare Gillan, vice president of applications at IDC, in Framingham, Mass. This is an area that will have to mature for the market to more easily expand."
The bottom line of the ASP model is what sold Enerline Restorations Inc., a Calgary, Alberta, Canada, oil and gas services company, on leasing applications from FutureLink Distribution Corp., also of Calgary. Six months ago, the 25-person Enerline shop was essentially running all of its accounting and day-to-day operations on one PC. The company urgently needed to add PCs and a full-blown network, but the firm had no IT staff to steer the initiative, let alone to support systems once they were installed.
"The FutureLink way was a no-brainer," says Ron Hozjan, Enerline's vice president and CFO. "The three-year contract and the fees I'm paying don't even reach the other alternative of buying the equipment and supporting it myself through third-party consultants." Enerline is currently renting Microsoft Office as well as a vertical accounting package for the oil and gas industry through FutureLink, for an up-front investment of around $60,000 to $80,000, Hozjan says.
Price was also a factor steering Sebastiani Vineyards Inc. to application hosting. Sebastiani's main motivation was to avoid the cost of hiring qualified IT people to support an SAP R/3 installation. The winemaker had an IT staff of four and had no desire to expand it to administer R/3 for 120 ERP users. Taking a hybrid approach rather than leasing the software, Sebastiani is outsourcing R/3 operations to EDS of Plano, Texas, and using Plaut Consulting Inc. of Waltham, Mass., as its implementation partner. "We're a typical mid-market company trying to implement one of the big boys of the ERP world and we didn't think we could service SAP from a technical perspective with the staff we had," says Jeff Perkins, director of information services for the $200 million Sonoma, Calif.-based vineyard, which was expected to go live with the application last month.
"If we didn't outsource, we'd have to hire several additional people in the IT group, and that goes away from the desire to have Sebastiani employees focus on the business [of making wine]," says Perkins. Part of what appealed to Sebastiani about the EDS outsourcing agreement, which runs for three years, was the guaranteed levels of performance for R/3. "EDS had well structured SLAs as well as feedback and response processes," Perkins says. Since the pilot began in Dec. 1998, he says EDS has lived up to all its performance levels and has been very accommodating about extra requests.
Choosing a vendor
The SLA--the contract provisions that specify guaranteed availability, response time, and quality of service--is one of the primary criteria for choosing ASP partners (see "Best practices"). Another key point is customization. Companies implementing ERP or HR applications on their own typically get into lots of custom programming. But in the ASP model, many of the players discourage customization because it impedes their ability to offer inexpensive lease prices.
Oracle, for one, has strict rules on what its hosting customers will and will not be able to tailor. "We do not allow customers to modify base tables in the application," says Chris Russell, president of Oracle Business OnLine in Redwood Shores, Calif. "If we do, we lose our ability to manage performance and upgrade without incurring a lot of cost." Oracle will, however, offer flexibility in terms of configuring the application.
Sunburst Hospitality's Warczak says Usinternetworking also discouraged customization, especially given the hotel chain's short time frame for getting PeopleSoft up and running--a 90-day window, which included upgrading to Version 7.5 and converting the system from an Informix Software Corp. database to an Oracle DBMS. "Their advice was to customize as little as possible," says Warczak. "But you don't want to tailor your business around the way some software works--you just need to sit down and make clear what your expectations are."
What to put in writing
In addition to writing specific customization requirements into his five-year lease, Warczak negotiated an exit clause, which would allow Sunburst to get out of the contract after three years with minimal penalties if the model didn't prove effective. Clarent Corp., which delivers equipment and software to service providers, also wrote an exit strategy into its five-year agreement with Corio. The 160-person company is planning to lease 15 PeopleSoft modules for 25 to 30 users, including financials and manufacturing, according to Richard Heaps, chief operating officer and CFO of the Redwood City, Calif., firm.
Both Warczak and Heaps also made sure the arrangements leave their respective companies with ownership of its PeopleSoft data. "If my people are trained, and we own the data, the worst thing [that can happen] is that we take the data and go to PeopleSoft and buy a license," Heaps explains. "The implementation costs have already been spent."
Karen Egan, systems specialist at Robert Mondavi Corp., doesn't see a worse-case scenario in the winemaker's decision to lease Oracle's human resource system through the software maker's Business OnLine program. Oakville, Calif.-based Mondavi, which needed to upgrade its payroll and HR system to comply with Year 2000 and improve performance, likes the ASP model because it frees up the company's 22-person IT department to concentrate on more critical sales and marketing systems that help employees sell more wine. The pilot, which launched in late Jan. and went live in May, supports seven HR specialists overseeing 850 employees. Says Egan: "Oracle has proven applications, and we don't feel the ASP model has a whole lot of risk. It's not that revolutionary--time sharing and hosted applications have been around for a long time."
Heaps says Clarent's ASP experience has been good as well. The project kicked off the first week in March and is scheduled to go live in Aug. But only time will tell if the exit strategy will come into play. "Until we have some real live experience with the process, the [jury] is out," he says. "But if my service provider doesn't keep me happy, they're not going to stay with me forever." //
Beth Stackpole is a freelance writer living in Newbury, Mass., who writes frequently about enterprise applications and e-commerce trends. She can be reached at firstname.lastname@example.org.
Partnerships promote application service provider standards
In addition to a steady stream of vendor announcements of new ASP customers and services, one of the more telling examples of collaboration is the ASP Industry Consortium announced in May at Networld + Interop in Las Vegas. The 25-member group, headquartered in Wakefield, Mass., is chartered with promoting the ASP model by sponsoring research, fostering standards and best practices, and demonstrating the benefits to users. A cross-section of companies have signed up for the initiative, including AT&T Corp., Cisco Systems Inc., Sun Microsystems Inc., Compaq Computer Corp., and Citrix Systems Inc.
|If partnerships are at the crux of the application service provider (ASP) movement, the flurry of activity over the last quarter seems proof that the model has long-term potential.|
"The ASP model is one of the great focal points of the IT industry," says Richard Steranka, director of marketing small/medium business at Cisco, a San Jose, Calif., networking company. "The main goal of the consortium is to accelerate this fast-emerging application segment and make sure we don't trip over ourselves in the early days."
Cisco also has its own aggressive game plan for the ASP market. The company's Hosted Application Initiative includes education and consulting, integration efforts, and technology developments. As part of its education platform, Cisco has created a Web site (http://www.cisco.com/warp/public/ 779/smbiz/hostedapp/), which it hopes will serve as a key reference on the ASP model. In addition, the company is setting up a lab, with partners, that will design benchmarks and reference models for testing hosted applications, Steranka says. On the technology front, Cisco is enhancing its IOS internetworking platform with APIs for network-aware applications as well as looking into new bandwidth and network management technologies. "The network is one of the key factors in delivering against service level agreements (SLAs)," he adds.
A variety of other players are promoting similar efforts. Hardware and software maker Sun Microsystems, of Menlo Park, Calif., announced its ServiceProvider.com initiative, which will encompass a range of products and services designed to help providers build ASP offerings based on Sun technologies. Sun has also established a competency center to test new ASP services.
For their part, Qwest, Hewlett-Packard Co., and SAP America Inc. have teamed up to offer SAP R/3 in a hosted environment. Telecommunications giant U S West Inc., of Englewood, Colo., launched its hosting solutions offerings and announced an alliance program, which will help provide IT expertise to its ASP customers.
Given the groundswell of support for the ASP model, industry analysts expect more of the same over the next year. "ASPs are just putting their models together, and as a result, we'll see tighter alliances and preferred partnerships," says Meredith McCarty, a senior analyst with market researcher International Data Corp.'s Internet Services research program, headquartered in Framingham, Mass.