ASPs are hot, but will the fire cool?

Thursday Jun 1st 2000 by Alan Radding
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The rapid growth of today's application service provider market can't extinguish an ongoing debate on the benefits the business model offers to enterprise application users.

Application service providers (ASPs) have exploded on the scene over the last year. At last count, AMR Research Inc., in Boston, tallied more than 300 ASPs, and the number is still rising rapidly. ASPs offer everything from Web site hosting to e-commerce and enterprise applications, including today's leading enterprise resource planning (ERP) and customer relationship management (CRM) software. However, the benefits of running enterprise applications, in particular, through an ASP despite the obvious rush to provide them--are still debatable for many user organizations.

For an organization such as the Transylvania School District, in Brevard, N.C., the ASP model is proving to be a tremendous blessing. The district installed the Eltrax applicant-tracking package from Eltrax Systems Inc., in Atlanta, and will install other Eltrax human resource (HR) modules, replacing a hodgepodge of stand-alone desktop systems and manual processes. "We get Web-based applications that give us ease of access from multiple locations, and [Eltrax] stores our data," explains Terry Holliday, superintendent.

Pros and cons
Pros:
  • Eliminates the need to find, hire, and retain people with high-demand skills
  • Eliminates the need to upgrade the hardware infrastructure
  • Allows predictable pricing
  • Allows easy scalability

    Cons:
  • No customization
  • No discount on software pricing
  • No clear speed advantage
  • Must integrate with in-house systems

    The Transylvania School District has little or no existing IT infrastructure, so officials there view the ASP model as probably the only practical way to get sophisticated applications like Eltrax up and running fast. Otherwise, it would have to find and hire skilled IT personnel, acquire and set up servers, and do everything else a competent IT group would do. The small, rural school district serves approximately 4,000 students, and the time and expense involved in building its own IT department would be prohibitive.

    But what are the benefits for organizations that already have an IT infrastructure? "I haven't seen a real compelling ASP story for most end users when it comes to enterprise packaged applications," observes David Caruso, vice president/enterprise application strategies, AMR Research.

    "I do find the ASP story credible," counters Joshua Greenbaum, principal, Enterprise Applications Consulting, Berkeley, Calif. "Customers need assistance. They don't have the time or the talent to install and maintain these applications. And it is even hard to buy the necessary talent and expertise," he continues.

    The ASP appeal

    ASPs install, host, and maintain popular packaged enterprise applications such as Baan Co., Oracle Corp., PeopleSoft Corp., SAP AG, or Siebel Systems Corp. on their servers for multiple clients. Organizations access and run the applications across the Internet, using only a browser or a Windows Citrix client. The ASP knows how to run large server and storage farms, ensure reliability and availability, and meet scalability needs. It also understands the packaged application, configuring and maintaining it to meet each customer's needs.

    The benefits ASPs promise to deliver include relief from the considerable headaches of having to install, configure, and maintain the packaged application yourself; faster implementation; reduced need to hire and retain costly, hard-to-find IT staff skilled in the packaged application; and lower costs. The lower costs presumably result from the ability to amortize the staffing and hardware overhead across multiple organizations. Software license fees remain essentially the same although they may be charged and paid monthly rather than requiring organizations to shell out a large up-front payment.

    Commercial NetLease Realty Inc., in Orlando, Fla., a real estate investment trust (REIT), turned to Oracle Corp., Redwood Shores, Calif., and its Oracle Business Online (BOL) ASP business unit when it decided to implement Oracle Financials. The company was moving from a mixed bag of old, nonintegrated real estate industry applications that no longer met its needs. "When you step up to the tier-one application environment with a product like Oracle, you are moving up in complexity. We simply didn't have the resources to do it ourselves," explains David Lachicotte, director, information systems.

    In addition, the ASP model saved the organization from the need to purchase new hardware, which would have been required to host Oracle Financials in-house. That is a savings estimated at tens of thousands of dollars.

    Time-sharing revisited?

    The ASP model is simply another form of outsourcing. It harkens back to the time-sharing that was prevalent in the computer industry in the 1970s. Back then, organizations would sign up with a provider who ran big, complex, core business applications on a mainframe computer. In those days, the cost of computer processing and the cost of storage were so high that many organizations could not justify the investment in a mainframe computer--and the entire glass-house infrastructure required to support it.

    "In the time-sharing days, the limiting factor was hardware. You just couldn't afford enough mainframe processing power," recalls Kirk Krappe, senior vice president, Corio Inc., a Redwood City, Calif. ASP. The goal was to connect as many users as possible to amortize the high cost of mainframe MIPS (millions of instructions per second of CPU power) and the high cost of storage.

    But times have changed. Moore's Law, which predicts that the processing power of computer chips doubles every 12-18 months, has inexorably worked its magic. Today, a commodity home PC has far more processing power than the mainframes of the time-sharing heyday. And almost every organization, no matter how small, can manage to support a Windows-based file server and a small network. Similarly, the cost of storage, once calculated in dollars per megabyte, has fallen to pennies per megabyte.

    "Today the limiting factor is not hardware or even software but people. Organizations need highly skilled people," Corio's Krappe continues. Companies find themselves hard-pressed to fill IT positions. Stamford, Conn.-based Meta Group Inc. reports that the demand for IT professionals in 1999 exceeded supply by 400,000 jobs and projects that continued demand will result in 1.2 million unfilled IT jobs by 2005. The number of IT graduates, estimated at about 30,000 per year, can scarcely make a dent in the expected demand.

    The result: Organizations that can easily buy a well-configured Intel-based server cluster running Windows 2000 for as little as $20,000 still cannot find, hire, or retain the skilled IT professionals necessary to run such equipment. Add the complexity of the applications hosted by ASPs--Oracle, PeopleSoft, SAP, Siebel--and the skills shortage becomes even more acute.

    The difficulty in hiring and retaining skilled people certainly played a key role in driving Clarent Corp., in Redwood City, Calif., to Corio when it made the transition to PeopleSoft from Intuit Corp.'s QuickBooks Pro. "Corio was hiring better resources than I could," admits David Blumhorst, Clarent's director of IT. In addition, the entire task of setting up an internal data center capable of supporting a rapidly growing organization running a mission-critical application was too daunting to attempt. "We would have had to really think about things like security and backup in addition to personnel," he says.

    The Internet also makes a big difference between the time-sharing of the past and the ASP offerings today. The Internet supports truly distributed computing. Users working from a standard browser anywhere can connect via the public Internet to the ASP and run feature-rich applications. Through the use of VPN technology, the connections can be secured and protected. By comparison, time-sharing relied on slow, cumbersome network links, costly leased connections, and dumb terminals. The resulting green-screen applications were hard to learn, difficult to use, and inflexible.

    Hype and reality

    Anticipated applications purchased from an ASP upon initial implementation
    Source: Zona Research Inc., 2000
    Given the benefits promised by ASPs--fast implementations, reliable services, knowledgeable service, reduced costs, and reduced headaches--International Data Corp. (IDC), in Framingham, Mass., expects the ASP market to take off. In 1999, IDC pegged the ASP industry at a paltry $296 million worldwide. By 2004, IDC predicts $7.8 billion in spending on ASP services, which represents a whopping 92% compound annual growth rate from 1999 to 2004.

    Fueling this growth, according to IDC, is the momentum ASPs are enjoying in signing up new customers, who are turning to the ASP model to gain access to new applications without initial investments in application licenses, servers, people, and other resources. In addition, the ASP model has gained credibility from the entrance of some of the industry's biggest players, including AT&T, IBM, Microsoft Corp., and Sun Microsystems Inc., as well as packaged application heavyweights like Oracle, SAP, and others.

    At this point, however, the ASP phenomenon is more hype than reality, at least for large companies running enterprise applications. "There are organizations running enterprise applications in ASP mode, but are they running their entire enterprise that way? I doubt it," says Greenbaum.

    Adds AMR's Caruso: "The reality is that some are running their business using ASPs, but these are smaller companies." SAP, he notes, is having its ASP success serving the midsize and small business markets.

    The ASP mantra--cheaper, faster, easier--also doesn't quite match the reality. Certainly it will be easier because the ASP is doing the work for you. As far as being faster and cheaper, the ASP may not have much advantage.

    For instance, if the organization already has the server and network infrastructure in place, the partially pre-configured quick implementation solutions offered by many packaged ERP application vendors can rival what the ASPs provide. Both the quick implementation solutions and the ASPs rely on the customer accepting a uniform set of configuration defaults and parameters. Packaged application vendors report that customers can get their quick implementation solutions up within 30 to 90 days-which is about what ASPs can do.

    Decision makers involved in the ASP services buying process
    Source: Zona Research Inc., 2000
    The cash flow around the ASP solution may be different, but it is debatable whether the net result is a lower cost. "It is hard to believe the ASP pricing models benefit customers. We have done fully-loaded comparisons and have found very little difference," Caruso reports.

    Read the fine print

    ASP pricing often entails an initial setup fee and fees for any back-end integration. The customer has to pay the packaged software license fee, either by directly licensing the software from the vendor or by rolling the fee into the monthly charge. There are also charges for a variety of production services. Finally, there is the monthly charge, which may be based on the number of servers, number of users, or number of transactions. Pricing models are still evolving.

    Knoll Pharmaceutical, in Mount Olive, N.J., a wholly owned subsidiary of BASF, opted for the Siebel sales force automation (SFA) solution through USinternetworking Inc., a leading ASP based in Annapolis, Md. Knoll purchased the software license directly from Siebel. "We found that the ASP is somewhat less expensive; it provides a minor advantage in cost," reports Rick Ofeldt, Knoll's director of sales and marketing systems. By subsequently shifting its communications network from costly 800-lines to the Internet, it was able to lower costs significantly.

    "Cost is a consideration, but that wasn't our top priority," Ofeldt continues. The company is counting on the SFA package--which it is rolling out to 800 sales representatives--to generate revenue. "Our priority was to make this project successful," he asserts, and the ASP option provided a primary way to reduce risk and ensure a successful Siebel implementation.

    When Clarent's Blumhorst did his cost comparison, he had to take into consideration the cost of building a data center capable of supporting the PeopleSoft application. "We figured it would cost us over $1 million to do it all ourselves," he notes, if the company could hire the right people. With Corio, the company paid a one-time implementation fee and the monthly hosting fee based on named users. Corio also helped with some integration between PeopleSoft and Clarent's internal Clarify CRM system.

    ASPs generally can save money by eliminating the need to hire and retain highly paid people, and by doing away with the need to upgrade hardware. They also save money as the organization grows, while providing easier, non-disruptive scalability.

    Selecting an ASP
  • Demonstrated expertise in the application you want
  • Proven financial stability, track record
  • Ability to integrate with your back-end systems
  • Competitive pricing
  • Predictable pricing
  • Responsive (commitment to a service level agreement)
  • Reliable performance (uptime performance commitment)
    The economics of the ASP model vary with the organization, its needs, and its approach to cost accounting and financial analysis. At Commercial NetLease Realty, Lachicotte did an return-on-investment (ROI) analysis and found that the ASP approach costs a little less than half of what the company would have spent trying to implement Oracle Financials on its own.

    However, the one factor that will kill any economic advantage of the ASP model is customization. The ASP model, like the vendors' own quick implementation packages, rely on the implementation of a vanilla version of the application. "We aggressively changed our business processes so we could take full advantage of the ASP," Lachicotte explains. A sister company, on the other hand, needed some serious customization, which eliminated the ASP model from its consideration.

    While ASPs certainly have an immediate roll to fill in the corporate computing landscape, it is unclear whether the ASP model over the long term can avoid the pitfalls that led organizations to abandon time-sharing. Back then, the complaint was lack of flexibility and customization, which prevented organizations from achieving unique strategic advantages. Organizations today still hope to gain strategic advantage through IT. That leaves the ultimate value of the ASP model debatable. //

    Alan Radding, based in Newton, Mass., is a freelance writer specializing in technology and business. You can view his Web site at www.technologywriter.com.

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