However, in the Ageof the Internet, the workscape is changing faster than anyone could have everimagined. Where there was once fear and distrust, there’s now growingacceptance of the idea that outside companies can manage hardware, software, andtelecommunications remotely. And, make no mistake, these so-called applicationservice providers (ASPs) are forever changing the way companies view technologyand how they use it to gain a competitive advantage.
“In certaininstances there are substantial advantages to outsourcing enterpriseapplications, including ERP software,” notes Dave Boulanger, service directorfor AMR Research, Boston. There’s growing evidence to back him up. Accordingto a survey by Inter@ctive Week magazine, the number of companies usingapplication service providers has increased from near zero in early 1999 to 7.3percent in early 2000. Market research firm IDC predicts that the ASP marketwill grow to $7.8 billion in 2004, compared to $296 million in 1999.
But behind theglitzy façade of progress lies an important truth: developing a strategy anddetermining how, where, and when to use the ASP model is no simple matter.Virtually all the major HR systems vendors, including SAP, PeopleSoft, Oracle,J.D. Edwards, Lawson Software, TALX, and Infinium Software, have begun to renttheir applications. So too have a seemingly endless wave of second- andthird-tier vendors offering add-on products. Meanwhile, independent ASPs likeUSinternetworking, Corio, Breakaway Solutions, Qwest Cyber.Solutions, andAristaSoft have begun to offer an assortment of enterprise applications.
While traditionalsoftware can take months to install, rented software typically requires only afew weeks, and sometimes days. Vicki Griffith, director of netsourcing at LawsonSoftware, says that ASPs offer a more predictable cost model and eliminate theconstant headache of upgrades, patches, and fixes. As new features becomeavailable, the ASP updates the software on its end. That can create a morestable computing environment, while helping an organization predict costs moreaccurately.
Laurie McCabe, vicepresident of consulting firm Summit Strategies Inc., Boston, says that manyfirms are beginning to recognize that the ASP model provides a powerful way todefer capital costs. “You don’t have to go out and buy hardware, software,and networking gear, which can add up to hundreds of thousands of dollars upfront.” Of course, deferring costs doesn’t eliminate them. The monthlyrental fee for major ERP packages, for example, has settled into the $400 to$1,000 range, after setup. Other HR applications range anywhere from $10 to $100per month per user.
Yet cost isn’talways the primary factor - or sometimes even a significant factor - in themigration toward ASPs. Time to market, the need to focus on core competencies,and the desire to reduce the risk of dead-end technology all play a role.There’s also the fact that ASPs allow an enterprise to quickly and easilyscale up the number of users. “What organizations buy when they adopt an ASPbusiness model is not just an application and hosting, but access to ITexpertise,” explains Daniel Sholler, senior program director for Meta Group, aStamford, Connecticut, IT consulting firm.
And it’s clearthat the level of IT expertise is growing. The first generation of ASP offeringsconsisted mostly of conventional client-server programs ported over to anInternet environment, whereas many programs are now designed to functionefficiently in a multi-user environment. Some vendors are also beginning tooffer greater customization - albeit at a higher price. They will modify anapplication’s interface and help integrate the software with other back-endsystems. In many instances, they can also provide templates designed forspecific vertical industries, from financial services to chemical manufacturing.
The bottom line onthe front lines of technology? ASPs are appealing to different companies withentirely different needs. For dot-com start-ups with no IT staff and virtuallyno technology infrastructure in place, it’s a quick way to acquire neededapplications - particularly core ERP and HRMS packages. In the past, many smallfirms did not have the wherewithal to afford such systems, says Sholler.
Meanwhile, largecorporations that already have an IT staff in place and have previouslyinstalled ERP systems are now eyeing ASPs as a fast and seamless way to addfunctionality in areas that are not mission critical. Instead of taking monthsto install software, it’s possible to add an application and have fullfunctionality available in days or weeks.
Yet, migrating to anapplication service provider business model isn’t without challenges. Somecompanies have found ASP performance lacking and the ability to solve problemssubpar. A problem with a server or a broken telecommunications link can bringdown an application - and in fact an entire business - in a heartbeat. An hourof downtime can set back a company anywhere from a few hundred thousand dollarsin lost sales or productivity to several million dollars. All of whichnecessitates a solid service-level agreement. [Seeaccompanying story.]
Then there’spricing. Some application service providers have introduced pricing schemesdesigned to grab business and market share. Whether prices will remain lowremains to be seen, especially as industry consolidation takes place.
Nevertheless, manycompanies are discovering that ASPs are a cost-effective and convenientsolution. Running software from a remote system can boost performance, cutcosts, and improve flexibility. “In a day and age of labor shortages andconstant technical challenges, it can provide a way to steer through technologyand focus on the actual business,” says Sholler.
Workforce, February 2001, Vol80, No 2, pp. 50-54 SubscribeNow!