Application Service Providers

“If you’re a CIO with a head for business, you won’t be buying computers anymore.  You won’t buy software either.  You’ll rent all your resources from a service provider.”   Scott McNealy, CEO, Sun Microsystems

     Information technology outsourcing is the transfer of components or large segments of an organization’s internal information technology (IT) infrastructure, staff, processes, or applications to an external resource provider.  In general, IT outsourcing can be divided into three categories:
     (1) Application Outsourcing providers manage and maintain software applications.  The provider assumes the responsibilities associated with the application.  Application service provider (ASP) and Application Maintenance Outsourcing are subtypes of the AO market.  An important distinction between the two types is the actual ownership of the application.  The ASP remotely hosts and delivers a packaged application to the client from an off-site, centralized location.  The client does not claim ownership of the application but instead “rents” the application, typically on a per-user basis.  Application Maintenance Outsourcing providers manage a proprietary or packaged application from either the client’s or provider’s site.
     (2) Information Utilities and Business Process Outsourcing providers focus on economic and efficient outsourcing solutions for complex but repetitive daily business processes.  These could be as sophisticated as finance and accounting business functions or more repetitive processes, such as disbursements and payroll.  The provider assumes all responsibilities associated with the entire business process or function.
     (3) Platform IT Outsourcing providers offer a range of data center services, including hardware facilities management, onsite and offsite support services, server-vaults and data security and disaster recovery capabilities.  These relationships typically involve the transfer of IT facilities, staff, or hardware.

Differences Between Outsourcing and ASP Approaches

                                              Outsourcing                                           ASP
Processing Locus             Local or remote facility                          Remote facility only
Pricing                        Time-and-materials (variable)           Per subscriber-per-month (fixed)
Application                       customer (typical)                                   ASP (typical)
Ownership Scope           entire business processes                            applications only
Provisioning Costs      borne entirely by 1 customer                 shared by many customers
Model                                   one-to-one                                              one-to-many

     The cornerstone of the difference between the Outsourcing and ASP models is the relationship between the application and the end user.  Rather than being purchased outright or licensed, the application is conveyed to the user for a specified term and for a specified fee, in a manner similar to a lease arrangement.  In other words, the burden of ownership – and of management, maintenance, and support – shifts from the customer to the provider.

     The convergence of software and IT infrastructure toward an Internet/network-centric environment has enabled the ASP concept to emerge.  Software has evolved from custom-coded, proprietary applications to pre-packaged or off-the-shelf applications and now to the development of network-centric applications.  Net-centric software allows Web-enabled commerce, communication, and the management of information content.  Likewise, IT infrastructure has evolved from a closed, mainframe environment to distributed computing and now towards a net-centric infrastructure linking all stakeholders.  The ASP concept also revisits the service bureau model that failed to materialize due to relatively inexpensive hardware, inefficient communication linkages, and unattractive overall economics.  There will need to be continual advances, particularly in software and broadband technologies to further propel growth in the ASP market.
     Users are disenchanted by complexity, expensive and lengthy system/application development and deployment, incremental productivity gains, and incessant technology change.  Users are shifting away from decentralized, locally hosted computing toward a new, network-based environment in which a new generation of second-party service providers will eventually assume most, if not all, of the responsibilities for providing IT solutions.  Global competitive pressures demand more efficient approaches to information management, and new technology has made these approaches feasible.
     By utilizing ASPs to provide application-related computing functions, business and IT managers hope to do the following:
     * reduce operational costs
     * provide relief to IT departments and/or free up application development resources for more strategic projects
     * improve speed of implementation
     * reduce investment risk.
     Prior to IT outsourcing, businesses typically went at it alone or hired a systems integrator to build complex systems internally.  But with the increasing complexity of the software required to run an e-commerce Web site, companies are finding it too costly to purchase, and then train their employees, on these new packages.  It often requires a separate group to install and support the necessary hardware.  And firms that hire integrators risk incurring the extra expense of bringing the integrators back when its own inexperienced IT team cannot upgrade or reconfigure the software.  Complicating the issue is the necessity to integrate the various software packages in order to maximize their functionality and run a quality Web site.  What complicates the horizon for ASPs is the large base of systems integrators that have proven experience records.  Companies like EDS, IBM, Sapient, and the consulting arms of the Big Five accounting firms already work with clients to develop Web strategies and implement technologies.
     The ASP industry is in the early stages of its life cycle.  According to IDC, the worldwide spending for outsourcing services should reach $142 billion by 2002.  IDC estimates the application outsourcing market, comprising both application maintenance outsourcing and ASPs, will grow to $16 billion in 2003, from $7 billion in 1998.  Forrester Research estimates more aggressive growth for application outsourcing with the market reaching $21 billion by the end of 2001.
     The early adopters and targeted markets for ASPs have been small to medium size enterprises.  Forrester Research estimates that there are 300,000 emerging enterprises in the U.S. with revenues between $40 million and $500 million and IT budgets of $5 million or less.  Based upon IDC’s projections, less than 5% of the emerging enterprises in the U.S. will need to utilize an ASP solution to achieve this projected market size.
     The ASP industry is highly fragmented.  Some of the industries that are establishing a presence in the ASP market include pure ASPs, Internet Service Providers (ISPs), telecommunications providers, ISVs, value-added resellers, and IT service providers.

     An ASP, in its simplest form, is a third-party service firm, which deploys, manages, and remotely hosts a pre-packaged software application through centrally located servers in a rental or lease arrangement.  In exchange for accessing the application, the client renders rental-like payments.
     An ASP manages and delivers application capabilities to multiple entities from a data center across a wide area network.
An ASP acts as an intermediary by facilitating a remote, centrally managed “rent-an-application” service between the organization or client and the independent software vendor (ISV).  The emphasis is on the use and not the ownership of the application.  The end client no longer owns the application or the responsibilities associated with initial and ongoing maintenance.  The client, either through an Internet browser or thin-client technology, accesses remote, centralized computer servers hosting the application.  Only the results from the application are managed locally by the client.
     ASPs provide a contractual service offering to deploy, host, manage, and rent access to an application from a centrally managed facility.  ASPs are responsible for (directly and indirectly) providing all of the specific activities and expertise aimed at managing the software application or set of applications.
     An Application Service Provider (ASP) is defined as "a business that delivers and manages applications and computer services from remote data centers to multiple users via the Internet or a private network," according to the ASP Industry Consortium, an advocacy group with over 400 members. They allow companies- ranging from small businesses to global enterprises to "rent" a wide variety of software applications- everything from e-mail to e-commerce to ERP.
     Application service provisioning (ASPs) is the delivery of application functionality and associated services across a network to multiple customers using a pay-as-you-go payment model.  The core proposition behind an ASP is the delivery of preconfigured template software from a remote location over an IP network on a subscription-based outsourcing contract.
     True ASP solutions do not include and are not synonymous with one-to-one relationships, post-implementation contracts only, application management, outsourcing, Web hosting, application hosting, co-location, or payment for perpetual licenses.  As ASP solution always includes services around a preconfigured solution implemented offsite vs. simply taking an application that has already been implemented onsite and moving it offsite, as in a one-to-one customized outsourcing deal.  Over time, some enterprises may choose to use ASP solutions for rapid deployment, and later migrate their solution to a more customized, one-to-one model, if needed.
     Full-service, application-centric ASPs provide complete access to an application service into an enterprise (that is, the entire infrastructure required for complete deployment – software, hardware, middleware, staffing, network infrastructure, security, and hosting services).  This contrasts with typical applications outsourcing services where the vendor only provides applications management outsourcing for a portfolio of applications already deployed on the customer’s (or vendor’s) site, or basic hosting services where the focus is network management and co-location services.  Asps also provide full life cycle application management services (such as application renewal, enhancements, fixes, new development, and tuning.)
     (One-to-many standardized offerings) ASP services are repeatable offerings standardized around the needs of a particular group of customers.  The ASP forms collaborative relationships with a wide variety of partners to provide prebrokered, preintegrated standardized templates and contracts.  The goal is to produce “good enough” software, designed to meet the bulk of the targeted customers’ needs.  Further IT services (integration, customization, and consulting) may be provided by the ASP or its implementation partners as additional services, but are not part of the core ASP offering.
     (ASP implementation partners)  An ASP may have many partnerships with various service providers including value-added resellers, systems integrators, resellers, professional service organizations, or business service providers.
     (Centrally managed, highly scalable, net-based software and servers)  ASP solutions are managed from a central location vs. each customer’s site.  In the purest form, these solutions are designed to be Web-native, multi-tenancy applications where multiple customers and users access a shared version of the application delivered through a standard browser.  Today, many of the client/server enterprise applications that enterprise ASPs sell are managed centrally but require individual servers for each customer.  This server-based architecture enables quick and relatively easy updates that can be applied simultaneously to each server.
     (Rental software)  The ASP concept is built around the idea that when software is server-based and servers are hosted and managed centrally, a software purchase becomes obsolete.  Users will instead rent complete business services or solutions online on a subscription or usage basis.  This eliminates perpetual software licenses, where the user buys and owns a software license into perpetuity, as well as the notion of financing the purchase.
     (Pay as you go, software as a service)  ASP offerings involve ongoing subscription- or usage-based payments for a product-like service – that is, access to software and related IT or business services.  Any up-front costs are not bundled into the ongoing operational fee.
     There are often up-front costs with today’s ASP offerings, including one-time setup charges (such as data migration, training, customization, or integration services).  Customers typically pay on a monthly basis, by a fixed amount (based on user, desktop, modules, servers, or transactions) or, long term, on a metered basis (resource based, hourly).  Over time, as the ASP model evolves to more Web-native software deployed for mass volume, some of these one-time costs will disappear or be absorbed into the ongoing monthly fees.
     ASP solutions are deployed remotely over some type of WAN vs. installing the software onsite.  Over the long term, the network will tend to be the Internet, but today it may also be an online connection via dedicated leased lines or a virtual private network.
     ASP solutions involve preimplementation services (i.e., obtaining new application functionality), as well as ongoing operational services.  It is not simply a post-implementation outsourcing contract involving the transfer of assets and software from user to provider or a new customized solution hosted by a service provider.
     The ASP model is a multi-tiered “ecosystem” supported by layers of prearranged vendor relationships.  The success of any ASP offering will be contingent on the collective strength of the value chain.
     Very few ASPs – even the so-called “one-stop shopping” ASPs (such as Usinternetworking) – directly provide all of the requisite components of their ASP offerings (such as networking, hosting, software, and implementation).  In most cases, an ASP’s component products and services are delivered through a series of prebrokered relationships.
     An ASP is a service provider that supplies its customers with leased access to software hosted outside the end-user’s physical domain.  The ASP manages, maintains, and monitors the application and some or all of the computing, storage, and network infrastructure needed to deliver it.
     Summit splits ASPs into two groups:
     * managed application providers – sell, host, manage, and support horizontal applications
     * vertical solutions providers (VSPs) – offer community, content, and collaboration services for industry segments along with managed application services
     An Internet Business Service Provider (iBSP) furnishes a combination of applications and services using the ASP business and service delivery model; the services provided include both IT and non-IT services.  IBSPs focus on a vertical market or are centered on a specific function and provide a suite of services within an integrated business framework – with applications in a supporting role.  iBSPs target all markets.
     According to Summit, iBSPs are rentable application providers (RAPs) that rent a single service or an integrated solution on a monthly per-user basis.  Rentable application integrators (RAIs), on the other hand, aggregate and integrate several Internet business services, in turn creating “virtual workplaces.”
     A Management Service Provider (MSP) is a company that provides IT, infrastructure, and management services, over a network, to multiple customers, on a rental basis.  Rather than delivering software applications like the traditional ASP, MSPs provide IT departments with management services to run their own technology assets.  An MSP does not replace an IT department, but it allows them to work on a higher level.  MSPs are designed to help IT staff members focus on day-to-day trouble shooting and advanced logistical planning.
     A Capacity Service Provider (CSP) is an organization that owns and operates data centers.
     Co-location providers (CLPs) lease data center space and network connections to ASPs and Internet business service providers (iBSPs).

Defining Characteristics of ASPs
     The ultimate objective of an ASP is a “seamless” service, in which the client interacts only with the ASP.  The most significant elements of a “seamless” integration of services include providing the hardware and software, integration and testing, a secure network infrastructure, reliable mission-critical data center facilities, and a highly-qualified team of IT experts managing the entire solution.
     ASPs have typically negotiated short-term, non-exclusive licensing agreements with independent software vendors.  An ASP can deliver any type of software application, from basic e-mail and messaging applications to a complete ERP (enterprise resource planning) system that manages, controls, and reports on the multiple aspects of an enterprise.  The ASP provides the pre-packaged application, infrastructure capabilities, the initial and ongoing support and maintenance services, and some degree of customization if requested.  The level of customization being performed by ASPs is minimal by today’s standards.
     ASPs are application centric.  The core value of the ASP service is providing access to and management of an application that is commercially available.  This service differs from business process outsourcing, for instance, where the outsourcing contract encompasses the management of entire business processes such as HR or finance.  It is also different from hosting services, where the focus of the service is management of the network and servers, but virtually no applications management.
     ASPs sell the application access.  Part of the value of ASP services is that customers gain access to a new application environment without making up-front investments in the application licenses, servers, people, and other resources.  The ASP is able to add this value to these services either by owning the software or having a contractual agreement with the software vendor to license access to the software as part of the ASP’s offering.  Under traditional applications management (AM) services, the customer already has acquired and deployed the application environment.  The AM outsourcers take over the management of that application environment, sometimes bringing it into their own data centers.  An AM service is different from an ASP service.  However, both AM and ASPs fall under the category of application outsourcing.  Also, hosting services differ from ASP services.  Under hosting service contracts, the customer owns the application and hands it over to the hosting company to host.
ASPs are centrally managed.  The application service is managed from a central location rather than at each customer’s site.  Customers access applications remotely; e.g., over the Internet or leased lines.
     ASPs offer one-to-many service.  ASPs partner with other vendors to package standardized offerings, providing for minimal or no customization, that many companies will subscribe to over a specific contract period.  IT outsourcing and AM services, conversely, are one-to-one, with each solution deployed meeting the unique needs of the client organization.
ASPs deliver on contracts.  There are many partners working together to provide an ASP solution.  The ASP is the company that is responsible, in the customer’s eyes, for delivering on the customer contract; i.e., seeing that the application service is provided as promised.
     ASP offerings are judged on reliability, availability, scalability, and affordability.

ASP Applications
 The most popular applications fall into these categories:
     * Analytic applications – any application built to analyze a business problem (e.g., financial analysis, customer churn analysis, Web site analysis, risk analysis)
     * Vertical applications – any industry-specific application, such as MRP in manufacturing industry, patient billing in the healthcare industry, and claims processing in the insurance industry
     * Enterprise resource management applications – accounting, HR, materials management, facilities management
     * CRM applications – sales force automation, customer service, marketing applications
     * Collaborative applications – groupware, e-mail, conferencing applications
     * Personal applications – Office suites and consumer applications (e.g., games, home productivity, “edutainment”)

Along the other dimension, ASP applications fall into these categories:
     * Core services – include the base level of services that an ASP needs to provide in order to manage the application environment and provide a base level of customer satisfaction.  These include services such as application updates and upgrades, 7x24x365 monitoring of the application, network, and servers on which the applications run, and basic customer support.
     * Managed services – include all of the core services, plus additional services and guarantees around support, security, application performance, and data redundancy.  They include services such as SLAs around application performance and data security, dedicated technical support personnel, and daily backup of the application and its data.
     * Extended services – include all of the managed services, plus additional professional services.  Although the extended ASP services begin to border on a custom-delivery model, they are still delivered in the context of the ASP one-to-many model.  Extended services will include application configuration and extension, strategy and planning, and training and educational support.

     ASPs typically receive a multi-year contract, normally ranging from 18 to 36 months.  A typical client relationship includes a fixed monthly payment structure ordinarily based on the number of users.  However, new technologies are permitting payment schemes based on variable terms such as the number of transactions, the number of screen clicks, and amount of usage time.  At this time, there is a high degree of uncertainty regarding pricing structures.
                                  Financial Metrics of ASPs

Direct Ongoing Cost                                                  Cost of Revenue
        Software license                                                         15 to 20%
        Data Center and Network Infrastructure                      25 to 30%
        Ongoing Support                                                         15 to 20%
     Total Cost of Revenue                                                   55 to 70%
Targeted Gross Margin                                                       30 to 45%

Key Enabling Technologies for ASPs

     Ubiquity of the Internet.  The migration from in-house application management to a hosted application solution has become feasible with the pervasiveness of the Internet and continuous development of Web-enabled solution.
     Access and declining cost of bandwidth capacity.  The combination of increasing accessibility and the continued declining cost of bandwidth enables a hosted solution delivered over the Internet or through thin-client computing to become a viable alternative as bandwidth capacity becomes a commodity.
     Shared applications in a client/server environment.  The remote access of ASPs is not a radical departure from the application delivery that users have become accustomed to with client/server technologies.
     Browsers as an accepted GUI application.  The acceptability of browsers as a functional graphical user interface has increased with the growing popularity of Web-enabled and thin-client computing.
     Potential of electronic commerce and e-business solutions.  Comprehensive e-commerce and e-business solutions share many of the same business and technical concerns for security and reliability that presently threaten the ASP concept.  The resolution of these issues in e-commerce and e-business will positively influence the perception of hosted applications.

Business Drivers of the ASP Concept

     Minimize total cost of ownership (TCO).  The ASP alternative typically translates into a 30% to 50% annual savings, varying by the complexity of each application.
     Predictability of cash flows.  The ASP concept introduces a degree of predictability by eliminating the uncertainties of post-implementation software-related expenditures.
     Focus on core competencies and strategic objectives.  The transfer of the implementation and management of an application to a third party enables the organization to focus on developing its core competencies.
     Improve efficiency of internal IT staff.  The elimination of application management enables the internal IT staff the freedom to develop processes and systems to leverage core competencies.
     Improve coordination efforts on a global basis.  The ASP concept can equip organizations with the latest technical tools and systems necessary to coordinate internal and external global operations.

Technical Drivers of the ASP Concept

     Shortage of skilled IT labor (locating and retaining skilled IT staff is challenging).  Organizations, particularly smaller entities, cannot afford the time and expense associated with recruiting, training, and retraining IT personnel.  It is easier to attract skilled IT personnel when the firm is developing or implementing a new state-of-the-art information system.  However, it is harder to keep them when the firm moves to system maintenance mode.
     Utilization of emerging technologies and “best of breed” applications.  The ASP, due to its favorable economics, allows smaller organizations to employ sophisticated applications such as supply chain management and customer relationship management.  Currently, these applications have only been affordable and manageable by larger enterprises.
     Accelerated application deployment and shorter application cycles.  Implementation periods become measured in days and weeks in the ASP model compared to months and years through traditional methods.
     Rapidly changing and increasing complexity of technology.  Internal IT departments struggle with the rapid pace of IT development and its increasing complexity.  The ASP concept resolves the internal uncertainty by assuming the application responsibilities and costs.
     Obtain technical expertise.  Many ASPs currently focus on a particular vertical market, business function, or application type.  This focused approach becomes more valuable to an organization searching for a specific need.
     Transfer of application ownership risk.  Internal IT departments have traditionally been very concerned about the viability and acceptance of an application among its users.  These concerns have affected many organizations’ willingness to deploy the next “killer application.”
     The Internet.  The Internet highlights the importance of time-to-market and scalable IT infrastructures.
     Network improvements.  Better desktop and reporting tools, intuitive user interfaces, and select application templates that support the ASP offerings blend the best of remotely managed, shared environments and locally managed individual environments.

Barriers or Challenges to the ASP Concept

     Security of information.  One of the central challenges to the ASP concept is the uncertainty regarding the security of  mission-critical, proprietary data and information.  Organizations will generally be apprehensive about jeopardizing sensitive information in complex hosting relationships.  Typically, organizations will demand more stringent security standards from ASPs than would normally be imposed internally.
     Overall quality of service and support.  Some of the performance concerns include availability, scalability, bandwidth capacity, and data and network redundancy.  (Also, what happens to proprietary data if and when the ASP goes out of business).  Service level agreements (SLAs) are contractual agreements binding the ASP to a predetermined level of service and performance.  These agreements obligate performance standards and measurements.  An ASP’s quality of service will be evaluated by the ability to ensure no single point of failure, a capability to accommodate increasing network traffic spikes, and the perception that the system is locally based.
     Scope and flexibility of services.  There is a tradeoff between scope and flexibility for ASPs.  These demands require both front- and back-end expertise from the ASP, including general expertise in the application, a solid understanding of the implementation, and a knowledge base regarding infrastructure requirements.  This challenge is further complicated by the notion that organizations will require an ASP to be flexible to meet their unique needs.  The issue becomes whether the ASP or the application has the unique characteristics and flexibility to accommodate for all and changing demands.
     Adaptability of software.  Most software today is not truly web-enabled.  To be most efficient, most existing software applications need to evolve toward a true net-centric model that is capable of leveraging the Internet by greatly increasing accessibility, gathering information from multiple destinations, and reducing maintenance demands.  Future applications will need to be developed with modular components that can be upgraded for improved functionality.

Making the ASP Decision:  What to Consider?

       Should I select the services of an ASP or select another option such as deploying the system in-house or hire a systems integrator to do the deployment?
       If I select a specific ASP, how do I structure the deal?
       What are the technical requirements I should consider for an ASP solution?
       What are the experiences of other ASP customers?  Check references.
       What should I look for (or demand) in the SLA?
       Integration of application environments.  Investigate whether the ASP will be able to offer ASP services for other types of applications (e.g., e-commerce, customer relationship management).  Ask the ASP if it is able to integrate these applications with each other and/or your existing environment.
       Seek a strategic partner.  Select an ASP that will be your partner, a company that is willing to work with your organization as it undergoes changes during the period of the contract.
       Get IT’s buy in.  Get IT’s buy in right from the start, because ASPs are not as hands-off as the client might think.  There are still resources from the company (namely the IT department) that are going to be required to make the partnership work.

Ask the following questions of the ASP:
       * Number and location of data centers
       * SLAs, especially with regard to uptime and application access
       * Security measures taken to protect access to company data
       * Technical support capabilities
       * Exit strategy options, including the option to take the application in-house
       * Long-term vision for the ASP business and offerings
       * The incremental value that the ASP offers or plans to offer that goes beyond traditional application delivery models

Keys to Selecting an ASP

       * General business considerations
       * Length of time in business
       * Nature of business
       * Experience in managing IT services
       * Financial commitment to the ASP model
       * Competition
       * Industry expertise
       * Specialization in industry segments
       * Consultants’ years of collective and individual industry expertise
       * Availability of templates based on industry best practices
       * Solutions expertise
       * Unique selling proposition
       * Focus on a particular industry or application
       * Partnerships with independent software vendors and related technology and network/infrastructure suppliers
       * Templates
       * Customized solutions that form part of a standard solutions implementation
       * Degree to which they streamline implementations and make the deployment of customized solutions more cost-effective
       * Status of operational infrastructure
       * Internal or outsourced technological infrastructure
       * Scalability of infrastructure in terms of new users, new sites, and new applications and features
       * Level of application and procedural security
       * Integration capabilities
       * Depth of knowledge of the enterprise’s existing information infrastructure and of application software
       * Service level agreements
       * Specificity of performance levels
       * Description of remedies
       * Monitoring
       * Project management skills
       * Demonstrated set of strong project management skills

Current ASP Participants

    Pure-Play ASPs
         FutureLink Distribution
         Telecomputing USA
         Global Recruiting Solutions

     Systems Implementers and Integrators
         CIBER Enterprise Outsourcing
         Metamor Worldwide
         Breakaway Solutions

     Telecommunications and Internet Service Providers
         Qwest Communications International
         Exodus Communications

     Independent Software Vendors (ISVs)
         Microsoft (through its purchase of Great Plains Software)

Independent Software Vendors have embraced the ASP concept for several reasons:

     New market opportunities.  ASPs principally target small- to medium-size companies.  This is a market characteristically neglected by robust enterprise applications due to complexities and high costs.  For example, the growth for high-end ERP applications among Fortune 1000 companies has stagnated, as the Tier 1 market has become saturated.  Therefore, ASPs create a new software channel by facilitating a distribution network to lesser-exposed markets.
     First mover advantages.  Establishing an early presence in the ASP market could, through first-move advantages, potentially create a barrier to entry.
     Predictability of business model.  Software vendors are likely motivated by revenue predictability.  Nearly three-fourths of quarterly revenue for software vendors has traditionally occurred in the last few weeks of each quarter.  The ASP model smoothes out back-end weighted quarters and essentially creates a revenue backlog.
     Learning curve economics.  It is also possible that ISVs are learning from the experiences of their ASP partners with the ultimate objective of internalizing the ASP relationship.  The threat of software vendors entirely bypassing the ASP by developing their own ASP model is a serious danger and a potentially motivating factor for aggressive ISV participation.

Strategies and Long-Term Implications for External Service Providers (ESPs)

     The technical and business advantages presented by application hosting will have significant repercussions over time on the entire IT ecosystem.  Many IT services companies are recognizing the opportunities and threats presented by ASPs and are beginning to proactively redefine their business strategies.  The dilemma for today’s IT service provider is how to establish the best ASP market position without severely impeding the company’s current business model.

     Three basic alternatives available today for IT services companies:

(1) Maintain status quo
At this early stage of the ASP market, this more cautious strategy may be appropriate.  There are some serious impediments for the ASP to overcome before the concept becomes widely adopted, including the security of proprietary information and issues regarding the overall quality of service.  Likewise, the achievement of any meaningful measure of profitability by the ASP has been elusive.
(2) Establish partnerships with ASPs
     Partnerships can add incremental cash flows and enhance firm value without severely jeopardizing or entirely reshaping the business model of the IT service provider.  ASPs searching to enhance channel services will likely have to turn to ESPs.  Key partnerships will need to be developed since the integrity of the ASP delivery channel is highly dependent upon the interconnectivity of each individual component.  Moreover, no single industry contributes all the characteristics required in the ASP channel.
     In these partnerships, each entity is responsible for a specific component of the ASP channel.  The benefit to each partner is an expanded market opportunity without severely overextending limited resources into areas of non-expertise.  The relationship between the ASP and IT service provider prospers only if the end client is provided a desirable level of service.
     A critical issue in the partnership strategy is how the ESP can best develop capabilities that are considered valuable to an ASP.  Recent developments suggest that a specific skill set, whether domain or vertical expertise, has been a valuable determinant in any strategic relationship.  ASPs lacking a desirable skill set have sought external providers.
     A demonstrated domain expertise can represent a great potential reward, but also requires carefully managing the threat that market conditions will supersede the skill set.  Risk can be minimized by developing an expertise with providers of “best-of-breed” enterprise applications, including SCM, CRM, and ERP packages.  Systems integrators with a demonstrated domain expertise have been attractive acquisition and partnership candidates for ASPs that lack internal proficiencies with a specific hosted application.
     IT service providers with a demonstrated vertical industry expertise also have value.  The ASP model will evolve from selling a specific application to selling a business solution.  The ability to convey a vertical market expertise will add enhanced credibility in addressing the unique business characteristics of the organization as business solutions address a broader set of industry-specific issues.  A successful ASP most be able to understand the nuances of a client’s business.
(3) Build or redefine based upon an ASP solution
     A critical issue for any ESP considering entering into an ASP partnership is to insure that it has the capability to effectively manage the major channel relationships that are required.  Each channel relationship – software vendors, systems implementation and integration, data center infrastructure and ongoing customer support – present unique challenges and complexities.  The ultimate objective for an ASP must be the seamless integration of each of these channels in a manner that the end client does not recognize any service inconsistencies.
     The ASP model, ultimately, will also radically reshape many of the current business models and methodologies utilized by an ESP.  Most ESPs do not currently possess some of the critical core competencies, such as management of either an external or internal data center, that are required to be an ASP.  In addition, developing a successful ASP model will likely require a substantial investment before any returns are realized.  Lastly, the threat of software vendors circumventing the ASP by developing a hosted solution must be considered.  The entry of the software vendor would severely jeopardize a critical component of the channel and threaten the positioning of the ASP.

The Applications that Heavy Adopters Lease: (in order)

         * database/data warehouse
         * ERP modules
         * E-commerce
         * Payroll
         * Desktop productivity suites
         * E-mail or messaging
         * External Web site
         * Accounting
         * Sales-force applications
         * Supply-chain management
         * Logistics
         * Supply-chain or extranet
         * Intranet or data portal
         * Customer-relationship management

Considerations for Selecting Your ASP

What does the Application Service Provider (ASP) model bring to your company? How do you start
the selection process? Pointers to get you started.

The ASP Value-Proposition

ASPs were initially viewed as ideal solutions for small and mid-size companies, but recent reports indicate that the Fortune 1000 are beginning to get their feet wet - testing out ASPs in niche areas. For example, 54 percent of executives polled by CIO magazine this April view ASPs as an "enduring change in the way IT is accessed and utilized." 44 percent admit that they do use ASPs for niche solutions while 40 percent said they are investigating the use of ASPs.

What's the ASP value proposition for businesses? Depends on who you are. For small and mid-sized businesses, reports Gartner (CIO Alert: Coming Your Way Application Service Providers, Feb 2000), the ASP value-proposition includes:

      * Faster ramp-up time
      * Software for rent
      * No up-front capital cost; lower ongoing total cost of ownership
      * Full-cycle application services
      * Simplified pricing; subscription model or usage-based
      * Limited customization only
      * Industry-specific implementation; extensive templating
      * Leap-frog to top-tier applications

Another recent survey by IDC asked CXOs (CFOs, CEOs, and CIOs) to rate the reasons for signing up with an ASP. The results:

      * Shorter implementation (51.6%)
      * One-stop shopping and support (51.4%)
      * Avoid capital investments (49.0%)
      * Scalability for business growth (48.1%)
      * Lower cost of entry for applications (46.6%)
      * Predictable fees to simplify budgeting (39.9%)

     These are all clear indications of the enterprise value proposition for ASPs. In addition, there is one other reason for using ASPs—experimentation. As ASP allows the enterprise to try-out various solutions quickly, fail-fast, and decide on what works and what doesn't. For example, signing on with an e-commerce ASP provides a significant benefit for enterprises that don't "get-it" and need to build e-business competencies quickly. The ASP model is an ideal "learning lab" for building enterprise awareness of existing industry solutions, and beginning a process of learning.

     Before doing the hard work of selecting an ASP, make sure your business sponsors understand the value-propositions for going to the ASP model, and use the same team and the same methodology to evaluate them all. The question is- should you subscribe, rent, buy, or build- and the ASP is now a real option!

An ASP Selection Checklist

     What industries does the ASP serve? What differentiates  them from the competition? How competent is their  management?
     Who are the company's major competitors?
     Who are the ASP's major customers? Can you talk to them about their experiences?
     What has been the ASP's performance over time (growth rate, stock performance, etc.)?
     How big is the company (revenues and employees)? What is the geographic span of the company??
     What is the company's growth strategy? Are they viable or likely to be taken over?
     What applications does the ASP offer? Are their any plans for new offerings? Do they have any strategic software partners?
     Are they certified or specialized in the solutions area you are interested in? Can you talk to other customers using the same applications?
     Does your ASP offer all the elements of the ASP infrastructure (the network, the platform, the applications, the operations, and the end services) or do they use partners to help them deliver? Who are these partners? Are they well integrated?
How will you take delivery? Is it a packaged solution with no customization, or is it a flexible customizable application?
What are the costs associated with customization? Are they providing a tiered approach to service- eg. core support only, or 24X7 support? What level of service is best for you?
     Does the ASP have skilled personnel in the following areas: application development and support, systems implementation, and network/data-center management? How many data-centers are there? Can you visit them? Do they have service level management software in place?
     What is the ASP's pricing model? Do they charge by subscription? By usage? By seat? Do they own the software license, or do you buy it? Are their costs for switching, set-up, etc?
     What technology processes & skills do they have to separate them from their competition? Any unique applications, services?
     How well defined is the ASP's Service Level Management approach? And how do they monitor/ manage/predict performance? Are their penalties in place for "out-of-SLA" performance?
     What will define success? What are the key measures for success? What tracking mechanisms are currently in place?
     How will the project be managed? Will there be a dedicated project manager on the part of both the ASP and your organization?
     What security procedures does the ASP employ? Are their data-centers secure? What precautions have they taken for network security, denial of service attacks, etc.
     What is the ASP's storage and backup capability? Are their robust recovery processes in place?
     Does the ASP have a data management strategy? Is there a way to verify that data-flows are intact in the technology stack. Are their data migration procedures in place should you choose to move the data from the ASP? What are the associated costs?

Last Words: Do Your Due Diligence

No one said selecting the right ASP was easy, but a systematic assessment of ASP capabilities and competencies can really pay off.  Early reports from Gartner indicate that savings from 50 to 70 percent have been documented in the enterprise ASP space. Do the work and find the ASP that's best for you.