Some of the Myths and Realities Behind ASPs

FRAMINGHAM (05/01/2000) - Here's a quick quiz for you:

1) Within the next three years, the application service provider (ASP) market will grow from $350 million to:

A. $2.5 billion.

B. $4 billion.

C. $10 billion.

2) ASPs, being mostly small companies, today sell mainly to:

A. Other small companies and start-ups.

B. Midsize companies and divisions of big companies.

C. Large enterprises.

Interestingly enough, all the answers above are possibly correct. ASPs have burst onto the IT scene with fanfare and noise that greatly exceed the companies' current impact. By most estimates, they're selling their services pretty much equally across small, midsize and large companies.

Also, there are far more of them than there is demand for their services, at least for now. But since three different research firms project as many different market growth figures (see Question 1 above), there are many questions about the future for ASPs. And the hype surrounding them has generated a few myths.

To set the record straight, I present to you my list of ASP myths and realities.

Myth: Very few IT environments are seriously considering renting applications from ASPs.

Reality: I've seen three different studies, each of which shows that from a quarter to a third of your IT brethren have already struck deals with one or more ASPs. Moreover, the general feeling among analysts is that if application performance and overall satisfaction are high with these early experiments, the rent-instead-of-buy concept could absolutely boom.

Myth: The key issue for IT in deciding whether to try ASP services is security of the application data when it resides outside the company.

Reality: It's true that security is the main issue, but for the wrong reasons.

In early experiences with ASPs, security has not been an issue or problem, thus it is a key perception holding back broader deployment of rented applications.

Rather, the key issue for IT should be the service-level agreement (SLA).

If you decide to contract with an ASP, make sure that everyone from the end-user representatives to the chief financial officer to the legal department carefully reviews the SLA. And make very sure that the ASP is adequately penalized (and you are adequately compensated) if service levels fall below contract levels. This assumes that the ASP also provides a bulletproof means of monitoring these service levels. Provisions for data security can be built right into the SLA as well.

Myth: The main reason for contracting with an ASP is to save money, which you'll definitely do.

Reality: You might save money; you might pay the same amount as you would if you had deployed and maintained the applications yourself. You might even pay more, though that's not likely.

But there are two compelling reasons other than cost for renting applications.

First, you will free up valuable and increasingly scarce IT staff to handle more business-critical work, such as bolting those jazzy new e-commerce front ends to back-room legacy systems. Second, ASPs are very good at rapid application deployment, which is sometimes measured in weeks for certain applications and takes less than six months for most. These are the real value propositions that ASPs bring to the table.

Myth: Working with an ASP, you'll get only plain-vanilla applications, with no customization.

Reality: While the ASP "one-to-many" business model relies heavily on renting applications without customization, nearly all ASPs offer some degree of application customization. Some will even modify core code but will probably charge you more than a typical systems integrator would to do so.

Myth: ASPs are a flash in the pan.

Reality: On the contrary, I believe ASPs will become the manifold expression of the growing belief among companies that much of what we call the information system can be looked upon as a utility, just like electricity or water.

Some may view ASPs as a threat to IT's influence and power. Perhaps a better way of viewing ASPs is as groups, which you can hold accountable should they fail to deliver with predetermined reliability. Wouldn't it be nice to be in that position?

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