In a development that could add viability to a fledgling ASP (application service provider) market, major IT platform vendors are muscling into application hosting.
Although the approaches vary, industry observers say investments by Oracle Corp., IBM Corp., Microsoft Corp., and Hewlett-Packard Co. will create an infrastructure to integrate outsourced and in-house applications. If their efforts succeed, these companies have a shot at convincing large corporate users to adopt the software-as-service model.
Oracle this week proclaimed that it will become a software-as-service company at its Oracle Open World conference in San Francisco. But Oracle is not alone among its competition in this move. Indeed, IBM, HP, and Microsoft have shared strategies for delivering applications as Web or "e-services".
Many users, however, are still more than a little reluctant to commit to a hosted strategy. That reluctance is triggered in part by the financial instabilities many ASPs, ISPs, and other online service providers have shown in the past year (see box, below).
The most significant technical stumbling block to emerge is the difficulty of data and application integration, according to users.
"It just doesn't make sense to outsource large applications when I have to get ERP [enterprise resource planning] from one ASP and CRM [customer relationship management] from another, and the data can't be integrated because it's housed by two competitors," said Pat Elwood, advanced technology consultant at Hertz, in Oklahoma City. "If I could have all my applications integrated, that would make the prospect more attractive."
Still, vendors such as Oracle, IBM, and Microsoft are insisting that software services are the way of the future and, in essence, betting their businesses on it.
With so few ASPs and other providers able to establish a profitable business model, some observers believe a handful of the platform vendors could step in and assume the role of a one-stop shop, including the role of an ASP itself. These industry heavyweights can withstand significant losses to establish that position while users and service providers go through the rocky transition of finding the right business model.
"Someone like Oracle is in a unique position of being able to risk injury to their current business while they establish a new business. They might be able to make a business out of their own hosting as well as selling hosting to service providers," said Dana Gardner, an analyst at Aberdeen Group Inc. in Boston.
Platform providers are emphasizing integration as the cornerstone of their strategies.
Oracle's plan, as discussed at its Open World conference this week, is to move toward being able to host all of its offerings and, more importantly, to integrate them all. Oracle will host applications and let third-party ASPs host its applications through a partner program called iHost.
"The focus of our partner program has been on ASPs that add value to our applications, instead of just hosting them raw the way we do," said Gary Bloom, executive vice president at Oracle, in Redwood Shores, Calif.
IBM is also pushing application integration. Officials believe Big Blue has established a secure position against its major competitors in the software-as-service markets on the strength of what it calls "e-infrastructure." This collection of middleware products, such as MQSeries, CICS, Domino, and WebSphere, integrate systems and automate transactions over the Internet, said Scott Hebner, director of e-business for IBM's Software Group, in Somers, N.Y. IBM has cast itself as "arms supplier to ASPs," meaning it will outfit ASPs with the necessary hardware and software infrastructure.
Rather than becoming a hosting service, Microsoft is aiming to provide ASPs with a complete platform, based on its .NET strategy of the Windows 2000 varieties and the Enterprise Server family. The next generation of the Web will take "advantage of standards like XML and SOAP [Simple Object Access Protocol] to integrate applications together," said Barry Goffe, group product manager of Microsoft's .NET developer and enterprise group, in Redmond, Wash. Like Microsoft, HP is developing an e-services development framework.
At this point, analysts believe that none of the platform suppliers has a major advantage quite yet.
"No one has an across-the-board solution. The vendors are just beginning to explore this. You see start-ups like Loudcloud who see opportunities to get involved in this because the major vendors don't have a delivery mechanism for it," said Richard Buchanan, an analyst at Meta Group Inc., in Stamford, Conn.
Meanwhile, application hosts themselves are trying to add on integration services.
"Some ASPs are putting together an equation of offering application integration with external services [such as access to market exchanges] that will serve the company from the front office to the back office," said Robert Anderson, an analyst at Stamford, Conn.-based Gartner. As an example, Anderson listed Corio Inc., a San Carlos, Calif.-based ASP that this week announced hosting services for customers of the e-commerce exchange Commerce One.
Until any shakeout occurs, the market is tough to understand.
"All the different options add a lot of complexity, and it's tough to sift through it all and figure it out," Hertz's Elwood said. "The whole ASP model isn't going to work at this point. I don't think it's mature yet. Sometime down the road it may be, but not today."
Database administrators within some sectors, such as financials and banks, said flat-out that their data is too important to entrust to an ASP.
"They could have tons of security, they could even have a policeman guarding the servers, but we still wouldn't do it," said a database administrator at a major bank.
But not everyone is opposed to using software-as-service.
"It can be a very good thing, and I am trying to get some of my clients to see the benefits of hosting," said Erwin Groenendal, CEO of consulting firm Cumquat Information Technology, in the Netherlands.
-- Additional reporting by Jack McCarthyNegotiating the SLARecognizing the need to keep users' heads above water when entering into first-time business agreements with ASPs, an industry group this week took steps to take some pain out of the process.
The Wakefield, Mass.-based ASP Consortium has released the "End Users Guide to Service Level Agreements," which outlines key areas for companies to consider when hammering out binding service agreements with ASPs.
The guide explains what an SLA (service-level agreement) should include, why it is needed, how new users or applications will affect the SLA, customization issues, and how much an SLA will cover, according to Paula Hunter, ASP Consortium president.
Hunter said it is important to remind enterprises looking to outsource that an SLA is not a guideline but a legal document that should be given the appropriate level of scrutiny should an escalation process or availability disagreement between the ASP and buyer arise.
"SLAs become the measuring stick people use when communication breaks down," Hunter said. "If there are issues, you raise them before they become red alerts. It's only in the most extreme of circumstances that you have to resort to [the SLA] contract. It just becomes a safeguard."
Hunter said that many SLAs are being written with far too much detail over minor points. As users become more familiar with ASPs, she predicts the documents will reflect a greater sense of trust.
Yet with industry heavy-hitters such as Oracle and IBM steamrolling into the ASP arena by carving out a "do-it-all" service provider promise, some question what level of attention will be paid to customers' specific SLA needs, particularly for e-business applications that demand significant systems integration.
"When standard business practices emerge with regard to business services, you're going to see this ad hoc type of stuff," said Keniko Barney, director of e-business infrastructure and services at Cahners In-Stat Group, a research firm in Scottsdale, Ariz. "I don't know if small companies will get into the habit or have the luxury of negotiating an SLA."
Barney added that ASP infrastructure providers are expected to play a key role behind drawing up services SLAs as systems become increasingly interconnected and complicated.
Observers expect ASP shakeout
Following historical patterns in the adoption of new technology, the ASP market will undergo a painful shakeout in the next year, industry observers said at the ASPWorld Conference & Expo in San Jose, Calif., this week.
More than half of the 500-plus ASPs currently doing business will not survive, according to Terrence Ozan, director of global sectors at Chantilly, Va.-based consulting firm Cap Gemini Ernst & Young.
"There are over 500 companies calling themselves ASPs -- hardware and software vendors, telcos, outsourcers, consulting firms -- all offering different things, from Web hosting to applications management," said Ozan, a keynote speaker at the conference.
But many will be gone within a year. "The good news is that the ASP market is too important to go away; the bad news is much needs to change for ASPs to be successful," Ozan said.
Dozens of new specialized ASPs have been formed but many are struggling financially. This instability is one reason large corporate customers are not jumping into application outsourcing, analysts said.
"No [ASP] has proven they have a durable business model. Their benefit to users is clear, but no one has come up with a way to provide these services cost-effectively," said Dana Gardner, an analyst at Aberdeen Group, in Boston. "What is needed is a maturely developed service provider industry in order for the big [corporate users] to move to that model."
Market research company International Data Corp., in Framingham, Mass., made available a bulletin at the conference that said an "inevitable consolidation" in which "hundreds of today's ASPs won't survive to see their first dozen customers" will occur.
But IDC said the ASP market, which showed revenue of $300 million in 1999, will reach $7.8 billion by 2004.
To survive in the future, ASPs will have to refashion their operations, Ozan said. "The market will require ASPs to transform their business."
"The ASP market will mature to meet the needs of high growth and large enterprises," Ozan said. "[Many ASPs] will move beyond being a technology utility to be a single-source provider of assistance and capability in business operations and integration."
Platform vendors eye software services
Although the number of companies calling themselves ASPs has exploded, IT platform providers are building the foundation for developing and integrating these Web services.
Oracle: Revamping its core database to offer hosted ERP application services; Business OnLine division hosts applicationsMicrosoft: Creating .NET, a programming and middleware framework for developing Web servicesIBM: Offering application hosting through professional services group; Providing infrastructure, notably integration middleware and hardware, to ASPsHP: Building E-speak, a development framework and middleware engine for finding, publishing, and integrating "e-services"