The ABCs of ASPs

Businesses of all sizes are experimenting with software outsourcing via application service providers (ASPs) - companies that rent software functionality over the Internet. In this concise primer, WebBusiness examines the ever-expanding community of today's multi-faceted ASPs and illustrates how their continual distribution model affects both providers and customers.

What are ASPs?

Application service providers (ASPs) are companies that rent software functionality over the Internet or a private network.

Many experts believe this model of distributing software will fundamentally change the way vendors do business and customer companies shop for and manage enterprise applications. This delivery model, however, is relatively new and unproven. Of the 300 ASPs out there as of this writing, most are less than a year old. Worse, GartnerGroup (US) predicts that by the end of 2001, 60 per cent of ASPs will fail or be bought by larger companies.

How do customers use ASP applications?

Companies that subscribe to an ASP's services, use the applications - which can range from outsourced operating systems to customer service packages to payroll processing software - just as consumers use telephone voice-mail. The voice-mail technology does not exist in the person's house; it lives at the phone company. The user simply pays the phone company a monthly bill to access its technology. Just as renting voice mail capability allows the consumer to avoid buying, maintaining and replacing an answering machine, subscribing to an ASP allows companies to avoid purchasing, installing, supporting and upgrading expensive software applications.

Who supports and maintains the ASP applications?

The burden of tech support is on the ASP. The application code lives on the ASP's (or ASP's subsequent provider's) server, and it can only be modified by the ASP's technicians. When upgrades are released, users don't have to worry about downloading and installing anything from the software company. Their ASP simply upgrades the copy of the software that lives on its servers, and all subscribers access the new version through a Web browser (in most cases). The downside is that subscribers may want upgraded software (to respond to changes in its business, let's say) before the ASP deems it necessary to do so. ASP customers must be ready to cede control over software upgrades to the ASP and be prepared to complain when they don't get what they want.

How many companies are ASPs?

New ASPs are created nearly every day. These startups, restructured software companies and hybrid entities born of strategic partnerships (often between consulting groups and infrastructure providers) provide over 80 types of applications, according to Zona Research. But, out of the current line-up of approximately 300 ASPs, The GartnerGroup (US) predicts more than 60 per cent will disappear before the end of 2001. Despite an inevitable shakeout, analysts like Deloitte Consulting see great potential in the ASP market, and predict it will soar from its present size of less than $US10 billion to $US48.5 billion in 2003.

What types of applications do they provide?

- Packaged applications that are minimally customised - if at all - such as enterprise resource planning (ERP) packages and small business software (like Windows 2000) - Vertical industry applications, such as documentation and management software for medical practices - Vertical industry portals, which host B-to-B electronic commerce and provide industry specific software functionality - Horizontal portals, which provide specialised "niche" functionality (transportation logistics management, for example) that can be shared by companies across many different industries What market segments do ASPs target?

- Small companies that want minimally-customised applications - Large enterprise organisations in need of complex "niche" applications that they cannot afford to develop themselves - Vertical industries that need B-to-B electronic commerce services or industry specific software functionality How many companies use ASPs?

Few measurements have been made of how many customers this multiheaded breed of provider is now servicing. Industry watchers agree that few Fortune 500 companies have committed to ASPs, and small and mid-sized companies are their primary customers.

The ITAA (Information Technology Association of America) surveyed executives from companies ranging from start-ups to the Fortune 1000 in May 2000 and found that one-fifth of the 1526 respondents are currently using an ASP. Within one year, 23.9 per cent plan to evaluate and 18.7 per cent plan to deploy ASP offerings.

Of the "ASP Customer Demand Survey" respondents that are using or plan to use an ASP, the majority are in IT consulting, electronics/high tech and software.

Why do some companies like using ASPs?

ASPs take on all the traditional headaches of software installations: large licensing fees, application integration, support and maintenance. Also, ASPs' pay-as-you-go pricing lessens the economic risk of buying software that may not be the best solution.

Why do some companies dislike using ASPs?

Some IT departments may not trust sending highly valuable and private customer data across the Internet to an ASP with a very short track record. ASP subscribers may also face potentially harsh consequences for opting out before the contract with the ASP expires. Other concerns include integrating ASP offerings with existing applications and loss of control over security and the network.

What's the best way to manage a relationship with an ASP?

Smart companies make sure that their contracts are flexible and can be adjusted if the pricing scheme proves to be too much for the value of the applications. (Many agreements are based on the percentage of desired uptime.) Customers may want to create exit plans if the young ASP folds.

After choosing an ASP that has proven expertise, customers may want to establish a single point of contact at the ASP's company. The customer can check with the contact on a regular basis to confirm the application's performance and ASP's business are proceeding as planned. Some customer companies choose to use their own performance monitoring tools.

What are the benefits of renting apps over buying them?

ASPs help customers get an application up and running in little time, for little money. The customers are thus free to focus their time and resources on their core business concerns.

ASPs can also help companies serve remote offices. Rather than set up the physical infrastructure needed to run applications at these offices, the parent company can arrange to deliver them much of the computing through ASPs.

While the ability to rent applications rather than maintain them in-house might have bottom-line benefits, the young ASP model has not been wholly validated. So early reports relaying customers' experiences with service level agreements and support during downtime, as well as changes in the marketplace, are being read carefully by the industry.

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