ASPs' Outsourcing Raises Risks for Clients

FRAMINGHAM (07/17/2000) - Some application service providers (ASP) are relying on hosted services themselves to help manage their growing businesses, a trend users need to be cautious of, say analysts.

Industry experts warn that relying on an ASP that itself relies on an outside service provider can increase the risk for customers. As a result, buyers need to ask for detailed service-level agreements and make sure their ASPs have similar agreements with their own providers.

Frank Zamani, CEO of San Jose-based database hosting service Caspio Inc., plans to hire an ASP to provide remotely hosted customer relationship management (CRM) software that will track his growing list of clients.

CRM software is particularly useful to a growing services business because it tracks customer information and thereby allows a company to improve its own service levels, which are the measure by which ASPs are judged, according to Amy Levy, an analyst at Summit Strategies Inc. in Boston.

In an ASP arrangement, users pay a monthly subscription fee to access applications via the Internet or a virtual private network.

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Zamani said hiring an outside firm to supply a CRM application would give him access to customer information in a matter of days rather than months. It also would save him from spending a lot of money up front and hiring people to support the application.

"Hiring IT staff is very difficult. When you get them, you want them to focus on your core business," he said.

Normal Liang, CEO of LocalMIS.com Inc. in New York, said he also plans to buy CRM services from an ASP within six to nine months. LocalMIS is an ASP that targets small and medium-size businesses in certain vertical markets and relies on resellers to distribute its services.

Like Zamani, Liang said he believes using an ASP would mean faster implementation, particularly if the ASP also offers training and consulting services.

These relationships among ASPs make it even more important than usual for end users to get bulletproof service-level agreements, according to Peter Bendor-Samuel, CEO of The Everest Group, a Dallas-based consulting firm.

For instance, if a company selects a CRM service provider that in turn selects an outsourcer to host its servers, there are more potential points of failure that could leave an end user stuck, he said.

Levy added that contracts with ASPs should include provisions that allow end-user companies to be compensated for downtime - not only from the primary ASP but also from any service it employs.

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