These are treacherous times for fledgling companies trying to make their stake in the world of high-tech, as even big players such as Nortel are feeling the shock waves of an unstable economy.
That’s why it’s more important than ever before for businesses considering outsourcing as a solution to make sure they can trust the company they’re turning to for help. Like parents trying to find a trustworthy babysitter, businesses looking for an application service provider to take the pressure off of their over-worked IT staff and limited hardware resources, need to be ever vigilant. Otherwise, that business’s employees, or worse yet, their partners and customers, might suddenly find themselves cut off from the data and applications they rely upon.
Despite the risks however, there can be some good business reasons to turn to application service providers, or ASPs.
“If you go with an ASP model, it’s almost always faster because you’re getting a canned solution,” said Rita Terdiman, a vice-president and research director with Gartner Group in Palo Alto, Calif.
Some in-house implementations can take years, agreed Jessica Goepfert, a senior ASP analyst with IDC in Framingham, Mass. With ASPs, implementations can take just months, weeks or even days, depending on the type of application.
“The true ASP model is a standardized offering with no customization,” Goepfert said. However, in most cases, companies will need some degree of customization, she said.
Businesses need to find a balance between getting an application up and running and customizing a solution to fit their needs.
“I sometimes have some hesitations about the idea that you could just go to any ASP and get an application and it’s going to be useful, because there’s always going to be some cusomization required, said James Governor, an analyst at Illuminata Inc. in London.
David Friedlander echoed those concerns.
“What’s not working with ASPs, or what’s not working with customers, is just a vanilla packaged app with no customization or no consideration to a company’s business processes. Even for a small shop to just buy standard packaged PeopleSoft without customization, doesn’t seem to go over that well,” said the Cambridge, Mass.-based analyst with Giga Information Group.
“What does seem to work is there are apps that need to be customized – companies doing both the customization and hosting. By tackling both they’re tackling a business process, and not just throwing IT at a problem, which is what FutureLink and some of the failed ASPs started doing,” he said.
Businesses need to find ASPs that acutally solve business problems, agreed the Anaheim, Calif.-based Sheila Lugenbuehl, vice-president of the ASP Industry Consortium.
“The ASPs that are successful are those that have some expertise in a particular industry and have an identified target market and have a business model for that target market,” she said. “So it’s not just a delivery of a single application, but it delivers a solution to a company.”
But customization takes times and resources – something a lot of companies are short on these days.
Going with an ASP solution allows companies to eliminate a lot of hassles, Terdiman said. “You don’t have to make hardware purchases; you don’t have to acquire staff, so it’s a much simpler implementation.”
The shortage in IT staff is a big draw, Goepfert agreed.
“What I hear from customers time and time again who’ve turned to ASPs is lack of in-house IT talent. IT is not their business, not their core competency. They didn’t want to waste their time, energy and resources focusing on managing and upkeeping sophisticated environments. So they turned to an ASP for that,” Goepfert said.
A cost which not many companies consider, according to Lugenbuehl, is the cost of maintaining an application once it’s been implemented.
“Maintenance is actually a big cost that most IT organizations don’t consider when they’re looking at the cost of an application. What they are looking at is the licensing fee, the hardware and the resources. But normally what they fail to recognize is the cost of maintaining an application,” she said.
“Maintaining the application on an on-going basis is extremely expensive.”
Collaboration and communication software, such as e-mail, are applications that a lot of companies are looking to ASPs for, she said.
“E-mail is actually a surprisingly complex application these days,” Governor said. And it’s one well suited for the ASP model, he said.
Companies considering an ASP solution need to put a lot of attention into the service level agreement (SLA), he said.
“A service level agreement isn’t an extra. A service level agreement should be the key to the deal. Many ASPs out there don’t really seem to understand that. So really it’s up to the users to push for that themselves,” he said.
Companies need to make sure the SLA has a penalty scheme in place if they don’t have access to their application, Governor said. The SLA should also include an agreement about response time, and the mean time it should take in fixing any problems that occur.
“Make sure that the software is appropriate for you business,” Goepfert said. “I’ve heard stories of an ASP customer choosing a tier-one application package, and they said it was just too much software for their business. It wasn’t appropriate. They use a fraction of the functionality that the software is capable. It’s just too overwhelming and they’re not able, in that case to take advantage of the ASP solution.”
nothing’s a sure bet
Anaylsts stress that businesses must investigate an ASP before signing an SLA. Check out how long the company has been in business, who their investors are and what their business model is, Goepfert said.
“Financial viability is certainly something that’s coming up more these days, because of the recent shakeout in the market. Customers are looking at who the investors are. ASPs should be as open and forthcoming as they can be about their financial position,” Goepfert said.
“The biggest problem today is the financial stability and viability of these guys,” Terdiman agreed.
A number of ASPs have had to cut back on their staff, or they’ve cut back on their service offering line, she said. “A lot of them are in trouble.”
And even placing your trust in the hands of established giants is no guarantee, as the example of expired ASP Pandesic illustrates, Terdiman said.
Pandesic was an e-commerce ASP that was owned partially by Intel Corp. and SAP AG. “So everybody felt quite safe with them.”
But the company went out business quite suddenly last summer without providing its customers with any notice or a transition path, she said.
“They (the customers) had no other ASP there to pick up the slack and this really caused a little stir in the ASP community. People went with Pandesic precisely because they felt comfortable with their stability – if anything happens, these guys (Intel and SAP) would step up to the plate and secure them,” Terdiman said.
But it seems that even the giants aren’t immune.
There’s simply too many players in the market, Terdiman added, so even if the economy gets better, there would still be ASPs going out of business.
The risk of your ASP hanging up an out of business sign on its door is one reason that it’s important to make sure that you retain control of the software.
“Owning the licence means you control the software and can manage change,” Friedlander said.
It also eases the migration strategy in event of a failure,” Goepfert said.
“They can purchase the licence separately from the hosting contract so they actually do own the software. So, if the ASP goes out of the business, they can assure that their data and their environment will be OK,” she said.
And any company thinking about using an ASP should have a contingency plan, in case its provider succumbs to the economy, Friedlander said.
While the instability of today’s economy may mean some ASPs aren’t safe, many argue that ASPs can offer another type of security.
Most small-to-medium sized companies don’t have the proper resources to properly look after security in-house, Friedlander said.
“There’s no question in my mind that a well managed ASP can do a better job than a small or mid-sized company that doesn’t have the resources or expertise most often to do that.”
But these generalizations may not apply to all businesses, Terdiman cautions.
“You can’t really compare the security of anyone ASP vs. any one company. Truly it depends on the customer,” she said.
Also the increased security generally comes because of an increased threat.
“Certainly an ASP is an attractive target – that’s the downside,” he said.
“You’re not going to get that much off Joe’s Pizza chain, but the ASP has lots of customers, and lots of data as a result – credit cards, financials.”
In Europe security was the number one concern with companies considering ASPs, according to an ASP Industry Consortium survey. In the U.S., it was number three. The number one and two concerns in the U.S. was that companies felt they already had sufficient IT resources and that they saw no cost advantage. In Europe, businesses were also concerned with uptime and obtaining a suitable SLA.
The uptake of ASP solutions has been faster in the U.S., the consortium’s Lugenbuehl said.
Bandwidth also remains an issue, Goepfert said. In evaluating prospective ASPs, businesses need to look at both response time as well as uptime.
“Bandwidth needs to improve as well in order for the applications to really be what customers want,” she said.
Companies are better off with applications that are developed from the ground up for ASPs. That is, the application should be designed for a one-to-many environment and for delivery over a network.
“But those applications tend to be less well known, and less robust, and not have as much functionality as some of the well known existing applications that are already out there. It will take time for those that are already out there to evolve their product and make it ASP-ready,” she said.
Despite the problems, the ASP Industry Consortium’s Chairman Traver Gruen-Kennedy believes that one day all software will be delivered over the Web as a service.
By the end of ’99 the term ASP had some negative connotations, Gruen-Kennedy admitted to a group gathered by IBM to hear about its ASP Prime program – a course designed for companies thinking about offering their solutions through an ASP model. But that shakedown was expected, and Gruen-Kennedy sees a bright future ahead for ASPs.
“Data is more valuable when it’s out there on the Web,” he said.
But Friedlander doesn’t see the value of placing all software on the Web.
“There’s questionable value to you just renting Microsoft Office because it’s fairly inexpensive for you to acquire. You’re liable to have PCs anyway, and the monthly cost of renting Microsoft Office, over a three year period – you’re probably talking thousands of dollars, vs. the (US)$300 or (US)$400 it would cost us to buy it.”