The ASP Rope-A-Dope

For the past year, application service providers (ASPs) have been positioning themselves much in the way Muhammad Ali did in his 1974 "Rumble in the Jungle" bout with the much feared, pre-burger-grilling George Foreman. Seemingly overpowered, Ali bought time by relying on a surprising new strategy, the now legendary "rope-a-dope" technique. Leaning against the ropes and covering up for much of the fight, Ali patiently waited while Foreman ineffectually hammered away at him. In the eighth round, sensing that Foreman was exhausted, Ali came off the ropes and unleashed a potent combination that quickly dropped his opponent, ending the contest.

Of course, unlike the resilient Ali, some application service providers have fallen through the ropes and out of the ring, causing customer apprehension. However, recent economic downturns and dot-com failures - though Foreman-esque in their fear-inducing capabilities - should not prevent companies from putting their money on ASPs. Those ASPs still standing, as well as those entering the ring for the first time, are prepared to come off the ropes with tools and benefits that should put IT buyers' concerns on the canvas. In fact, research firm IDC forecasts spending on application service providers (ASPs) to grow from $1 billion in 2000 to just under $24 billion in 2005.

Who's Putting On The ASP Gloves?
The acronym ASP could just as accurately be WASP, for "Web-based application service provider." No matter which version of an ASP model is offered, the services a company outsources from an ASP reside, more or less, at the provider's (or, host's) site and are accessed via a Web browser. Web-based applications and services can be used to manage and/or store the mission-critical data generated by fundamental business needs such as CRM (customer relationship management), ERP (enterprise resource planning), and SCM (supply chain management).

Obviously, an initial barrier to widespread adoption of the hosted application model has been customers' hesitation about trusting their business practices and data to a Web-based partner. However, as e-business interaction becomes more commonplace and security concerns wane, the fundamental issue that will emerge is value. As with any IT purchasing decision, companies want to know what they are getting and why they would want it.

Traditionally (not a long tradition, by the way), what customers have been getting are boxed software applications retrofitted for delivery over the Web. The providers either partner with a software vendor to host that vendor's software, or they are software vendors who bring their own software applications to the Web. A next generation model, currently emerging, has providers developing products and services that have been architected from the ground up for one-to-many Web delivery. In a related model, providers customize their Web-architected applications and services to match customers' particular business demands.

Customers can also outsource data storage and storage management functions to hosting service providers. Some ASPs build and maintain their own data centers. Others partner for that function, often with an SSP (storage service provider).

Is There Any Wallop In That ASP Punch?
ROI from outsourcing applications and data management includes the savings realized by not spending money on software upgrades and user licenses. Many ASPs offer scalable price-per-seat contracts, which guarantee that customers always receive the latest upgrades. Greg Gatti, CEO customized applications provider DigiVerge (Fayetteville, NC), notes that it makes financial sense to outsource commonly used tools such as messaging and conferencing. "With an ASP, you are paying for mailboxes rather than user licenses," Gatti said. "You can also outsource for modules like CRM (customer relationship management) that would cost a lot if purchased."

Outsourcing also means reduced spending on server infrastructures. "Traditionally, customers had to buy relatively large servers and a minimum number of licenses because the licenses correlated directly to the size of the servers they were running," said Mansour Salame, CEO of White Pajama (Hayward, CA). "Companies would buy hardware capacity they didn't need. With applications hosted from an ASP's servers, customers don't have to build an infrastructure based on forecasted growth."

Jessica Goepfert, senior ASP Analyst for research group IDC (Framingham, MA), sees both small and large companies benefiting from outsourcing at least some IT functions. Smaller companies in industries such as manufacturing are unlikely to consider IT management as their core competency. An ASP can deliver functionality that, without in-house IT staffing and expertise, smaller companies would otherwise not be able to have. "Even if a company has its own IT department and is tech savvy, there are benefits to working with an ASP," Goepfert said. "Outsourcing applications frees up your IT folks to focus on strategic business projects rather than on systems administration tasks. For instance, instead of managing the back office ERP system, they can be working on a customer support initiative."

Technologies And Providers Head Into The Later Rounds
Industry insiders believe that, far from being a fad that failed to catch on, Web-based delivery will become the dominant way companies access their business applications. "The majority of software companies are going to migrate to an ASP model, especially for end user applications," said Salame. Gatti also senses the shift. "There is definitely a move from software vendors to Web-enable all of their offerings," said Gatti. "You see it, for example, in Microsoft's .NET platform." Looking toward the future, Gatti envisions seamless communication among applications from multiple Web-based providers. Eric Westerkamp, president and CTO of Quickstream (Colorado Springs, CO), agrees that cross-application communication will happen but not for another five years or so. Nonetheless, he sees the emergence of technologies such as XML (extensible markup language) as a sign that the building blocks are indeed being laid. "The ability for an application to talk with another application and to do that without human intervention is the ultimate goal," Westerkamp said. "XML is initially coming through as the mechanism by which you bring these applications together."

In the meantime, companies looking to outsource some of their software needs should benefit from the proliferation of hosted applications. As it becomes increasingly difficult for ASPs to distinguish themselves by simply offering applications, they will have to make their mark in other ways. "Now you can find pretty much any application offered in a hosted environment," Goepfert said. "So, the trick for providers is to offer unique SLA (service level agreement) options or advanced components, such as wireless compatibility." Westerkamp agrees. "Just hosting the application isn't enough. There must be some value-added process or business knowledge," he said. Since companies on the market for hosted applications clearly hold the judges' scorecards, contending providers will be forced to deliver knockout Web services.