The ASP reincarnation

Esker Software develops document and delivery management applications. So two years ago, when it was struggling to integrate an unwieldy customer relationship management (CRM) system with other back-office applications, the suggestion that it didn't need to "own" the software but instead could outsource the functionality seemed like heresy.

"It just stunned me that someone would actually think of putting their data off-site," recalls Mitch Baxter, Esker's executive vice president for business development and a member of the company's board. "I'm a software company guy. It just seemed profane!"

Yet after a pair of short pilots, Esker, a French company with U.S. headquarters in Madison, Wis., scrapped a planned upgrade of its Siebel Systems Inc. CRM system and rolled out Salesforce.com to 180 users in 60 days, joining the ranks of thousands of companies procuring enterprise applications as Web-based services for a monthly subscription fee.

Software as a service -- which typically eliminates hefty upfront license costs and requires little or no hardware or IT personnel to install, configure or maintain -- is growing in popularity among large corporations and small businesses alike. Last year's successful public stock offerings by fast-growing providers Salesforce.com Inc. and RightNow Technologies Inc. have shined a spotlight on a software delivery model reminiscent of the buzz surrounding application service providers (ASP) in the late 1990s.

Fallout from the tech stock collapse in 2000 claimed many of the estimated 1,000 to 1,500 ASPs that sprouted in the late 1990s to offer hosted enterprise applications over the Internet. But as the economy has recovered, the surviving ASPs have been joined by a growing cadre of companies delivering software as a service. Hardware vendors such as IBM and Sun Microsystems Inc. are preaching the on-demand gospel, along with traditional enterprise software companies such as Siebel, Oracle Corp. and SAP AG, which offer hosted versions of their applications in response to upstart competition and strong user demand.

"Forgotten but not gone," is how Gartner Inc. analyst Ben Pring describes the software-as-a-service delivery model promoted by ASPs. "It was gathering steam and momentum all the time, whilst it was out of fashion."

Indeed, the new generation of software providers led by Salesforce.com and RightNow now use terms such as on-demand software to describe their offerings. Unlike applications hosted by some ASPs and traditional enterprise software vendors, these have been built from the ground up to be shared by multiple clients and delivered over the Internet.

Market researcher IDC recently dropped the term ASP and uses "hosted application management" to describe companies that provide outsourced hosting of packaged software. Hosted e-mail and security providers and companies such as early ASPs USinternetworking Inc. (USi), NaviSite Inc. and Corio Inc. -- acquired in January by IBM -- are in this business.

"There's this first generation of Neanderthals [that] didn't really take advantage of the environment or the Internet," says Tien Tzuo, senior vice president of product management at Salesforce.com, about the early ASPs. "Homo sapiens -- software as a service -- have always been around. We just needed those Neanderthals to die out."

Applications delivered as a service are forecast for rapid growth that could make a more sizable dent in the overall software market. Worldwide spending on software delivered as a service reached $4.2 billion in 2004, up 40% from 2003, and will reach $10.7 billion by 2009, according to IDC. And Gartner predicts that one-third of all new software deployed over the next five years will be delivered as service rather than purchased and installed in-house, Pring says. Subscription-based software accounts for only about 3% to 5% of the total software market today, he says, but will rise to about 10% over the next five years.

Faster, better, cheaper

Proponents of software as a service are quick with automotive metaphors for the traditional way of buying and deploying enterprise software: buying a $500,000 Ferrari while you can rent one just when you need to drive it, or buying a car in pieces -- engine, drive train, chassis, steering wheel and so on -- then putting it together yourself or paying a mechanic to assemble it for you.

A large corporation pays a six- or seven-figure license for the software -- plus the cost of the hardware and network infrastructure to run it -- and then the spending really starts as it deploys IT staff or consultants to customize, configure and integrate the software with current applications. Add to that IT staff for ongoing maintenance, and the vendor's 18% to 20% annual maintenance fee for upgrades and 24-hour support, and companies pay $6 to $8 in extras for every $1 they spend on the traditionally licensed enterprise software, says Jason Maynard, a senior analyst at Merrill Lynch & Co., which last year launched an on-demand index to track the growth of software by subscription.

Software as a service eliminates much of the upfront cost, can be deployed much faster and heightens the vendor's incentive to provide solid support and a good user experience, since customers can switch vendors with relative ease. Typically, customers pay a monthly fee for each user on the system. Providers host all the software and data on their own servers, giving them economies of scale, as well as allowing them to perform bug fixes or major upgrades for all customers at once.

"If you can provide the service reliably, it keeps my initial costs down, it keeps my recurring costs down and my switching costs down," says Bob Lamoureux, CTO of America's Growth Capital LLC, a Boston-based investment banking firm that uses a hosted CRM application from Salesnet.com to track activities, events and communications associated with clients and prospects. "It works really well, it's reliable, and it's very flexible," says Lamoureux. "Those are the key ingredients of a successful on-demand player."

The evolution of the ASP

Today's software as a service has largely overcome the hurdles that tripped up many first-generation ASPs. For starters, the post-bubble economic climate is more hospitable to ASPs, as corporate IT budget tightening has made the lower upfront deployment costs of on-demand software more attractive. In addition, technology advances such as Web services and service-oriented architectures, plus five years of added maturity for both the applications and executives running ASPs, has helped the business model come of age.

"When we started, we viewed ourselves as faster, better, cheaper," acknowledges USi CEO Andrew Stern. "But what we've come to understand ... is that the real problem that our clients have is getting the value out of the technology that they thought they were buying."

The lack of flexibility to tailor the software and to integrate it with other corporate applications was one of the key failings of the first generation of ASPs, Lamoureux says. "They were solutions that the ASP implementers or providers deemed were the features and functions that you wanted. There wasn't a lot of flexibility to do much else with it," he says. That has changed with the inception of Web services and other technical advances.

"The ASPs of today are much more targeted. They identify a critical business need, and they solve it," agrees Frank Gillman, vice president of technology at law firm Allen Matkins Leck Gamble and Mallory LLP in Los Angeles. "So if you're a company that has that problem, you can solve it by writing one check and turning something on in two hours."

Allen Matkins has been using a hosted application from FrontBridge Technologies Inc. for e-mail processing and spam filtering since 2000. Last year, it outsourced the firm's Web site and content management applications using a tool designed specifically for law firms called Hubbard One from Thomson Corp., and it uses other legal practice tools that its lawyers access on-demand via the Web, Gillman says. Its monthly bill for hosted applications is between $5,000 and $6,000, depending on how much e-mail is archived by FrontBridge.

"To me, what you're buying with an ASP is not just the software, it's the expertise that comes with it," Gillman says.

Serving all shapes and sizes

Though many of the first ASPs were targeted at midsize companies -- large enough to need complex enterprise applications but not big enough to support large internal IT staffs -- on-demand software is growing in popularity with companies of all sizes. USi, which specializes in hosting and managing complex applications such as PeopleSoft, Oracle, Ariba and Siebel, along with some Microsoft Exchange, says that nearly 60% of its revenue comes from businesses with annual revenue of $1 billion or more.

IDC's latest study of software as a service found that more than 40% of the IT executives surveyed at large companies are buying software as a service, while another nearly 50% are reviewing service offerings. Less than 10% were neither purchasing nor reviewing software as a service. Midsize companies lagged their larger counterparts only slightly in adoption of software as a service, and small businesses weren't far behind.

Sales force automation and CRM are among the most popular applications delivered as a service, judging from the success of companies such as Salesforce.com and RightNow, but in various surveys of IT management, payroll and accounting, human resources, e-mail, security and Web conferencing/development also crowd the top of the list.

Large companies often use a mix of on-demand software with traditionally licensed enterprise applications, sometimes from the same vendor. Industrial equipment giant Ingersoll-Rand Co. has close to 1,000 users of Siebel OnDemand to go with several thousand users of the "on-premise" CRM software.

"We're an incredibly ROI-driven business. Everything we're doing is based on getting that ROI within a year, if not sooner," says Robert Martens, director of CRM at Ingersoll-Rand's Enterprise Services Center in Davidson, N.C. "So in a lot of the businesses that want to get to market quicker, the most cost-effective and safest way for them to do that is to move into an on-demand model."

Siebel released its first OnDemand product early last year, and most major enterprise software vendors have added some form of hosted or on-demand offering to their product lines. Oracle was an early convert to on-demand. In fact, CEO Larry Ellison was an early-stage investor in Salesforce.com and a co-founder of NetSuite Inc., then called NetLedger. SAP, rumored to be working on an on-demand product, has been the laggard, currently offering only application hosting and management for a fixed monthly fee through a separate SAP hosting organization.

Cost comparison

The software as a service set dismisses hosted applications from the traditional vendors as more costly and complex than software designed from scratch to be delivered as an Internet service, and without the seamless migration to new versions such applications offer.

For example, NetSuite costs about $99 per user, per month for the full suite of ERP and CRM applications, though there are some advanced accounting modules, such as revenue recognition, that carry an additional flat fee of $500 per month. Similarly, Salesforce.com has a Professional Edition that costs $65 per user, per month and an Enterprise Edition that adds integration capabilities for SAP, PeopleSoft and other enterprise applications for $125 per user, per month.

Despite his initial hesitancy about the on-demand model, Esker Software's Baxter now can't get enough of it. The company runs all its sales force automation, customer service and tech-support functions using Salesforce.com.

"We've customized the heck out of this thing, and there's no end in sight," Baxter says. "I would say we're probably rolling out a new application or subapplication about once a month."

Esker pays substantially less than the $22,500 monthly list price for its 180 users, though Baxter declined to specify its level of discount, citing contractual restrictions. The one-year total cost of the Siebel upgrade Esker considered was $255,000 for only 165 users, or about $129 per user, per month. And 70%, or $180,000, of that cost was for IT infrastructure and personnel to host and manage the application. "So even if we were paying list for our Salesforce.com Enterprise licenses, we'd be saving money," he says.

"Our bill hasn't gone up at all, and yet our use of the thing and our return has probably gone up by a factor of five or 10," Baxter says. "They basically get you paying them a per-user fee, and then it's all you can eat. It's a buffet. And we eat a lot."

(Garretson is a freelance writer in Gaithersburg, Md. He can be reached at rgarretson@teamtrsg.com.)

This story, "The ASP reincarnation" was originally published by Network World.

Copyright © 2005 IDG Communications, Inc.

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