Primer: Application Service Providers

With all the ink being spilled about application service providers, you'd think ASPs would be as well understood as, say, PCs. But just as PCs have their many manifestations, architectures, system software and business roles, ASPs are a varied lot whose profusion can create confusion even among those who use them.

One advantage ASPs offer is application expertise that's often difficult for IT to develop or keep current in-house. ASPs are also faster at rolling out software than standard, fully customized corporate versions.

ASPs are also more likely to upgrade to the most recent release of an application and keep current with all the bug fixes and security problems.

Because ASPs charge a rental basis, start-up costs are low compared with licensing and deploying an application on your own.

That and the comparatively small amount of development work required to get an application up and running can let users try an application on a rental basis without having to commit massive resources to support it in a technology world in constant flux.

That was critical to Bill McBain, assistant treasurer at Ocean Spray Cranberries Inc., a $1.5 billion Lakeville, Mass.-based cooperative, when the company adopted a new online travel and entertainment program from an ASP.

"We wanted a system we did not need to invest a lot in upfront, especially because technology is changing so much," he says.

These points in ASPs' favor are attracting IT and helping fuel the market's growth, which Framingham, Mass.-based IDC says will reach $13.8 billion in 2005 from under a billion last year.

The ASP World

But technology and business value coupled with market growth don't always make a business proposition more clear. The name ASP itself causes problems. Most of these vendors prefer the specificity of such designations as BSP (business service provider), MSP (management service provider), VSP (virtual service provider), AIP (application infrastructure provider) and other more refined definitions of what services they offer.

In addition to breeding an acronym overload, it has made this market more perplexing to grasp, especially because, as any CEO of a BSP or MSP will acknowledge, deep down, he runs an ASP business.

Whether you work with a VSP or an AIP, all have a singular commonality: They run on the ASP business model.

Simply put, an ASP uses the Internet as the delivery mechanism for subscription-based computing services.

It's such an obvious application of the Web for business users that it has spawned hundreds of start-ups and prompted software powerhouses like Microsoft Corp. and Oracle Corp. to jump on the bandwagon.

"Anyone can be an ASP," says Paula Hunter, chairwoman of the nonprofit ASP Industry Consortium in Wakefield, Mass. "What they're doing is leveraging a delivery model."

In a "traditional" sense, application service providers rent applications from other vendors, then provide access to that software to customers over the Web. This is what Corio Inc. in San Carlos, Calif., USinternetworking Inc. in Annapolis, Md., and many others do.

These companies take complex, IT-oriented applications, such as SAP, Siebel and PeopleSoft, and build templates or application modules that are then shared by dozens, hundreds, potentially thousands of businesses over the Web. These ASPs also rent a vast amount of e-commerce software from the likes of Ariba Inc., Commerce One Inc. and others, using the same shared template approach to deployment. These templates are based on standard uses of an application. For example, a tax payment program module for Massachusetts or Montana need be created only once, but can be rented out many times, just like a shopping cart program in a generic e-commerce application.

ASPs are reluctant to customize these templates in more than cosmetic ways, through the addition of company logos, for example, because their main business is renting a generic version of the software to as many companies as possible. The more customization, the more it eats into their profits.

ASPs also add value to traditional client/server software by making it accessible with a browser. In so doing, the original thinking about ASPs was that they would bring data-center-caliber applications to small and medium-size businesses. According to Hunter, that's not turning out to be completely true.

"Larger companies have been more accepting of ASPs than smaller companies because they have been more experienced and comfortable with outsourcing and SLAs [service-level agreements]," she says.

Outsourcing vs. ASP

CIOs often lump ASPs in with other outsourcers. In a broad sense, of course, they're correct, because an ASP is simply an outside organization managing computer-based assets. However, there are significant distinctions, and they're important in understanding the different roles ASPs and outsourcers play in any corporate IT strategy.

For one thing, many outsourcers function as contractors working on company premises, often indistinguishable from other IT staff. When not running things on-site, outsourcers usually manage other companies' IT assets at an off-site data center with links to their customers local networks via dedicated (and expensive) leased T1 or frame-relay lines.

In contrast, ASP services are offered remotely and depend solely on the Internet to deliver services. And ASPs don't send staff to a customer's site.

Stuart Harris, a consultant at Compass America Inc. in Reston, Va., says he sees further distinctions. He defines outsourcing as "the one-way, one-time transfer of an organization's ability to do something for another organization." Historically for IT, that often has meant existing technology infrastructure would be physically moved outside the organization, he says.

ASPs don't do that, Harris says. ASPs provide new applications, rather than transferring existing assets. Ideally, Harris argues, customers would never have to invest in infrastructure or staff to support a service they would buy through an ASP.

That means IT managers commonly use ASPs to launch new business units that lack IT staff or to lessen the impact on existing IT workloads. Or ASPs are introduced to offer new capabilities to the enterprise, such as a portal or exchange, or to off-load IT administrative functions such as network and Web management.

At their best, ASPs are an extension of an enterprise's IT operations, not a replacement, as an outsourcer can be. That's because there's no such thing as a full-service ASP, offering every application a company will use in its business. You can go to IBM Global Services or Electronic Data Systems Corp. and get a soup-to-nuts outsourcing partner, if you're willing to pay for it. But there's no analog in the ASP world, unless you're a small business. As Harris notes, with ASPs "you are buying solution by solution."

Solution by Solution

The "solutions" are, of course, the different services you can rent. Most ASP-style services of interest to IT managers will be those that off-load Web-related IT operations. For example, tactical Web site management, such as assuring that network capacity is available and that backups are done regularly, is seldom part of IT's day-to-day workload. Today, most companies outsource the underlying infrastructure of routers, servers, databases and site management software to an ASP, if not a traditional outsourcer.

But even the most advanced ASPs that offer a "complete" Web package will lack one feature or another. For example, you might hire an ASP and sign an SLA, then hire an MSP to verify that the first provider is offering service up to contracted levels.

In fact, most Web sites today are comprised of a variety of subscribed services hosted on computers strewn across the Internet. The tricky part for IT managers is juggling the right mix of ASP services for an enterprise.

That will become increasingly difficult because, just as PCs slipped inside corporations through departmental budgets, targeted ASP-delivered software is cropping up in companies without IT even being aware of it. For example, department managers at Thomas Cook Currency Services Inc. in Toronto and Newark, Del.-based W.L. Gore & Associates Inc. both bypassed normal IT approval channels when adopting Inc.'s customer relationship management (CRM) program, because the managers knew they could get it into their sales staff's hands almost immediately.

This targeted software is generally considered the provenance of BSPs, which take a standard client/server concept, such as CRM or travel and entertainment software, and build it from the ground up for the IP-oriented world of the Web.

Although time-to-market motivates many departments to opt for a BSP's wares, IT also gets benefits from these kinds of applications, says Roderic O'Connor, vice president of technology at San Francisco investment bank Putnam Lovell Securities Inc.

According to O'Connor, if his company had chosen to license and implement its own version of Siebel Software Inc.'s CRM package, he wouldn't be getting the same benefits as he has from adopting's Web-based software.

He says, "For one thing, every three months we get an upgrade," because that's how often updates its product.

"If we owned the software, it would only get updated every 18 months." And O'Connor adds, even if he had rented Siebel from a traditional ASP, he'd still be dependent on its upgrade schedule, which would always lag behind the software vendor's release cycle.

"This way, I always get the latest version," he says, noting that bugs are always fixed immediately.

But the profusion of BSPs that market their services directly to end users—departmental and divisional executives—doesn't mean IT is left off the hook. According to users and BSPs, IT is almost always involved to vet the security capabilities of the service provider. After all, the application may belong to the Web-based vendor, but the data is owned by the user.

IT staff time also gets tied up with ASP software when back-end operations need to be integrated with the Web-based application.

Net Net

The shared essence of all ASPs, then, is a simple business model. Although that doesn't seem so significant, you could also say the shared essence of PCs is the office desktop. Just saying it or thinking it diminishes its importance.

Yet, ASPs are changing the way IT and corporate departments are specifying and deploying software. Like PCs, ASPs are entering the corporate world through the front and back doors, making them beneficiaries of both top-down and bottom-up demand. And just like the early days of PCs, they are causing confusion while adding to the complexity of IT responsibilities.

As with so many things, the more they change, the more they stay the same.


Copyright © 2001 IDG Communications, Inc.

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