Service providers give users more IT options

Business models vary, but reliance on IT outsourcing is becoming common

Service providers are proliferating like microbreweries, offering many tempting flavors. But before you slake your thirst on the perfect online application at the surprisingly low lease price, analysts and even service providers themselves suggest you look closely at the business behind the software.

First, there's the nomenclature of service providers (SP). There are the tried-and-true Internet service providers, the network access companies. Next best known are application service providers (ASP), which offer packaged software to lease online. Then there are business service providers (BSP), which rent only their own proprietary applications. And wholesale service providers (WSP) are a new category that bundles a selection of BSP products.

Each SP category has a different business model for its technology. You should look carefully at these models before signing up, said Albert Nekimken, an analyst at Input in Vienna, Va. Nekimken said small and midsize businesses make up the initial target market for ASPs such as USinternetworking Inc. in Annapolis, Md., with its "greenfield operations in two data centers with no legacy hardware."

The reason small and midsize businesses would be attracted to ASPs is obvious: They get a breadth of applications to choose from without having to invest in either the staffing or infrastructure to support them. Analysts also see information technology departments adding BSPs to their outsourcing options to quickly fill departmental needs for point products such as special travel and expense reports.

Lew Hollerbach, an analyst at Aberdeen Group Inc. in Boston, said ASPs and BSPs are becoming critical for small and midsize business strategies and even important to augment large IT operations. "For a lot of companies, service providers are becoming the new IT," he said.

Among start-ups, especially those funded by venture capitalists, ASPs and BSPs are increasingly the de facto IT department. Venture capitalists "don't want to see business plans that include IT staffs," said John Marchese, director of business development at Citrix Systems Inc. in Fort Lauderdale, Fla. He said venture capitalists believe an SP can lower start-up costs and contribute to a more predictable cash flow.

Even start-up providers feel compelled to use SPs. BitLocker Inc. in Palo Alto, Calif., considered hosting its software in its own data center, but the economics were daunting. So BitLocker uses the network infrastructure provided by Exodus Inc. in San Jose to host Sun Microsystems Inc. servers that run its application.

And even though it doesn't own the Exodus network, BitLocker was able to stress-test it by using a product from yet another SP, Mercury Interactive Corp. in Sunnyvale, Calif. BitLocker customer service director Deanna Falcon said that when BitLocker was preparing for its launch last month, employees using Mercury's LoadRunner product discovered that Exodus wasn't delivering enough bandwidth and her application's performance was tanking. Once the bottleneck was uncovered and the SP corrected the problem, Falcon's data center was ready for what she hoped was a deluge of interest in her company's offer of a free online database to small businesses around the globe.

Hollerbach said he sees "a shift in IT dollars to service providers" for point solutions such as travel and expense reports or time cards. "It's an easy way (for IT) to stick (its) toes in the water," he said.

Testing the Waters

At WL Gore & Associates Inc. in Elkton, Md., the business development area has ventured into shallow waters with a pilot program using a Web-only contact database from Salesforce.com in San Francisco.

The department's 20-person, global sales force previously used contact-management software on laptops, according to Bob Muscat, an associate at WL Gore. "There was a cumbersome process of synchronizing field data to the home office," said Muscat.

Because Salesforce.com is Web based, employees can access their personal contact data from anywhere in the world to update or add information, and the Solaris servers run by Salesforce.com immediately refresh the information.

Muscat said he also liked the fact that there was no learning curve for users and that it took only two days to launch the system. "And the price is pretty attractive, too," he said. Had he gone to WL Gore's IT department for something similar, it could have taken up to a year to deploy and would have had far greater up-front costs.

While Muscat chose Salesforce.com on his own, Janet Lecuyer, vice president of electronic brokerage at Charles Schwab & Co. in San Francisco, worked with her company's IT department and DigitalThink Inc., a BSP also in San Francisco, to deploy The Learning Center, an investor education service, on Schwab's Web site.

Although DigitalThink hosts the content of the Learning Center on its own server farm, Lecuyer said Schwab's IT department had to sign off on project details and implementation because access is via the main Schwab site. The Learning Center went live with three complete courses in December after six months of development. "Our IT could have done it," she said, "but it would not have been a priority."

Analysts disagree on which SP type is most appopriate for either midsize businesses or even larger corporate IT departments. Input's Nekimken said the issue is whether "best of breed" point products will be as interesting to the primary market, which will embrace all-in-one application integrators. "If you can provide 70% to 80% of what a company needs, it's much more appealing," he said.

Aberdeen's Hollerbach said integrating online applications will add enormous expense to SPs, undermining their biggest advantages of low cost and quick deployment.

Judith Hurwitz, CEO of Hurwitz Group Inc. in Framingham, Mass., said it's a matter of core competency. "Is your business your software or your infrastructure?" If WSPs package a selection of applications for vertical markets, she said, a middle ground could be found.

As for whether ASPs and BSPs are a long- or short-term phenomenon, Hollerbach said, "the jury is still out."

Service Provider Glossary

AcronymDefinitionDescription
ASPApplication service providerOnline channel for packaged software. Applications can vary by ASP but generally focus on high-end applications like databases, enterprise resource planning and customer relationship management.
BSPBusiness service providerInternet software developer that makes its applications available only via the Web. Generally, the software is specific in function or proprietary.
ISPInternet service providerBusiness that offers Internet access. Some, like AOL, offer it to millions of consumers. Others, like Exodus, offer it to other SPs. Manages network infrastructure.
WSPWholesale service providerA packager of applications for distribution online; not unlike a virtual value-added reseller.

Copyright © 2000 IDG Communications, Inc.

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