Why even DIY'ers are turning to ASPs

We took advantage of this year's Interactive Week ISP customer survey to find out what types of applications businesses are outsourcing or plan to outsource, and to whom. We found that electronic commerce applications and data center applications such as Web hosting and data warehousing are the most commonly outsourced, and software vendors have a slight edge over third-party ASPs as the hosters of choice.

E-commerce tops the list of popularly outsourced software apps. Fifty-two percent of the readers surveyed who use--or plan to use--an ASP, are motivated to do so for e-commerce applications.

"What it boils down to is this: E-commerce solutions are expensive and complex to build, as well as time-consuming to operate and manage. [They are] solutions that a lot of users need access to, [and they] require adequate bandwidth and scalable security," says Liza Henderson, vice president of consulting of TeleChoice. "Scale is one of the big issues here, and a service provider is better positioned to solve scalability issues."

Forty percent of current and prospective ASP users surveyed outsource or plan to outsource data center applications. Thirty-eight percent outsource knowledge management applications, such as e-mail, messaging, word processing and spreadsheet software, and 34 percent use ASPs for enterprise and line-of-business applications, including Enterprise Resource Planning, human resource management and customer relationship management.

Most of the ASP users surveyed outsource multiple applications--the mean number of outsourced apps is 2.3. Of those surveyed who use ASPs, 30 percent outsource one application, 31 percent outsource two apps, 14 percent outsource three apps, and 25 percent use ASPs for four or more applications. Based on these findings, once an enterprise chooses to outsource one application, chances are good that it will outsource another.

A slim majority of ASP users surveyed purchase application hosting services from software vendors rather than third-party ASPs--53 percent of outsourcers look to software vendors for application hosting, while 47 percent use third-party ASPs. And most of the software involved is from established software vendors like Microsoft, rather than new "Web-native" software vendors like Portera Systems. In fact, 67 percent of the hosted software is from established vendors and only 33 percent from Web-native vendors.

ASP users' attraction to software vendors over third-party ASPs for hosting services may be explained by the expertise the vendors bring to the table. According to Henderson: "End users have a much higher level of comfort and trust with the software vendors. Some enterprises liken going to a third-party ASP to getting your Acura vehicle's parts and service at Bob's Garage--which may be a generalist and works on all makes and models of vehicles. Also, some ASPs are viewed as middlemen that need to coordinate with different vendors to support the solutions effectively."

Although software vendors are somewhat favored, many ASP customers, such as Caryl Felicetta, design and technical partner at marketing communications firm The Argyle Studio in Edison, N.J., chose Aspre to host a Microsoft e-commerce application, and so far the experience has been a good one. "When we were developing the project, we looked at different ways to do it. Aspre was at the right place at the right time. They have the programmers who know the software and can develop it further, rather than taking what you get in a box and being stuck with that."

Other ASP customers, including Ryan Libel, IT technician of office furnishing company Goldsmith's in Wichita, Kan., use both types of providers. "We utilize one of each. Our virus protection is from McAfee[.com], a software vendor with an ASP solution, and our SFA [sales force automation] software is hosted by Salesforce.com, a pure-play ASP," Libel says. As for why Goldsmith's chose one of each: "We've had a long-standing relationship with McAfee, and recently shopped around and found their ASP solution was a wonderful fit for us. Salesforce.com provides good service at a good price and has all the features we were looking for."

Goldsmith's also uses an ASP that doesn't fall neatly into a third category. "We have a vendor-related ASP that comes from neither a software company nor a pure-play ASP; [it's] sort of supply chain management stuff," Libel says.

As it turns out, ASPs also use ASPs. Rachel Pace, director of product and community development of third-party ASP BizProLink Network, in Fort Lauderdale, Fla., says her company has used "ASP services internally for more than 18 months. We do our payroll, project management, online file storage, etc. The case of payroll is an interesting one because we are currently partnered with both Payroll Online and [Automatic Data Processing] and while ADP is a leader in payroll business, their hosted EasyPay product is in an early stage of development. We have been using Payroll Online since January of 2000 and have been very satisfied with the service, availability and cost."

Some amount of customization is the norm for hosted applications. Forty-one percent of those surveyed require customized applications, and 33 percent use both customized and off-the-shelf applications, while 26 percent use exclusively off-the-shelf hosted applications. Some customize the applications themselves.

"All of the services we outsource are open source enough to allow us to customize the apps ourselves, without a lot of customization by the vendor," says Arik R. Johnson, managing director of Aurora WDC. "Frankly, because cost-avoidance is a very key driver for this kind of thing, [if] it can't be self-customized, then we'll just do without and keep searching or wait until something that can comes along."

In terms of payment models, the most common way respondents pay for hosted application services is through user licenses. Thirty-six percent of surveyed ASP users pay for application hosting services based on user licenses, compared with 28 percent who lease or rent the application and 23 percent who pay based on a transaction model.

The Argyle Studio's Felicetta has advice for those looking to outsource applications hosting to an ASP: "Check them out thoroughly, just as you would an ISP. It's just a higher-level version of an ISP. In this market climate, you want to make sure they will be there tomorrow. Get a good relationship with the people there, particularly if you are going to be adding on to the product, as we did.

"It's also a good idea to go to the facility, to see that it exists." Felicetta adds. "When you visit, you can tell a lot from what the atmosphere is like, what they've invested in terms of infrastructure, their processes and their physical location."

Application hosting's time has not yet come, but this year's Interactive Week survey results suggest that it may be just over the horizon.

A small--but notable--9 percent of the population surveyed is currently using software hosted by application service providers. Another 14 percent of respondents plan to use hosted application services, while 77 percent neither use nor plan to use an ASP.

The fledgling application hosting market has not yet soared because, at least for now, most businesses don't see a compelling advantage to outsourcing what they currently do themselves.

"Many enterprises still feel that they can operate in a do-it-yourself mode more effectively, efficiently, securely, conveniently and cost-effectively," says Liza Henderson, vice president of consulting of market-research firm TeleChoice.

But the fact is that some businesses are currently using ASPs. Why? The answer to that question is especially interesting, considering that 45 percent of respondents using ASPs say they could provide the applications internally but choose not to. The main reason is that they find it easier and faster if someone else hosts select applications, rather than doing it themselves.

Our survey reveals two primary reasons businesses outsource application hosting: Forty-seven percent of those that outsource say they do so for ease and speed of implementation, and 45 percent do so for ease of user administration and support.

Cost reduction and the ability to do things better are also common motivators for application outsourcing. Forty-two percent of businesses using ASPs cite the reduced cost of hardware ownership as an outsourcing motivator, and 39 percent mention access to a set of integrated applications. Reduced personnel costs motivate 38 percent to outsource; desire to concentrate on the core business is cited by 37 percent; lower total ownership costs are appealing to 36 percent; faster upgrades motivate 35 percent; and faster access to new applications motivates 34 percent.

Overall, ease and speed beat out all other factors as the primary reasons early adopters are drawn to outsourcing.

"We chose to outsource to an ASP for the most stereotypical reasons: because they're all noncore functions, like Web site hosting, credit card processing, etc. that could better be handled by someone specialized in that area," says Arik R. Johnson, managing director of Aurora WDC, a competitive research and analysis firm in Chetek, Wis. "Plus, in comparing costs of doing it ourselves, it would have been as much as 10 times as costly to get the same results."

Johnson uses several application hosters and is so far pleased with the results. "Everything has gone extremely well, to be honest," he says.

Caryl Felicetta, design and technical partner of marketing communications firm The Argyle Studio in Edison, N.J., says that cost initially motivated her company to use an ASP.

"We were looking for ways to cut costs. It seemed to be the best way to get the job done and maintain quality. Otherwise, we would have had to get the hardware and software, and hire someone to maintain it. It would have been too tall an order for a company our size and too large a cost.

"This is a good model for us, since we are a small development/design firm that does not have the extra 'people power' to handle updates and technical issues," Felicetta adds.

TeleChoice's Henderson sees better times ahead for ASPs, as businesses warm up to the idea of application outsourcing, but she says it won't happen overnight. "The ASP model requires a shift in mindset and culture, as well as trust. The ASPs need to earn the end users' trust and confidence incrementally," she says. "ASPs can't expect end users to automatically embrace the model for all of its applications.

"Reversing the trend will require ASPs to be more patient, focus on smaller implementations, target applications that enterprise customers are more apt to outsource and develop prepackaged services for market segments with little to no applications and IT expertise."