ASP and Ye Shall Receive

For the first few years of its life, the Internet was little more than a novelty act, appealing mainly to the technology elite, academic researchers and curious onlookers. E-commerce sites like Amazon.com and Priceline brought forward the consumer masses. Now it's time to get down to business. Application Service Providers (ASPs) are enabling the Web to become an integral part of a sales and marketing or CRM solution.

In fact, CRM is the fastest growing application for hosting. According to Forrester's December '99 report on "Sizing App Hosting," CRM will represent 64 percent of all hosting revenues, as companies begin to move their processes onto the Web. Forrester predicts that the ASP market will grow to $11.3 billion in annual revenue by 2003.

The Changing Face of IT:
The arrival of the Internet has changed the nature of the IT infrastructure from a closed client/server environment based on mainframes and dumb terminals to a distributed model in which multiple devices are linked to each other at all times. Wide area networks are now as fast and reliable as local area networks once were in sharing and distributing information and applications.

Portals were only the first step in the transition to doing business online. While portals can still be useful for placing company, product and employment information online, in the end you'll need to do more than just keep your employees away from Yahoo! if you want to truly automate your business processes.

Hosted business applications allow you to go beyond mere brochure-ware and sales transactions, right to the core of your organization's operations. The range of available hosted business applications is growing at a phenomenal rate and can help you automate all aspects of your business, including human resources, sales, payroll and purchasing operations, with applications available from a spectrum of enterprise application providers that include PeopleSoft ERP, Siebel Sales and Broadvision eCommerce.

"As e-commerce becomes a part of people's business processes, companies are starting to realize that they don't have the necessary skills in-house," says Paula Hunter, V.P. of the ASP Industry Consortium. "It's more than just creating the look and feel, you need to be able to provide the hooks into the back-end architectures."

The trend toward outsourcing, she said, has been largely driven by a shortage of IT resources. This differs from the old time-sharing models where it was a shortage of infrastructure that drove adoption. But outsourcing has particular appeal to small businesses and Internet start-ups that may lack an IT infrastructure entirely. Without an IT staff that might be threatened by an ASP and lacking a major investment in legacy data and information systems, these companies can more easily make a clean break from the past.

Among the earliest adopters are travel, financial services, real estate and other industries that rely on a client/agent model of customer interaction, but there's no clear trend as to which industries will ultimately adopt the ASP model. Once the SFA and CRM applications that they rely on had been Web-enabled, hosting was the next logical step.

Major CRM applications, including Siebel Sales and Oracle's CRM 3i, are available as hosted applications. In a 1999 report, the Yankee Group predicts that the trend toward ASP solutions will have a major impact on the way CRM applications are licensed and sold.

Pioneers such as Usinternetworking and Corio have been joined in the ASP market by the largest providers of enterprise sofware, including Oracle and IBM. Conspicuously absent is Microsoft, who has yet to fully articulate its plans for hosting software. Expect the largest ISPs, such as AOL, UUNet and Earthlink, to get into the ASP act also.

With all of this activity, it's clear that outsourcing has a tremendous amount of momentum behind it. But is the ASP model just a fad or does it really save money and allow small and mid-sized companies to focus their resources on growing their businesses?

Rent or Buy?
In its purest form, an Application Service Provider is an organization that hosts software applications over the Internet. Instead of residing on your company's servers, these applications are stored and managed off-site at a data center either owned or contracted by an ASP and provided to your company through a pay-per-use model. The dominant pricing model is per user, per month. The ASP handles support, maintenance and upgrades. Over the long haul, an ASP solution can be less expensive than purchasing, deploying and supporting these applications yourself. ASPs are especially cost-effective for enterprise applications that require a high level of performance, reliability, security and scalability.

Today everyone wants to be an ASP. There are pure ASPs, such as Usinternetworking, that just host other vendors' applications. Others, such as Oracle Business Online, are software companies that have discovered a new distribution model for their own applications. At the high end, you'll find full-service firms that go beyond hosting and maintaining applications to provide more extensive customization.

ASPs usually align with an Independent Software Vendor (ISV). The ISV supplies the application but the ASP manages it, providing implementation and integration, data center management, connectivity and support. In most implementations, the ASP performs little, if any, customization of the software, instead concentrating almost entirely on supporting the application.

ASPs provide your organization with all the necessary hardware and software, a secure network infrastructure, reliable data center facilities and an on-call staff of IT experts to manage the solution.

As the trend toward hosted applications accelerates, we can expect to see even off-the-shelf productivity applications find their way onto the Internet. But the shift is occurring first in human resources, sales force automation, customer relationship management and enterprise resource planning; applications aimed at streamlining and improving internal business processes.`

Web Delivery
The early days of outsourcing were characterized by a lack of communications bandwidth. Before you could deploy a solution, you had to ensure that you had a reliable network infrastructure to run it on.

Today, that infrastructure is free, widely available, platform-independent and almost unlimited in scalability. It's called the Internet. A new wave of Web-enabled applications is making it easier than ever to outsource your CRM applications.

Typically, these applications are written in HTML, XML and Java and delivered to users through a Web browser. The Web as a means of distribution totally eliminates one of the long-standing headaches of IT: getting your entire organization to standardize on a single platform. The reliance on cross-platform standards means that these applications can be both platform and device independent. It doesn't matter whether your users are using a laptop, a PDA or even a set-top box. And giving your users remote access can be as simple as entering an IP address in a dialog box. In fact, the ability to access an enterprise application remotely is one of the key reasons for going with an ASP solution.

Entrusting your mission-critical applications to a third party may sound a bit like putting your life in the hands of a complete stranger. But, through adoption of Internet standards, strong partnerships and the sharing of best practices, the ASP industry is working hard to address customer concerns relating to security, availability and control. Comfort levels have been raised, says Hunter, by the increased use of remote services such as online banking by individuals.

"These are the same concerns raised by anyone in regard to outsourcing," says Hunter. "But with more people storing their personal information and applications on a remote server, it's less of an issue."

Security concerns are easily addressed through the use of encryption and Virtual Private Networks (VPNs). VPNs make use of the public telecommunications infrastructure, maintaining privacy through the use of a tunneling protocol and additional security procedures. Data is encrypted before it is sent through the public network and decrypted as it is received. Encrypting the network addresses at both ends provides an additional level of security.

One example of this is the point-to-point-tunneling protocol, which is built into Microsoft's Windows NT Server product. Hunter advises a sensible approach to dealing with security concerns that includes a cost-benefit analysis.

Full-service providers can be attractive because they run their own data centers, introducing one less variable into what is already a somewhat risky endeavor. But, cautions Hunter, it's important to remain nimble. Because an implementation can be complex and fraught with unforeseen challenges, you may want to consider the ASP's ability to move quickly and partner. "It's nearly impossible to do this on your own," she says. "ASPs do a good job of managing the customer relationship but still rely on the telcos for bandwidth, the ISVs for applications, and the operating system and hardware vendors."

still, an ASP can provide one-stop shopping for companies with a need to get a solution up and running as quickly as possible. "Web hosting is a pretty good fit for small business," says Robin Retallick, vice president of Zland.com's CRM-ERM Group. "It's a natural for companies that have different types of employees, running at different speeds, in different locations." Even if you've already implemented CRM, the ability to outsource your applications may force you to rethink your strategy. Says Retallick, "The emergence of the Web may invalidate anything you were doing before to reach the customer."

The ASP model works less well for larger companies running complex applications that require customization. ASPs typically shy away from customization because they either lack the necessary programming talent, or because customization inhibits the ASPs ability to perform mass upgrades. If you're already doing CRM, however, there's a good chance the applications you are already using are available from an ASP.

Retallick believes that these applications will only really take off when companies realize that CRM needs to be part of an integrated solution that includes the Web. "What we've got today is a lot of disparate PC applications where the user thinks they own the data, but what's really needed is an enterprise-wide approach."

Comparing the evolution of CRM to the early development of client/server financial systems, Retallick suggests that companies should be looking at everything from sales force automation to relationships-not just with customers, but with vendors, press and industry influencers. "The biggest trap in CRM is to buy CRM," says Retallick. "It's easy to go after the low-hanging fruit such as SFA, but you'll be hurt in the long run if you don't give some thought to how these applications should be integrated."

The Death of Shrink-wrap?
Microsoft, the world's largest software company, and the first one to figure out that selling shrink-wrapped software into the enterprise was a numbers game, is treading lightly in the fledgling ASP market. While it's far too early to predict the abandonment of its traditional pricing model, Microsoft just announced it is testing the waters with a pilot program designed to explore the viability of the outsourcing model.

Dwight Krossa, group manager, applications hosting in Microsoft's developer division, said that Microsoft has been looking at this market for some time. "What's driving a lot of this is a desire on the part of a lot of companies to move to a subscription model, and that's something we've been trying to get them to do for a long time." He says any subscription-based model would add to, not replace, any existing licensing programs.

In keeping with Hunter's assertion that a good ASP must be able to partner well, Microsoft announced it was working with many of the leading ASPs, including British Telecommunications PLC, CenterBeam, Data Return, Electronic Data Systems (EDS), Equant, FutureLink, Hewlett-Packard, Mi8, Micron Technology, Netstore Group, MTT Mpowered (a division of Aliant), Qwest Communications International, TeleComputing, United Messaging and USinternetworking (USi).

Microsoft's ASP partners are offering hosted solutions for messaging and collaboration based on Microsoft Exchange Server 5.5. In the future, these companies are expected to offer the improved functionality anticipated in Exchange 2000 and Office Online-software that allows Microsoft Office 2000 to be used over the Internet. Together, Exchange 2000 and Office 2000 provide a platform for e-mail, group scheduling and collaboration, and information exchange. The paranoid might suspect that Microsoft is responding to a threat from Sun Microsystems, whose purchase of star Office has given them a complete office suite that can be deployed on Sun's UNIX workstations and thin clients and run over a network. But no matter where you stand, one thing is clear: Microsoft's interest validates an emerging market for hosted applications.

Microsoft's approach to ASPs is two-pronged. On the one hand, it wants to make sure that its platform, including the Windows 2000 operating system, development tools and database software, remains the preferred one for the deployment of business applications as they move to a hosted model. On the other, it is working to make sure that its own applications are ready to be used by ASPs in a hosted environment. "Small to medium-sized businesses don't buy a lot of high-end applications today," notes Krossa. "The ASP market is enabling these small companies to gain access to these solutions through hosted applications." For larger companies, a hosted extranet can help extend the companies' reach to customers, suppliers and partners.

Indeed, the ability to provide a robust infrastructure for e-business is key to the acceptance of ASPs. A December 1999 International Data Corporation (IDC) report, 1999 Worldwide Market for Application Servers: Setting the Course for 2000, named Oracle the number one application server vendor, largely on the strength of its lead in relational database management software (Oracle has a 40 percent market share in RDBMS). According to IDC, Oracle has a 15.4 percent market share in the application server market, followed by Forte Software (recently acquired by Sun Microsystems) with 9.7 percent. Although the ASP market has been largely pioneered by small start-ups such as USi, in the long run these companies may not be able to provide the kind of complete end-to-end e-business solutions that customers are demanding. Analysts expect a shakeout in the market, where the smaller fish get swallowed by the larger ones, similar to what happened with Internet Service Providers. "As the hosting vendors add more services, there will be some consolidation in the marketplace," predicts Hunter. "There will be a smaller number of vendors doing the hosting and providing the IT infrastructure. You'll also see those players with a particular expertise moving into the ISP space."