Apps on Tap

Software Magazine, Dec, 1999 by John C. Whitmarsh

Internet application hosting is poised to become a significant model for software and services delivery to small and midsize businesses, and the first true "IT Utility."

A red-hot e-business model is driving a fundamental shift in app1ication software implementation, delivery, and pricing. The Standish Group believes that Internet application hosting, as it's called, is poised to become a significant, perhaps dominant, model for software and services delivery to small and midsize businesses (SMBs) over the next two years. If so, it could stand the software business on its head.

Internet application hosting has many names, from "application outsourcing" to "rent-an-app." That's just one sign of how new this concept really is and how ill-defined the market. No matter what they are called, service companies that host, manage, and maintain packaged business applications on their own servers in their own data center(s) and deliver them to customers over the Internet for a fee are commonly known as Application Service Providers (ASPs). Application service provisioning is the hottest sector in IT outsourcing today.

For technology and business managers in small and midsize companies, this model could change forever the way IT services are deployed, delivered, and paid for. Large companies, while intrigued, will be a tougher sell. signing on with an ASP may not be the optimal solution for everyone, and because the concept is so new and relatively unproven, it carries above-average risks.

The New Breed

An ASP rents or leases application software primarily to small and midsized businesses. A customer's applications and data are hosted off-site on servers in the ASP's centrally managed data center(s), where they can be secured, supported, maintained, and upgraded. Network administration is done centrally by the ASP, further reducing administrative overhead.

ASPs tend to specialize in either off-the-shelf applications or complex, customized core business packages. Many companies already use an ASP for e-mail or Web hosting services; others are beginning to rent core business systems such as ERP suites, database applications, and e-commerce.

Application hosting pioneer Interliant Inc., Purchase, N.Y., has three application models to choose from. Interliant's AppsOnline site offers: "Instant Apps," easy applications a user can access with a Web browser and a credit card; "Quick Apps" for organizations requiring larger implementations and customized billing; and "Advanced Apps," customized enterprise solutions delivered over the Internet, corporate intranet, or extranet.

Customers access their applications and data through the Internet, virtual private networks, dedicated leased lines, or a dial-up connection.

ASP customers can rent services on a per-user, per-transaction, or per-month basis. One monthly flat fee covers the hardware, software license(s) and network infrastructure to run the applications, all of which are usually owned by the ASP. The fee also includes technical personnel required to support, manage, and maintain the systems at a contractually agreed service level. Customers can choose between lease-to-own or lease-only options. Monthly fees can range from hundreds to thousands of dollars. Leases typically run one to five years.

Bountiful Benefits

The benefits of an ASP are attractive. A company can usually rent powerful end- to-end application solutions for significantly less than buying, deploying, and supporting them in-house. ASPs generally expect that their services can reduce IT expenditures by 30% over a five-year period. The Standish Group recently encountered one company whose cost reductions approach 70%.

In addition to lower cost, another benefit every ASP touts is the newfound freedom for a business customer to concentrate not on technology, but rather on its core competency. Moreover, some companies may be able to slash facilities costs by running hosted applications on servers in an ASP's data center rather than building a new data center of its own.

These benefits are especially attractive to SMBs, for whom an ASP is a credible alternative to in-house IT. The costs of buying, maintaining, and upgrading hardware and software--and hiring staff to operate IT systems--are significant and ongoing. Outsourcing shifts those costs to the ASP, which can spread them among many customers. For those companies that cannot afford the upfront capital to build an IT organization--or simply don't want to make the investment at all--an ASP makes compelling economic sense. The Standish group believes SMB companies will be the key business drive of the ASP market over the next two years.

Old Wine, New Bottle

ASPs are traditional outsourcers by another name. Time-sharing and hosted applications have been around since at least the 1970s. IBM, EDS, and others have been successfully managing companies' computer systems for years. In fact, most Fortune 1000 companies outsource some portion of their IT and/or network services. But ASPs add a new twist.