Software as Service

Software Magazine, Dec, 1999 by Dan Kara

Application hosting has less to do with applications, and more to do with services

At the most basic level, the Internet, and implicitly the Web, is nothing more than a set of agreed upon standards, namely HTML, TCP/IP, IIOP, and now XML, that allow parties to share data and information globally and instantaneously. But oh, what these simple standards have wrought. A downpour of IPOs featuring business-to-business (B2B) and business-to-consumer (B2C) Web sites, along with the obligatory twenty-something millionaries, have captured the imagination of the public at large. Everyone, it seems, now recognizes that the Internet has demolished the older paradigms by which companies interacted with their customers and business partners. Just ask your parents, your children, your grocer.

The emergence of the Internet is also producing subtler, but no less substantial, changes in the manner in which business is conducted. For example, the old ways of doing business are gone forever, but so, too, may be the ways in which the software that automates business processes has been marketed, sold, purchased, and even developed. I am speaking, of course, of application hosting, the new outsourcing paradigm where software is rented or leased (as opposed to purchased) from application hosting vendors. The applications themselves are centrally managed by the hosting vendor and can be accessed from anywhere using standard IP networks, including the Internet, extranets, and virtual private networks (VPNs).

As the next "next big thing," application hosting is the current darling of information technologists and the computer industry press. Wall Street is equally enamored with a nascent market sector that is expected to grow extremely rapidly over the next few years. For example, International Data Corp. (IDC), Framingham, Mass., estimates that worldwide spending on Web application hosting services amounted to $150 million in 1999, but will reach $2 billion by 2003.

Not to miss our on a good thing, a large number of vendors, including hardware companies (Sun, HP, etc.), application vendors (PeopleSoft, SAP, etc.), Internet Service Providers (ISPs), Internet service and operations firms (Sprint, Digex, Exodus, AT&T, etc.), traditional service firms (Andersen, IBM, EDS, CSC, etc.) and others, have come to market with hosting solutions (or more typically, have announced application hosting offerings and alliances). Leading the application hosting market in marketshare, as well as mindshare, is a class of relatively new, yet well funded, application hosting "pure plays" that are led by seasoned management teams. USinternetworking, Pandesic, iXL, Cysive, Corio, FutureLink, Breakaway Solutions, and others are representative of this group.

A Compelling Story

The reason behind this rush to application hosting is easy to fathom. There is an alignment of the stars in terms of the maturation of the Internet and a very sound concept that addresses real business needs. At the strategic level, application hosting allows companies to outsource the deployment, operations, maintenance, and management of their software systems, thereby freeing them to focus on their core business competencies.

The tactical advantages of the hosting approach are equally compelling. For cost-conscious business management, hosting offers reduced capital outlays for servers and software, as well as predictable monthly usage fees, with the net result that cash flow is greatly improved. Moreover, companies have the benefits of using leading-edge software without the necessity of installing and maintaining the stuff, to say nothing of the armies of increasingly rare and increasingly expensive trained staff required or the care and feeding of such systems.

It should be noted that the jury is still out on whether application hosting saves money in the long run over the traditional way of purchasing and utilizing software. In fact, it could cost more. But with application hosting, costs are amortized over the life of the service-level agreement, so at least costs come in little bites instead of one lump sum. There have been some predicative models that indicate that the Total Cost of Ownership (TCO) for hosted solutions is less than that of traditional approaches, but the question of cost might be moot. Issues relating to rapid deployment, global reach (thanks to the Internet), and elimination of technology obsolescence trump other cost considerations. For small to midsized firms ([less than]$250M) that simply cannot afford to invest in an expensive internal IT architecture, the application hosting option is the only way they can compete technically with larger firms on an equal basis.

Revolution Under Way

Again, much has been written recently in the industry press and analyst reports describing the emergence of application service providers and application hosting. Unfortunately, most of the articles and reports that describe the ASP delivery model are somewhat academic, and do not provide real-world ROI measurements following adoption of the approach (or other quantifiable benefits and pitfalls of the approach). This is forgivable given the relative immaturity of the market and dearth of companies utilizing the services of ASPs. A common joke within the industry is that there are more ASPs than actual sites employing hosting solutions.