Buzz roundtable: Application outsourcing, 09/27/99

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Network World Fusion, 09/27/99

Let's shift gears to application outsourcing. Application Service Providers claim to be able to rent users access to applications at a lower overall cost as opposed to users providing the applications on their own. There are are more than 150 companies calling themselves ASPs now, selling applications ranging from e-mail to Enterprise Resource Planning systems. What kinds of companies, if any, could benefit from ASPs? And what should customers be concerned about with respect to ASPs?

Bradner: The sensibility of doing it.

Kobielus: Clearly, small and midsize customers can get the service right away without having to buy, install and manage the internal infrastructure – software, services and whatnot.

Bradner: They do have to maintain the internal physical network infrastructure to make use of such a service. And you need to be willing to trust your corporate family jewels and future to an independent third party.

Nolle: I'm very comfortable with the idea of application service outsourcing in a general sense and I'm very uncomfortable with all of the people who propose to do it because they seem to be attempting to outsource applications based on technical convenience instead of based on some objective buyer requirement to provide the thing on an outsource basis. I saw two presentations recently that were just surpassingly stupid. One of them was a company that proposed to provide SAP applications to small businesses. Now I'm a small business and I would find it extraordinarily difficult to even guess what I would do with an SAP application. And the other one was somebody who proposed to outsource components of Microsoft Office. Now here we are with people going out and buying high-performance Pentium systems to get good response from applications like Word and Excel and we believe we can run these applications at acceptable levels of performance by brokering them over a network connection? I don't think there's any logic in either one of those two perspectives.

Kobielus: That's why the application outsourcing model makes sense only if the provider also provides consultation services to help you manage and train your users to use these services. Some of the higher-grade ASPs are such shops – they are outsourcers and they are also consultants. And most applications that are being outsourced are not totally outsourced. The administration of the applications, whether they be e-mail or whatnot, still usually are handled in-house by the customer, by a browser via SSL connection or whatever in a secure way.

Nolle: But if you look at the applications that are actually being outsourced today with any degree of statistical significance, they were derived from the popularization of things like e-mail and the Internet. In many cases those applications were never insourced. Most most small organizations never had electronic mail internally until they ended up having electronic mail on the Internet. And it's not that they were outsourcing this application. They were simply extending existing Web site hosting and e-mail hosting agreements into, for example, hosting internal e-mail and some e-commerce applications that derive from the Web applications. But those are really not application outsourcing. Those are really new applications that were developed out of the Internet experience. And because the buyer has neither a political investment nor a technology or financial investment in these things, there isn't any resistance to doing them on a service basis as opposed to doing them on a capitalized basis.

Kobielus: Right. In many cases, as you indicated, these outsourcers are providing infrastructure that the customer never provided for themselves in the first place. But in other cases, for example e-mail outsourcing, you're finding the messaging service providers are targeting companies that are going through a lot of flux in terms of mergers and acquisitions and whatnot. They're providing a common message gateway infrastructure. Each of the individual companies that were merging had their own e-mail system but maybe one of them was using Exchange, another was using Domino and so on. So the outsourcer comes in and provides the gatewaying function, that common infrastructure that wasn't there, but only as a stopgap until the corporate customer says "Hey, we're going to take this in-house now, we've decided to consolidate on this or that system." Most companies as they scale up don't necessarily want to keep outsourcing these services. They want to at some point bring them in-house.

Nolle: If you look at the total revenue of all application outsourcers and, in fact, the total value of all of Internet services put together, it's less than the revenue from custom calling. So we're saying there's a lot of this, but there still isn't a lot of this in a financial sense and in a sense of the total amount of application expense that's actually outsourced. This is one of those areas where there's a good fundamental idea at the bottom of a whole bunch of industry crap and, unfortunately, a lot of the buyers are so engrossed in trying to dig through the crap that they're never going to get to the kernel of value.

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