NW poll: ASPs show strength despite doubts

By Network World Staff
Network World, 11/29/99

Network professionals are still skeptical about application service providers (ASP), but a new Network World survey shows there is also a groundswell of support for ASP offerings that has the potential to turn into a major wave.

Roughly one in five respondents said they are already using some kind of ASP service - not bad for a concept that has only emerged over the past year or two. What's more, one-third of respondents who are not using ASPs seem ready to give application outsourcing a chance. And most of these same respondents expect they will give ASPs a shot by the end of next year.

The survey, based on interviews with about 300 network professionals, found that companies are turning to ASPs for a host of reasons that range from difficulties in retaining qualified IT staffers to anticipated cost savings to the challenge of keeping up with application upgrades.

And while ASP services generally have been considered most attractive for small and midsize companies, our survey shows that large companies also are embracing ASPs. One-fourth of the respondents who told us they are using ASPs said they work for companies that employ more than 20,000 people.

It's too soon to know if increased demand will amount to the kind of market that ASPs and their investors envision.

Venture capital firms are putting millions of dollars into new ASPs, and established software, hardware and services companies are vying aggressively for a big piece of the ASP pie that industry watchers say could be worth as much as $23 billion in five years.

Whether the market actually gets that big will depend largely on whether companies that are waiting to see what happens don't wait too long.

"The market is still too new," says Jonathan Wilson, PC specialist for Hickory Springs Manufacturing in Hickory, N.C. "I would have to wait for it to mature some in order to make a decision to go with outsourcing. It just feels too fly-by-night and too much of a security risk right now."

Taking the ASP plunge

Companies that have taken the ASP plunge have done so with a variety of applications.

Payroll proved to be the most popular application to outsource, with 30% of respondents reporting that they currently outsource this key function.

Manufacturing company Lochinvar in Nashville expects to outsource its payroll applications in the next year or so.

"With the growth of our company . . . we've had to put up big money for servers that would suffice for a while, then we find ourselves adding more," says Mark Gamboa, a network administrator. "If there is a company that can control that for us, that can grow as we grow, it would save us a lot of money."

Other applications scoring well in the survey were e-commerce, messaging, human resources, inventory management, accounting and intranet applications. Companies also said they have handed over marketing, supply chain, customer support and enterprise resource planning applications to ASPs.

In perhaps the most high-profile application outsourcing move to date, United Airlines two weeks ago announced that it was scrapping its aging client/server e-mail system and awarding USA.Net a contract to manage 20,000 Web-based e-mail seats. The company decided to outsource its e-mail after asking itself the basic question: "What is our core competency?" says Nirup Krishnamurthy, director of business systems development at the airline's information services division.

As for why companies are using ASPs, difficulty retaining experts on staff was an extremely or very influential reason for more than 40% of respondents.

One respondent, for instance, went with an ASP after deciding to move from financial applications developed in-house on AS/400s to Oracle financial applications. The data communications manager, who asked not to be named, said the software change would have required the company to hire more IT staff. Instead, the company cut a deal with an ASP, whose staff now handles all software and systems upgrades for the customer.

"The cost savings were realized by not having to hire staff to support the applications," the data communications manager says. "That was the best justification for going with an ASP."

Sterling Capital is renting Microsoft Office 2000 applications from an ASP called TeleComputing and will start renting a Great Plains accounting package early next year. The company teamed with TeleComputing because it wanted to focus on hiring professionals for its new educational investments and not IT staffers.

"We didn't have the expertise, and we didn't want to make the investment in an IT staff," says Steven Fragapane, chief information officer at Sterling, an investment firm in Baltimore.

The firm is operating a company called Sylvan Learning Centers with the plan to sell these centers in the future. So Fragapane doesn't want to install, maintain and deploy applications that may be thrown out or viewed as a debt by potential buyers.

Business users already working with an ASP say they like the service provider's ability to move quickly from initial deployment to ongoing software support. In fact, more than 80% of respondents said that an ASP's ability to upgrade a customer's applications was somewhat to extremely influential in their decision to team with an ASP.

US at Work, a Web start-up that supports a portal site for business users that's similar to the Yellow Pages, teamed with an ASP called Corio because it needed its PeopleSoft system up and running quickly. The decision enabled the customer to get its applications online in weeks rather than months, says Larry Lilliback, project manager at US at Work.

"The fact that Corio could rapidly deliver the system and offer continuous upgrades was very attractive to us," Lilliback says. "And Corio offers Siebel Systems [customer relationship management] software that we plan on adding in the near future," he says.

One thing that early ASP adopters are learning is that every ASP is different, a subject we tackled in Part Two of this series. In light of this, customers are devising interesting approaches to working with ASPs to address their specific business needs.

Database Production Services (DPS) is a Lombard, Ill., data processing company that works with marketing firms and banks, creating clean data records used in direct mail and advertising programs. DPS evaluated ASP bids to create and deploy a new Oracle-based application for its clients.

But having ASPs build a custom application would have sent costs skyrocketing and dragged the deployment time out, says Slav Gadomski, vice president of operations. Instead, DPS' own database administrators and programmers built the application and its database, which an ASP will host and manage. In effect, the company will use an ASP as an extension of its data center operations, eliminating the need to have staff working 24-7.

"We're in final beta testing right now," Gadomski says. "Total project time has been about 18 months. We saved roughly nine months by using an ASP to host the application."

Healthy dose of skepticism

Even companies that are using ASPs have their reservations (see Figure 2).

More than 90% of ASP users said they are somewhat to extremely concerned about the ability of their service provider to keep data secure, to ensure optimal application performance and to respond quickly to changing customer needs. There is also some edginess over the relatively unproven ASP business model.

"I wouldn't even recommend going with an ASP until the right type of data security was in place, and by that I mean 512-bit key encryption," says Jeremy Cohen, telecommunications specialist at the Department of Veterans Affairs in Washington, D.C. He is concerned about the vulnerability of data shipped over a WAN to servers at different sites.

As for companies that are not using ASPs, most of the reluctance has to do with giving up direct control over applications that are essential to business.

Loss of control was cited by 46% of respondents as very or extremely important in their decision not to use an ASP.

"It's kind of scary that someone can take that much control of your business," Lochinvar's Gamboa says. "With the control they have, you're forced to use certain products and to go along with how well they can support you."

As we reported in Part One of this series on ASPs (NW, Nov. 8, Page 1), customers are also concerned about the lack of customization of applications that they can expect from ASPs.

"There is not much of a market out there that will support the vertical solutions we've developed internally," says Mark Henry, network staff manager at Lupkin Conroe Communications, a Douglas, Texas, telecommunications services reseller. "Our billing and support applications are very specialized for our industry. I don't see any of the ASPs providing that kind of flexibility."

More than 40% of respondents not using an ASP said worries over whether ASPs can ensure continuous availability of applications are very or extremely important in their decisions to keep their applications in-house.

"The ASPs have to have the infrastructure on the back end to be able to run a service business," says a network manager with an airline who asked not to be identified. "But most ASPs don't want to build massive data centers."

Companies that have already made big investments in their own data centers and applications say they can't really justify going with ASPs.

Other inhibitors to trying out ASPs are concerns about security, customer support and the basic sustainability of the ASP business model (in other words, will the ASPs be around in a few years).

So what might turn the skeptics into believers?

Well, 43% of those not using ASPs say "nothing" could change their minds. So the ASPs have their work cut out for them there.

But about one-third of the companies that said they are not very or at all likely to go to an ASP also said the move to totally new applications could be a reason for them to reconsider ASPs. Also, the emergence of strong service-level guarantees and testimonials from early adopters could sway them.

For others, it may just take time.

"If we were ever going to use application hosting, we would need to see the industry mature and stabilize over time," says Mel Kirby, program analyst with the City of Radford in Virginia.

John Cox, Phil Hochmuth and Denise Pappalardo prepared this report.