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Being Strategic With Your ASP

SAN FRANCISCO--Medium-sized businesses that are implementing successful E-business strategies are spending 30% to 50% of their technology budgets on such initiatives. In order to keep up with technology changes, as well as garner the necessary IT skills required to create successful E-businesses, midsize companies need to outsource noncritical back-office applications, build out their infrastructures, and better align IT functions with lines of business.

That was the topic of discussion in the opening session of Gartner's Midsize Enterprise Summit here today. "Approximately 50% of E-business skills required to create successful strategies and implementations will be found through external service providers," said Ray Laracuenta, Gartner's VP and research director. "One of the most significant opportunities to quickly become successful in E-business lies in the ASP model," said Laracuenta, who also recognized a high level of risk associated with going to an application service provider. The ASP market expects massive consolidation this year. Its size is expected to shrink 60% to 70%, from 500 vendors to only about 150 by the end of the year.

Still, Laracuenta remains bullish on ASPs and predicts that by 2003, more then half of midsize companies will have outsourced their packaged applications. Apps he recommends for outsourcing included accounting, payroll, enterprise resource planning, customer-relationship management, and B-to-B Web sites. This will let medium-sized companies focus IT talent on more strategic E-business initiatives that can drive revenue growth as opposed to cutting costs. It's important for businesses to find ASP vendors that have viable business models and a specific focus on their customers' industries. "It's not necessarily a good idea to hire the cheapest ASP," Laracuenta warned. "A strong vertical focus will also allow your ASP to create more value from a standard packaged application."

Companies have a lot of work to do before they can achieve IT utopia. According to Laracuenta, many medium-sized businesses "milk" their IT infrastructures until they're virtually worthless. This makes adding software packages such as ERP or hiring a host company a big undertaking since the entire networking infrastructure needs to be revamped. Through 2003, more then 50% of companies' initial E-business efforts will be spent on building better networks and communications outside the enterprise, whether it be to consumers, suppliers, or service providers, Laracuenta predicts. In addition, skilled project managers need to be hired to successfully manage ASP contracts.

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