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3/4/2003
02:07 PM
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Good Hosts

Enhanced services and richer technology mean that ASPs may deserve a second look

The solution "gives us seamless communication with our customers," says Marc Moskowitz, CRM project manager for LivingNaturally.com, a business-to-business site for retailers in the natural-foods business. Because the setup doesn't require integration with the company's Outlook Mail configuration or an Exchange Server, "there are no IT headaches in getting started and no maintenance required to keep our team up and running."

This week, Salesforce will publish Web-services-based APIs that let customers use its software as a platform to develop new apps, such as order-fulfillment modules. This is possible "because of the power of Web services," chairman and CEO Marc Benioff says. "From an API perspective, we will be completely exposed."

One of the knocks against hosting has been that customers couldn't customize the software to their specific requirements. Vendors are getting a bit better at handling that. SAP, for instance, offers some best-practices implementations for specific vertical markets, while RightNow says it wrote the presentation layer in the popular PHP scripting language. RightNow has set things up so that when customers prepare to upgrade--which they can choose to do at any time, rather than on a schedule defined by the vendor--its management software will flag custom components and send alerts to reintroduce those changes into the new environment.

Some ASP customers still have to work within the vendor's upgrade schedules and parameters, however. David Al-Khazraji, IT manager at Utility Service Corp., says planning has to be a priority when IT departments switch to hosted software. A hosted Oracle customer, Utility Service, which builds and maintains water tanks, is moving to version 11.5.8 of the vendor's ERP software package next month. But for Al-Khazraji, the upside of hosted software far outweighs the downside. The premium he pays to Oracle for its hosting services is about what it used to cost the company to maintain its legacy systems internally. "And we were getting a fraction of the functionality," he says.

James DeHoniesto -- Photo by Jeff Sciortino

Cabot saves on staffing by using hosting services, DeHoniesto says.
Indeed, it's the promise of significant savings at a time when most businesses are desperate to cut costs that's making the hosted model attractive again. Forrester Research found that the total cost of accessing Net-native applications can be 25% of the cost of on-site enterprise software. That resonates with James DeHoniesto, director of global information technology at Cabot Microelectronics Corp. When the manufacturer was spun off from Cabot Corp. three years ago, it needed to establish its own IT identity quickly, which drove DeHoniesto to look at outsourcing. Cabot uses enterprise applications that are maintained and hosted by Oracle. Although the hosting services cost the company 50% over the cost of the software license, DeHoniesto says Cabot still saves money. "It's half of what we would have paid to try and staff around the clock."

Oracle, which has had an on-again-off-again relationship with the ASP business model, is back in the business. Most big enterprise software vendors have stuck with offering hosting directly to customers, except Siebel Systems Inc., which bowed out of the market a couple of years ago. Oracle has said it believes most software will be delivered as a service within 10 years because that approach lowers maintenance costs. It offers a pricing program aimed at giving midmarket customers quotes that include the cost of buying, installing, and maintaining 11i apps in Oracle data centers.

SAP Americas has about 100 hosted clients, about 3% or less of its business, CEO Bill McDermott says. But, he adds, "our customers are more and more asking for these kinds of services." SAP's hosting unit has seen triple-digit revenue growth since its inception in 2000, the company says.

PeopleSoft Inc. plans to make its hosted offerings more price competitive by making architectural changes to its apps that will make them less costly to offer as a service. Among other things, the company is tinkering with ways to give its software a smaller footprint so it takes up less room on a server. "That could significantly drive down hosting costs," says Bill Henry, VP for marketing and strategy at PeopleSoft. The company also may extend its services from basic hosting to full application-management services, Henry says. "Application outsourcing is still in its infancy, and we're taking a hard look at a number of business models," he adds.

Some of today's hosting companies say the first generation of ASPs didn't look closely enough at developing strong business models. RightNow, for instance, says it made a conscious decision to design software for hosted environments to keep its and customers' costs low. "The first round of ASPs failed because the apps weren't built for multitenancy," CEO Greg Gianforte says--that is, service providers took existing software with multiple layers of database logic and other technologies required to support it, then deployed everything in a co-location center. "There were no economies of scale," Gianforte says. RightNow's application was built so that thousands of clients can co-exist on a common hardware platform without a separate hardware stack for each customer in a hosted facility, he says, so the variable cost for an additional customer is near zero.

RightNow charges the same up-front price for its software whether a customer chooses to have it hosted or run it in-house--and it costs less for RightNow to run hosted customers. Not surprisingly, 80% to 90% of customers choose the hosting option, because it eliminates their hardware costs.

Photo of James DeHoniesto by Jeff Sciortino

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