Good Hosts

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



The application service provider industry isn't what it used to be, but that's a good thing. At the height of the Internet frenzy a few years ago, rent-an-app vendors sprung up to offer startups and small and midsize companies a low-cost way to get high-priced enterprise software and services. But business faltered because of the twin pressures of the dot-com bust and unsustainable business models.

Yet some of the same things that made the ASP model attractive to those companies a few years ago are drawing a new crop of customers, including some big-name accounts, in today's more constrained times. More and more businesses are willing to give up some control over their applications to save money, simplify operations, get fast return on investment, and redeploy IT staff to more strategic tasks. But software-as-a-service providers--from enterprise suite and software specialty vendors to pure-play hosting outfits--also have new tools and have learned a few things about how to address customers' concerns about integration with other applications, customization, and planned upgrades, while maintaining the economies of scale that can make the hosting business a profitable one to be in. And they're looking to extend their business models to encompass higher-end services, such as business-process outsourcing.

A few years ago, executives such as Doug Meeker, VP of operations at AOL Time Warner, might not have turned to an application-hosting provider, because many larger companies had concerns about security, scalability, and whether these providers had the staff and expertise to understand how the applications that companies deploy affect their businesses. Over the past several years, though, AOL Time Warner has tried a number of off-the-shelf and homegrown contact-management and sales-tracking programs with little success. Instead of continuing to burn up internal development, software, and hardware resources, Meeker decided to try a suite of contact-management apps from Salesforce.com Inc. Thousands of AOL sales reps now use the application, and Meeker has no complaints about scalability.

"We became very enamored with the ASP model," he says. "To me, it's nirvana; we're not hosting it, we're not messing with hardware." Plus, the Web-based platform, with a portal that lets salespeople quickly see how close they are to hitting targets, makes the software easy to use, so people were eager to adopt it, Meeker says.

WHO'S BOUGHT WHOM?

Consolidation has marked the pure-play hosting market. Some highlights:

May 2002 -- USinternetworking completes merger with Interpath

June 2002 -- Exigen Group acquires Portera's professional-services automation business

August 2002 -- Corio buys QwestCyberSolutions' ASP assets

March 2003 -- Surebridge acquires ManagedOps, following October 2002 acquisition of Transchannel

April 2003 -- BlueStar Solutions acquires Agilera, which had previously acquired United Messaging and Applicast

May 2003 -- Navisite acquires all assets of Interliant, following its January 2003 purchase of Avasta and December 2002 purchase of ClearBlue Technologies

Data: Gartner and vendors

Research firm IDC projects a 26% annual growth rate for the software-as-a-service market, from $1.8 billion in 2002 to $5.7 billion by 2007. One of the biggest developments helping breathe new life into the ASP space is the rise of Web services. ASP providers' support for tools that incorporate Web-services standards promises to help solve thorny integration problems that hampered the effectiveness of the ASP model, as customers struggled to connect internally managed software with outsourced applications or to connect apps hosted by different vendors.

Allied Domecq Quick Service Restaurants, the parent company of Dunkin' Donuts, Baskin-Robbins, and Togo's fast-food restaurants, shows that the integration problem is still a big one. The company's franchisee data mart is hosted by Qwest Communications International Inc. Allied Domecq CIO Michael Furlow wants to find an easy way to pull that data into the company's internal enterprise resource planning systems, and he believes Web services may be the answer. "We're starting to explore Web services. We don't have a strategy fully defined yet, but we think it's very promising," Furlow says.

Belgacom SA, Belgium's largest telecommunications company, has turned to an ASP for speed and integration ease. Last year, the company's Skynet ISP division (since integrated into Belgacom) wanted to cut costs by providing automated customer support over the Web and by more efficiently routing telephone queries to the right agents. Eric Pageau, a consultant who acted as system architect on the project, turned to hosted software partly as a result of Belgacom's mandate that "this could not be a big project that would take two years to implement," he says.

Pageau settled on a combination of hosted customer-support software from RightNow Technologies Inc. that it could implement in 10 days and an internally managed Cisco Systems computer-telephony integration system designed to route service calls within a contact center. He was able to integrate the RightNow suite with the Cisco software using a combination of XML and Java programming. Customer queries are routed by the computer-telephony system and delivered to the appropriate agents through RightNow's Web-based front end. Pageau also used Microsoft's Active X technology and Dynamic PHP coding to connect other databases--such as those containing customer financial information--to the RightNow front end so that agents could see a real-time picture of client status. The enhanced self-service capabilities of Belgacom's Web site have reduced customer E-mails by almost 79% and phone calls by 27%. "It's a huge savings," Pageau says.

Other vendors also use XML and other Web-services standards to enhance integration capabilities. Salesforce uses XML to help customers such as new-wave urban-scooter manufacturer Segway LLC connect its hosted customer-relationship management applications to internal ERP software, the vendor says. Salesforce recently unveiled bidirectional integration between its CRM service and Microsoft's Outlook application that uses Salesforce's XML API to give businesses the ability to communicate with customers using either application and forgo the need for Exchange server integration. Sales and customer-service personnel can log messages in Salesforce's site using familiar Outlook controls.

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

In the last couple of years, more software developers have entered the market because of its growing appeal to customers. Talisma Corp., a Web-based customer-support and contact-center software vendor, began offering a hosted option about 18 months ago. Last year, 20% of Talisma's business was hosted. So far this year, that percentage has grown to between 30% and 40%. Talisma CEO Dan Vetras says flexibility gives his company a leg up over competitors. "We can go in at the 11th hour and turn it from a license deal to a hosting deal," Vetras says.

With software vendors aggressively marketing hosted versions of their applications, is there room left in the market for conventional ASPs that offer a range of third-party products? There seems to be. Corio Inc., for instance, claims more than 150,000 subscribers to its Applications on Demand service, and its first-quarter sales rose 66% from a year ago to $16.7 million. (It still lost $2.8 million, down from $8.0 million last year.) Executives at USinternetworking Inc. say that a few years ago, the market was oversaturated with providers that expected there would always be a plentiful supply of dot-com companies to service, and a shakeout was inevitable--and now it's time for the survivors to benefit from the consolidation. USi last year emerged from bankruptcy and merged with Interpath, another troubled ASP. Backed by $81 million in private equity from Bain Capital, the company is proving that the classic ASP model isn't dead, USi officials contend. "This is still a business model that creates real value," USi senior VP Mike Harper says. In recent months, the company has signed contracts with customers including United Parcel Service, ING Direct, and Sterling Commerce.

USi, which serves up apps from Ariba, BroadVision, Siebel, and others, claims customers can achieve an average of 20% savings by moving to an ASP for enterprise software. ASPs are also in a position to extend the hosting model to encompass business-process outsourcing, in which customers trust not just the apps but their data to their partners for certain processes, Harper says. "Customers may access PeopleSoft through the ASP model and then recognize the value of running payroll through that same system," he says. USi is beginning to run payroll for large customers.

Surebridge Inc. stands to benefit from the same trend, says Peter Boni, the ASP's CEO. The company offers supply-chain, CRM, financial-management, and human-resources management software from Microsoft, PeopleSoft, Siebel, and Vignette for the midmarket. Surebridge plans to offer business-process outsourcing services by partnering with established business-process outsourcing companies, including some with facilities offshore.


Christopher Bristow

Creek and River couldn't have implemented critical software on its own, CEO Bristow says.
Overall, a large number of subscribers to hosted offerings continue to be the small and midsize companies that want a fast, economical way to gain access to sophisticated enterprise applications. "It helps smaller businesses play on a more even footing," says Humberto Andrade, a Technology Business Research analyst. Creek and River America, the U.S. subsidiary of a Japanese media talent agency, tapped Bullhorn Inc., an ASP that serves the media industries with software for maintaining talent rosters, controlling project status, and managing freelancer contracts. The software is critical to the company, but "there's no way we could have implemented this ourselves," says Christopher Bristow, Creek and River's CEO.

Some CIOs still can't get past age-old concerns about hosting. According to a March Information Technology Association of America survey, respondents asked why the model wasn't achieving faster adoption cited internal hurdles such as loss of control and the need to reassign, retrain, or lay off workers if they used an ASP. While respondents acknowledged that outsourcing to an ASP would likely save money in the long term, the in-house IT investment already made would be lost in the first year of such an arrangement.

When you host, "you can't go down the hall and ask someone to do something for you," admits Al-Khazraji at Utility Service. But that may be as much a blessing as a challenge, says Cabot's DeHoniesto, because it can enforce organizational discipline. "When software is on-site, it's very convenient to make changes, but you often wind up making changes you shouldn't because it's so easy to do," he says.

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