Today, new technology takes software outsourcing to its logical limit: you can buy software applications as a service and pay based on usage. Vendors in the emerging market that provide this technology are known as Application Service Providers or ASPs.

In simple terms, an ASP rents applications to its customers. It owns and maintains all the servers, software, and personnel to run your business’ applications while you pay a monthly or usage based subscription fee for access. To improve efficiency, the ASP maintains a data center and you access your software using direct connections, private networks, or the Internet. While the concept has been in use since the days of Mainframe time-sharing, recent Internet and Windows Terminal technologies provide efficient access to modern sophisticated user interfaces over connections as slow as dial-up modem.

Fundamentally, renting software means your current needs determine how much you pay for technology rather than the traditional practice of paying up-front based on your anticipated needs. This shift means a radical change in how businesses will value technology.

Currently, businesses must evaluate systems in terms of expected return on investment over several years to justify the expense. The ASP model changes the traditional return on investment calculation because businesses can calculate system cost versus return on a monthly basis. The impact on the software sales cycle is dramatic: ASP customers can continuously evaluate their software choices rather than buying on faith. On-going evaluation means ASP software vendors are motivated to deliver on-going value.

Using an ASP can be like using public transportation in New York City. Without a car, you can choose your vehicle depending on your needs for the day: take the subway most days, catch a cab on rainy days, hire a limo for special occasions, and rent a car when traveling. In addition to flexibility, your up-front costs are minimal and you’ve off-loaded maintenance and parking. However, this approach works where the infrastructure supports it, it fails without a critical mass of services.

The ASP market is now reaching critical mass: technology, bandwidth, and people are generally in place to provide ASP services. However, the market is still emerging. Early adopters may not be able to find a vendor with the complete range of services they want or even one who can serve their area. The good news is that even where a complete solution is not available, it only takes an Internet connection to access many ASP services.

All current ASP customers would be considered early adopters. Excluding novelty seekers, early adopters venture into new territory when there are concrete benefits for changing. The current ASP benefits attract customers with specific needs who face one or more of the following challenges:

ASP buying decisions are tied to reducing technology costs, management burden, or both. This is not surprising; technology expenses have become a major budgetary issue for small and midrange companies.

Looking strictly at base costs, an ASP approach offers no long-term savings. However, substantial savings materialize when we factor in hidden costs like data center personnel, buying new PCs, and telecommunications. Factoring in these costs, the ASP model costs less than $1 million over 5 years instead of $1.5 million (Figure 2). This improvement also does not factor in added value features like eliminating capital outlay to buy systems, accelerated deployments, enabling ramp up of user counts over time, centralization of multiple sites, automatic upgrades, and integrated eCommerce solutions.

AMR Senior Analyst David Caruso does not see cost as a motivator for switching to an ASP. He has compared ASP versus traditional deployment cost for several customers: in every case, costs for both approaches were about the same in the long term.

However, Caruso does see substantial value for ASP customers from other factors. For example, businesses can rent sophisticated software they could not otherwise afford and some ASPs provide integrated application suites that enhance the software value. These factors can tip the scale in favor of ASPs for many customers.

For example, Missy’s Candies chose an ASP deployment of Lawson software because it best fit their expected growth. Tony Pranigoni, COO of Missy’s Candies, knew that their expansion plans would require Lawson in three years but they could not afford the product based on their current size. Using an ASP means that they can affordably grow into Lawson without having to step through other products.

Paul Hubbard, a Vice-President at The Revere Group, sees two disparate factors driving initial ASP customers: price sensitivity and system complexity. Generally, smaller customers are both price sensitive and unable to implement complex systems. This tends to drive them away from powerful but sophisticated technology. Hubbard predicts that initial ASP solutions will specifically address midrange customers’ needs to simultaneously control price and manage complexity (figure 3).

Lack of technology skills is another critical factor for ASP customers. Deploying applications requires specialized skills that are hard to find in today’s tight labor market. Many businesses must do without the advanced applications they want since critical systems skills are unavailable for most businesses. In these scenarios, ASPs are essentially outsourcing top tier talent along with the software.

Hubbard believes that the ASP model fits perfectly with Revere’s traditional outsourcing practice. The ASP model benefits his customers in several ways because Revere can "control all the variables" to both provide the right skills and manage the data center. Ideally, the customer can outsource all their "heavy lifting" like server, database, and web administration.

Typically, companies have used outsourcing to manage complexity. ASP deployment basically extends the outsourcing model so that the application host has control over the entire system environment (see figure 4). This is a critical distinction because traditional outsourcing can represent a substantial and uncontrollable expense for businesses. "Our customers see using an ASP as the way to make IT costs predictable," says Dave McCrory, CTO of ProTier.

Predictability is a key factor in other areas too. Glenn Holmes, COO of FutureLink, wants to make software availability as simple and reliable as telephone service. He says that we must "migrate from PC quality to dial tone quality" so that your software is always there and always on. Eventually, upgrading or adding new software features should be as simple as making a phone call. Delivering that dial tone level quality requires a new breed of technology vendors.

Since nearly all technology vendors are splashing the term ASP into their offerings, selecting an ASP can be a confusing process. Buyers must educate themselves on the several facets of ASP deployment until the ASP market consolidates.

Fundamentally, no single company can be an ASP because putting all the pieces of the ASP model together is too much for any one company. According to Kevin Wachter, VP of Sales/Marketing for Champion Business Systems, "ASPs are not single entities, but partnerships of collaborators delivering technology value."

Figure 5 shows how the ASP depends on collaboration between several types of vendors: Infrastructure, Hosting, Software, and Reseller. All ASP customers are actually getting service from multiple vendors so it is important for ASP customers to understand how each vendor collaborates to deliver a complete ASP. June 2000’s Technology Corner covers the four parts of the ASP model in detail.

The dependence on multi-vendor collaboration will be a bitter pill for businesses seeking turn-key solutions from single vendors. Yet the very nature of deploying an ASP solution makes it impossible to single source. Even seemingly self-contained web-only applications do not typically run on computers owned by the software vendor. Some companies embrace rather than hide an ASP’s collaborative nature and work to manage their multi-vendor environments. For example, value added hosts like FutureLink and ProTier provide first level customer support and then redirect calls to the appropriate vendor or reseller if needed.

Even with increased vendor collaboration, ASP customers must understand how each part of the model fits together and fits into their business. The strength of the ASP solution will only be a strong as the weakest link.

There is little doubt that the ASP model is going to change the rules for how businesses buy and use software. Businesses deploying ASP solutions today are seeing benefits even as the market is maturing. Businesses considering ASP solutions should expect to see more integrated offerings, innovative applications, and more choices.

Dan Allison, Director of Global Logistics of ESPRIT de CORPS, uses an ASP deployed global supply chain execution application from Capstan. He expresses the ASP model’s impact simply, "It is hyper drive for implementation."

You can obtain Internet links for the vendors listed in this article and other on-line ASP resources.

Each ASP provides services that best match it focus area. Some ASPs are collaborating with software vendors, resellers, and consultants to offer more complete services. For example, Plaut established Syntacom-IT to host their SAP implementations. Other ASPs concentrate on delivering value in a few key areas and let the customer fill in the remaining gaps. For example, Capstan Systems delivers an export management solution but does not "enter the plant."

The table below describes the range of services available from ASPs. While no single vendor provides all these services, collaborating vendors can.

Of all the ASP customers interviewed, every customer was enthusiastic and eager. Few considered themselves to be early adopters. They all felt like they had a better relationship with their vendor because of the deployment model.

This table attempts to show both sides of each issue for both deployment models.