ASP Just Never Went Where It Should Have

aspDaniel Lubin knows how important it is to make a good impression. His company, Folio Inc., designs and manufactures trade show booths and exhibits that help customers stand out from the crowd.

Earlier this summer, IS Vice President Lubin decided his IT organization could shine by getting out of the business of deploying and managing back-office financial systems and, instead, concentrate on highly visible projects such as e-commerce extranets that can help Folio build closer ties to its customers. To help make that happen, Lubin bought into one of the hottest outsourcing trends around, turning management of his company’s enterprise financial systems over to an ASP (application service provider), The Taylor Group, of Bedford, N.H., an ASP that is also a reseller and integrator of financial applications from Great Plains Software Inc.

“Our core business is building the best exhibits in the industry, not data centers,” Lubin said. “The key is, this is the ultimate in outsourcing. All we provided from an IT standpoint was strategic direction and infrastructure support.”

Like Lubin, more and more IT managers are seriously considering ASPs for everything from ERP (enterprise resource planning) to e-commerce applications. ASPs typically deploy and operate enterprise applications in their own data centers, giving corporate users access to applications over the Web or leased lines for a fee. Early customers say outsourcing to an ASP can speed deployment of new applications while helping IT managers cut implementation headaches, bypass IT skills shortages and, most important, cut upfront capital expenses. That means they have more time and resources to focus on more important tasks such as e-commerce strategy. But, say experts, there are still plenty of reasons to be cautious about the still-young ASP business model. The best fit, they say, may be for relatively small, fast- growing companies such as Folio or those looking to deploy a single, functionally focused application quickly. Going with an ASP may make less sense, however, for larger companies with ERP and other core applications and infrastructure already in place.

That may be one reason why the number of ASP customers remains relatively small. International Data Corp. projects that companies will spend $150 million this year on high-end ASPs, which are those that both host and manage enterprisewide applications such as ERP. But that figure is expected to grow to $2 billion in four years (see chart, Page 68).

Fast growers

Folio fits the profile of an ASP customer. The $46 million private company based in Worcester, Mass., has grown since March of last year from a single operating division to five, mostly through acquisitions. Last month, Folio went live with Great Plains’ Dynamic C/S+ to replace the disparate financial applications among its acquired divisions. By using an ASP, Lubin expects not only to free up his IT staff to focus on more strategic issues but also to drive down costs.

Lubin estimated that Folio will save some $300,000 in upfront capital costs, plus another $200,000 a year in IT salaries for workers the company would have needed to manage the system. Unlike many ASP customers that buy a fully bundled application service, Folio bought all the software licenses needed to run the applications in a hosted environment, including Great Plains, Microsoft Corp.’s Windows NT and SQL Server, and Citrix Systems Inc.’s Meta-Frame. The three-year hosting deal should cost about $500,000, including upgrades and maintenance.

The ASP model works for companies with limited IT resources. The question is whether large companies can benefit from ASPs. To the extent larger companies have signed on with ASPs, it has usually been for function-specific applications such as resume tracking or expense reporting, analysts say.

That was the case at Shaw Industries Inc., the world’s largest carpet maker. The Dalton, Ga., company’s IT department was already involved in large projects such as implementing ERP software from PeopleSoft Inc. in-house when its human resources department decided to find an application for automating the tracking of resumes and job requisitions. But by using hosted software from an ASP, the company was able to speed its hiring process without creating more work for IT, said Steve Pound, Shaw’s director of employment resources.

Pound said he considered buying and deploying traditional client/server software to smooth the hiring process. The company evaluated nonhosted products from Resumix Inc., of Sunnyvale, Calif., and Greentree Systems Inc., of Campbell, Calif. However, Pound opted for a hosted application, HireSystems Inc.’s Express, when he realized the outsourced deal would not only better manage some 10,000 resumes a year but also save Shaw money. For one thing, the company could avoid tapping into the $150,000 it had budgeted for in upfront hardware and software expenses for the new system.

Shaw pays about $5,000 a month for the application modules and a service HireSystems provides to input resume information into the system. That price is based on a projection of the number of resumes that will move through the system over the one- year term of the contract, rather than on the number of users.

“Financially, we don’t have to commit to buying hardware, we don’t have to buy software or worry about updates,” Pound said. “It just gives us a lot of flexibility and puts the onus on HireSystems to make sure everything is up and running.”

Shaw started rolling out Express in July. All the company’s 40 current users need is access to the Internet and a Web browser, something Shaw was already providing. Users log in to the system to view resumes, forward them to other hiring managers and track candidate interviews.

Not so simple

For companies deploying larger applications such as ERP, though, getting started with an ASP isn’t as simple as logging on to a Web page. Such companies usually require detailed consulting and integration with legacy systems, something that most ASPs are not offering, said David Caruso, vice president of enterprise application strategies at AMR Research Inc., in Boston. For example, most ASPs such as USinternetworking Inc., of Annapolis, Md., and Oracle Corp.’s Business Online unit, include a limited amount of customization and integration in their application packages, since the majority of their applications are preconfigured with industry-specific templates. Customers wanting in-depth business-process consulting or systems integration would hire consulting firms at an additional expense.

That can make the ASP look less appealing, Caruso said. Because of its complexity, ERP outsourcing can make less sense for companies with existing systems.

But for startup companies or new implementations, the ASP model begins to make more sense. The deployment can occur more quickly, sometimes within 60 to 90 days instead of a year, and without spending hundreds of thousands of dollars upfront.

Those factors helped convince Converge-Net Technologies Inc., of San Jose, Calif., to use Oracle’s ASP division, Business Online, to implement a full suite of Oracle ERP applications. Rather than start by shopping for an ASP, though, the startup manufacturer of enterprise storage systems first chose its preferred vendor for its mission- critical applications, said Hans Hartmann, ConvergeNet’s vice president of operations.

“From my perspective, don’t get enamored with the ASP function,” Hartmann said. “Evaluate what tools you need to do the job and then look at how you implement.”

To implement Oracle applications, ConvergeNet used an independent integrator for configuration and testing. Still, Hartmann said he believes the ASP model proved to be the most economical way for a new company to start production and was the key to getting the system up and running last month, after about 12 weeks. Hartmann said using an ASP will save ConvergeNet several hundred thousand dollars over the three-year life of the contract.

Those kinds of savings can prove irresistible. But even companies for which an ASP service would seem to be a good fit will need to put effort into finding the right ASP. At this early stage of the market, there are huge differences in the breadth of applications ASPs offer and how they price their services.

Let’s make a deal

“It’s still a Monty Hall ‘Let’s Make a Deal’ atmosphere,” said Marty Gruhn, vice president at consultancy Summit Strategies Inc., in Mesa, Ariz. “I don’t see any end to that until someone strikes the right approach.”

ASPs tend to either focus on different classes of applications, sometimes aligned with specific vendors, or to provide a wide range of software. The most basic offerings often are messaging and collaborative applications such as enterprise e-mail. On the higher end, some ASPs provide business-process applications from ERP and CRM (customer relationship management) packages to sales force automation and supply chain tools. Another concentration has developed around e- commerce applications, from storefront software to order processing and inventory tracking. (See story, left.) Yet another group of ASPs, such as BidCom Inc., of San Francisco; Blueline Online Inc., of Palo Alto, Calif.; and Portera Systems Inc., of Campbell, Calif., offer hosted applications tailored to vertical industries: building, architecture and engineering, and consulting industries, respectively.

Not only is it difficult to understand what ASPs are offering, but their variety of pricing options can be dizzying. Many customers of hosted ERP and other enterprise software, such as ConvergeNet, pay on a per-user, per-month subscription basis without owning any software licenses. Even that type of pricing option is not simple. Oracle’s Business Online prices vary, for example, depending on the number of Oracle applications deployed. For a full suite, however, the monthly fees would run about $895 per user with full access, $395 for a casual user running reports but not entering data and $5 for self-service users, said Business Online President Chris Russell.

Even for ASP customers seeking fairly straightforward per-user pricing, there are many choices. Take the difference in some of the contract terms among Folio, Shaw and ConvergeNet. Folio’s Lubin, who has a three-year ASP contract with an exit option, bought the software upfront and is contracting separately for Internet connectivity to access the application. At Shaw, Pound had no upfront costs in his one- year contract but manages his own Internet connectivity. And while the three-year package for ConvergeNet’s Hartmann didn’t include connectivity, he hired a separate consultant for his implementation.

Hosted e-commerce applications present a new set of options and choices for potential ASP customers. There the per-user, per-month model is often replaced with a per-server, per-month fee for hosting and management of front-office applications. Users are difficult to track when they are customers of a Web site.

Sharing the wealth

At least one e-commerce ASP, Pandesic LLC, incorporates revenue sharing into the mix. The company receives a small percentage of an e-commerce company’s revenues, which varies from customer to customer, in addition to a monthly base fee and per-server fee, said Jill Schaeffer, Pandesic’s director of marketing. Schaeffer declined to specify a percentage range.

While some companies may shy from sharing their revenues, it made sense to startup eVineyard Inc., of Portland, Ore. The revenue sharing created a stronger partnership between eVineyard and Pandesic, which shared in both the risk and possible rewards of a new venture, said Michael Osborn, an eVineyard founder and executive vice president. Osborn declined to provide details of the arrangement but said it offered the online wine retailer a way to grow its business while gaining the full front- and back-end functionality it needed to run the site and operations.

Pandesic, a joint company of Intel Corp. and SAP AG, offers an e- commerce package based on SAP R/3 as the transactional ERP system, integrated into the site’s front end from the order-taking process to the catalog database. The result is that eVineyard’s IT staff a chief technology officer and a developer can concentrate on the site presentation of merchandise and content rather than the development and maintenance of infrastructure and applications to take online orders, fill them and ship them.

Still, such a wide variety of pricing options makes it difficult for potential customers to compare ASP offerings, said Summit Strategies’ Gruhn. That will present “an impediment to the marketplace because it doesn’t create an ability to shop. It’s all [comparing] apples, oranges and kumquats.”

Despite the complexity involved in finding and selecting the right ASP and the best pricing model, hosted applications can work, said Folio’s Lubin. He said he believes pricing and choices will only improve for users, and he is already considering tapping ASPs for future applications such as product and inventory management and intranets and extranets. A key part of the decision, he said, will come down to whether he finds ASPs with expertise in the applications and which can host them for less than he could himself.

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