The enormous application service provider mothership hovers over your office in the dead of night–tractor beams knifing through the dark–to abduct the anemic enterprise systems your shop has slaved over for months. It takes them to an unknown location for study and replaces them with an upstart set of Internet-enabled applications beamed from another galaxy. The next morning, alien interfaces stare blankly at you from your monitor as you sip your coffee and click into a program built and maintained in a land far, far away.
Why has your organization decided to jettison its homegrown systems and go into "rent-an-app" mode? Management hopes to save money, time and talent in moving to a ready-made, fully supported e-business or resource planning suite, freeing your team to concentrate on coding an artificial intelligence engine that responds sensitively to customer complaints or some other time-consuming, pie-in-the-sky task. The corporate IT shop will be decimated– although the displaced developers will easily find jobs at the companies supplying 24-hour "software as a service," in the new parlance.
Such a paranoid fantasy, while unwarranted, does highlight the potential sea change awaiting the software industry. It remains to be seen, however, whether this wholesale shift to outsourced software will really take place, and whether IT managers will endorse the companies seeking to run their more conventional applications. Despite the hyped-up market potential, ASPs today are primarily aiming for the low-hanging fruit of dot-coms–those with big ideas, deep pockets and few or no developers–and providing conventional e-commerce or business software for vertical markets.
The Business Case
"Six years ago, you couldn’t get people to send you their source code–it didn’t leave the house. Now, companies like AT&T attach mission-critical software to an e-mail as a Zip file," says Dave Jones, CEO of Reasoning, an ASP based in Mountain View, California. This Internet- and time-to-market-fueled irreverence is one reason why his company thinks it can successfully move from year 2000-bug work to outsourcing quality assurance for developers.
Founded as a research firm in 1984 by a Stanford University professor with a pet program and buoyed by an $8 million venture capital infusion in 1996, Reasoning chose to provide services rather than package its flagship static defect analysis tool for sale. In 1999, the 75-person company made $20 million in Y2K-bug work, and it continues to provide date-change-related services to 150 customers. A second round of funding recently netted Reasoning $25 million to launch a full-fledged ASP business earlier this year. Reasoning now has six customers for its Instant QA automated software inspection technology; it also transforms legacy client/server applications to the Oracle Internet Computing platform.
"We see our market as helping the world’s 7 million developers to remove crash-causing defects from their programs. We’re targeting every e-commerce business out there," says Jones. "Our initial customers are independent software vendors, embedded systems manufacturers–static source code analysis is ideal for them, since they can’t really do black-box testing–and dot-coms. Our business model is based on lines of code and number of inspections per year. If we inspected 100,000 lines of code four times a year, that would cost $36,000."
Eventually, the company envisions hosting applications as they are being built, providing a "developer cockpit" that tracks personal metrics and offers defect, configuration and project management. With enough clients using the service, Reasoning could begin to keep tabs on productivity and offer intelligent project schedule estimates based on benchmarking among all the organizations in their database.
For now, though, Jones and Reasoning Senior Vice President Scott Trappe see several trends supporting the viability of the simple ASP model they’re aiming for. Market pressures are forcing companies to focus on core competencies and the Y2K-bug experience helped legitimize outsourcing. But most important is a company’s willingness to release source code–only a recent change, made possible by the Internet and also by the financial successes of players in the open source movement.
"Maybe keeping code private isn’t such a big deal," says Trappe. "The open source approach shows that service creates more value." And, in a canny move intended to build confidence in an eventual Reasoning "seal of approval," the company is negotiating to remove all the defects from Napster, the hip, free MP3-gathering Web crawler jamming university T1 lines everywhere. One thing is clear, though: Reasoning will have to gain developers’ confidence with 24-hour turnaround times and low false-positives–both works in progress–before it can call its ASP approach a success. And in that sense, little has changed in the past 40 years.
A Brief History
The software rental model isn’t new; in fact, it goes back to the mid-1960s, when it was called mainframe time-sharing. The use of mainframes took off at that time, thanks to the introduction of the IBM 360, but even the smallest such computer required a substantial six-figure investment. Most companies were reluctant to put that much capital into such a new, relatively untested tool, so the idea of using computer services on a connect-time basis seemed like a cost-effective compromise.
When PCs and then networks came to people’s desktops in the early 1980s, the pay-as-you-go concept went fallow. But now it’s come full circle; International Data Corporation (IDC), the Los Altos, California-based Internet Research Group (IRG) and the Yankee Group are among the industry think tanks hailing ASPs as The Next Big Thing in the software world.
"The emergence of the application service provider is the single most important development in the IT industry since client/server models," says John Katsaros, vice president of Jupiter Communications in Los Altos, California, an Internet commerce consultancy headquartered in New York. Katsaros cowrote a recent
Internet Research Group white paper on ASPs.
"The client-server model changed the way companies did business years ago; the ASP changes yet again the way companies do businesses. ASPs serve as the new delivery vehicle for software companies." Within a couple of years, Katsaros predicts, "we will see the majority of client/server software available only through the ASP delivery model."
Via the Internet or leased lines, ASPs can provide seamless integration with a client company. The software is made available on a subscription or rental basis, typically covering infrastructure, upgrades, online access to the applications and end-user support. The applications–usually custom-configured–include front- and back-end business, intranet and extranet, front office-to-plant-to-business partner applications and others.
The Market
Momentum in the ASP field began about three years ago and has continued to build steadily. In 1999, the total market was worth $296 million, reports IDC, which estimates that it will surpass $1 billion in 2000 and reach the $7.8 billion mark by 2004. The Yankee Group is even more optimistic, predicting that the ASP market will reach $11 billion by 2002.
Just how many ASPs are out there is unclear, however. Information Week Online listed 86 providers of application-hosting services (mostly start-ups) doing business in the U.S. at the end of 1999, using either existing packages such as SAP R/3 and PeopleSoft or offering their own custom-developed software. In May, WebHarbor.com, a Web portal offering a free listing to companies describ-ing themselves as ASPs, listed 564 firms.
Why the sudden upsurge in this field? Is the traditional corporate development team being overwhelmed by gargatuan system integration plans and e-business infrastructure requests?
Indeed, although business-to-business Internet commerce is expected to rise to a staggering $1.3 trillion in 2003 from $43 billion in 1998, according to Forrester Research, a March 2000 PriceWaterhouse Coopers report reveals that most large corporations still cannot conduct standard transactions via the Internet. In a race to capitalize on the online sales sector, some companies may have little choice but to work with an ASP.
"If a company is in a high-pressure ‘build’ situation, in that they need that application yesterday, then an ASP makes perfect sense," says Michelle Perry, marketing director of USinternetworking Inc. "Companies can outsource development or running the system–it’s their choice. A lot of smaller companies with a horde of Big Five apps to run can’t or don’t want to handle them; they look outside for help, so they can stay focused on their core business."
Scott McNealy, CEO of Sun Microsystems, is similarly bullish on the ASP business model: "Five years from now, if you’re a CIO with a head for business, you won’t be buying computers anymore," he writes on the Sun Web site. "You won’t buy software either. You’ll rent all your resources from a service provider. In fact, if you’re not taking a close look at your organization right now and deciding what to outsource, you’re toast. Because resources that should be going into making your company more competitive are being wasted–wasted on routine rubbish that could be done better and cheaper by someone else."
The Players
The ASP market may be nascent, but it’s incandescent–at least in terms of hype. New ASPs are clamoring for attention, although not all are truly following the software hosting and service business model. And part of the glut is due to the outsourcing companies that sprouted during the year 2000 bug crisis and are now repackaging themselves as more than just fix-it-shops for millennial mishaps.
Of the hundreds claiming the moniker, four merit attention as true market leaders: they are USinternetworking, Breakaway Solutions, Oracle and Corio.
USinternetworking Inc. (USi), based in Annapolis, Maryland, deploys and manages enterprise resource planning applications for customers via four data centers located around the world and owns 36 percent of the market in number of contracts, according to the Internet Research Group in a December 1999 report. USi was founded in January 1998, went public in April 1999 and reported a market capitalization of $1 billion last summer. It focuses on midsize companies with annual revenue of $50 million to $1 billion, although it has signed such giants as Hershey, General Electric, Samsung and HPshopping.com in recent months. USinternetworking is ISO-9000-certified and its security system is audited by Ernst & Young. It serves 148 companies (as of May 2000) and has 1,230 employees.
"We are truly a rental model," Marketing Director Michelle Perry says. "Nobody else is doing exactly what we’re doing in the marketplace."
Typically, USi’s customers sign three-year contracts with a 10 percent down and monthly fee. About 80 percent of the applications USi provides its customers are "canned," Perry says. "A lot of companies really need cookie-cutter kinds of services," she says. "But what we bring to the table ultimately depends upon the customer."
Breakaway Solutions Inc., based in Boston and founded in January 1999, provides Internet-based services to growing enterprises, including application hosting and strategy, and application and customer-relationship management solutions. It currently owns 16 percent of the ASP market, according to the IRG. Partners and clients include Sun Microsystems, eRisks.com, AviationX, InvestorForce.com, StarCite and Circles Inc. Its solutions package includes Breakaway Solutions QuickStart, powered by Clarify; QuickStart, powered by Onyx; and eCommerce-in-a-Box, which utilizes Microsoft Site Server Commerce Edition, OrderTrust payment processing and Microsoft SQL Server database software. Breakaway has 660 employees and reported a total of 27 new clients in the last quarter of 1999.
Oracle Corp., based in Redwood Shores, Calif., is ranked third (and rising), with 9 percent of the ASP market share by number of contracts, according to the IRG. Oracle is in a strong position to dominate the emerging ASP industry because it has more system vendor, service provider and independent service vendor partners than any other information management company. The company already boasts that a handful of ASPs (including FirstWorld, NaviSite and USi) are providing customers with an Internet infrastructure built on the Oracle Internet platform–database, application server and tools. In addition to outsourcing its own applications, Oracle plans to expand its own ASP program, Business OnLine, to target small and midsize businesses by partnering with telecommunications companies in a soon-to-be unveiled "network affiliation program." "If you want to be an ASP," Larry Ellison, Oracle’s chairman and CEO, told financial analysts in April, "you had better be in control of the software."
Corio Inc., based in Redwood City, Calif., also holds a 9 percent market share, according to IRG. It was founded in September 1998 and has made strategic partnerships with such companies as Siebel Systems, Concentric and Netegrity. Corio supplies Fortune 500-class e-business capabilities to rapidly growing companies. For a monthly fee, Corio claims to provide "a full suite of integrated, best-of-breed business applications and services hosted over a secure network supported by world-class IT talent, available 24 hours a day." Corio’s integrated suite features BroadVision, Cognos, Commerce One, E.Piphany, Microsoft, PeopleSoft and Siebel Systems applications. Customers include Excite@Home, Lycos, HomeGrocer.com, Vertical Networks and Clarent Corp.
Other companies angling to become major ASP players include Cisco Systems, Sun Microsystems and Microsoft. They are on the playing field, but none of these giants has been able to move as quickly within the market as the dedicated new start-ups.
Where the Jobs Are
Now that global connectivity has broken down the barriers–time and space–that used to block outsourcing efforts, IT managers and developers should consider another distinct possibility: whether their jobs are safe.
Some would caution information technology types to be very afraid. Others dismiss the whole issue, insisting that there will always be a need for expert internal development at companies of all shapes and sizes.
Clearly, an IT staff will still have to be on hand at companies that choose to go the all- or partial-ASP route. But their roles–and their total numbers–may change; a high percentage of what the in-house developers used to do will be taken out of their hands if the outsourcing proves successful and seamless. With less to do, will fewer people be needed to do it?
USinternetworking’s Perry says her company’s experience leads her to believe that corporate developers have nothing to worry about.
"Of course, IT people were wary at first about the idea of an ASP coming into their space," she says. "But I’ve seen their attitudes swing all the way around. Most of them see ASPs as a kind of salvation. They now consider us as someone who can really help them get their jobs done. There is so much to absorb in the business. By helping them with maintenance of existing systems, we allow them to move forward to other projects that have been stacking up."
Vas Vasilindis, vice president of corporate strategy for CrossWorlds Software Inc., a Burlingame, California-based applications provider, agrees.
"I see a great many new opportunities for IT people and programmers," Vasilindis says. "One of the biggest assets of a company like ours is that we offer value-added services, including customized integrated applications that provide more functionality for our customers, all through the fulfillment process. We’re going to need a lot of developers to handle that load."
A Leap of Faith
Almost 60 percent of IT managers in the insurance, legal and real estate markets said they would consider contracting with an ASP in a recent Evan Marketing Services survey; only about 30 percent of those in finance and healthcare would do so, unless those ASPs were approved by an independent organization. Their concerns are understandable, considering what is at stake.
"Any company that uses software and thinks it’s not going have any horror stories is going to become one," Katsaros says. "There are a lot of issues when you’re involved with running a large environment. It’s true that many of those problems can be eliminated through the use of an ASP, but who is to say that the ASP itself won’t have buggy software? Software is a buggy business. But the time may be lessened in fixing bugs through an ASP, because the client company doesn’t have to worry about several layers of the process–like development, testing and bug-fixing."
Aside from choosing an ASP that isn’t up to snuff, the main downside, of course, is that companies relinquish virtually all control over the deployment of their business applications, and with that loss of control, they place the daily operation of their mission-critical business applications in the hands of an entity that may be several hours–or even a continent–away.
The ASP business model is undoubtedly attractive to start-ups, often themselves Internet-based, without a large investment in IT staff or internal networks. Despite the forecasted potential of the market, ASPs and supporting vendors must leap several hurdles (primarily, the levels of service that can be realistically guaranteed, the importance of scalability, the limits of partnerships and the overlapping functionality of multiple players in the value chain) before they can routinely and effectively support mission-critical IT applications.
It’s also unlikely that the ASP industry can reach critical mass along technology adoption and diffusion guru Everett Roger’s continuum of innovativeness (innovators, early adopters, early majority, late majority and laggards) without the active support of mainstream IT shops.
These aren’t likely to be easily won over, given their past skepticism toward other panaceas such as overarching ERP systems, enterprise application integration and data-warehousing solutions.
Two More Hopefuls in the ASP Arena
Dedicated Companies Provide Supply-Chain Integration and Storage
CrossWorlds
CrossWorlds Software Inc., based in Burlingame, Calif. and established in 1996, concentrates on prepackaged applications that integrate business processes across multiple functional areas, both within the enterprise and between the enterprise and its trading partners. The company does a high percentage of its business with chemical and biotechnology companies. CrossWorlds’ product suite is designed to eliminate the need for individual enterprises to develop their own custom point-to-point integration applications, which can be expensive, risky and time-consuming.
"We work with our clients and their partners through the entire supply chain," says Vas Vasilindis, vice president of corporate strategy. "A client, for example, can outsource its entire procurement operation applications to us and get a complete, real-time picture of what is available in the warehouses. What we do for them is seamless, from front to back end."
CrossWorlds’ Supply Chain application suite is designed to provide direct links to an enterprise’s supply-chain management application from both the front office and its enterprise resource planning (ERP) applications.
Vasilindis says that the next generation of ASPs will offer even more valued-added services and customized application-integration solutions. These services enable plant-to-corporate, plant-to-plant or component-to-component integration by uniting enterprise resource planning systems or individual ERP components.
Webvision Inc.
Webvision’s name is particularly fitting: Its founders truly had a vision–an astute one–about where the ASP business is going. The Torrance, California-based company is not really an ASP. Rather, it’s an ASP enabler that has amassed an impressive physical plant since it was established in January 1998.
Of course, if you’re going to be servicing clients such as The Boeing Company (Webvision hosts a high percentage of their enterprise application set), the Los Angeles Unified School District (data storage, application hosting and intranet), Pacific Gas & Electric (e-commerce and application hosting) and other mammoth organizations, then you had better be prepared to handle the job.
Webvision’s facilities resemble NASA’s Mission Control in Houston–rows of monitors manned 24 hours a day, 365 days a year. The company offers a full suite of applications for accessing the data it stores: online sales, scalable Internet auctions, a project communications network, an XML-based supply chain optimization, online bidding and recruitment management.
Webvision houses its storage capacity in three data silos, each capable of mounting 5,000 70-gigabyte cartridges, for a total of 1.05 million gigabytes of storage space. In recent weeks, the company has increased its overall capacity to something approaching 1 pentabyte–5,000 terabytes–of space, and perpetual storage media increases are part of the plan.
