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Application Service Providers and the Enterprise

Application Service Providers and the Enterprise

Over the past few years Application Service Providers (ASPs) have become the rage. It's unusual to pick up a trade magazine that doesn't contain a major article discussing the benefits of ASPs. Many believe that the ASP is a new deployment and business model; however, ASPs have existed for many years. The only recent changes of any significance were the proliferation of inexpensive wide area networking, such as the Internet, and improvements in software development tools. By using tools that are similar to the current offerings from Sybase, development of ASP service offerings is much easier than it was several years ago.

Application service providers offer a wide variety of services. The term ASP is far too broad to have much meaning. ASP industry offerings can be broken down into three major delivery and business models - application outsourcing, service outsourcing and the supra-enterprise services model. These are actually business models rather than technology models; however, each brings unique advantages to the enterprise. To better understand how to take advantage of the various ASP offerings, we need to understand the purpose of each delivery model.

Application Outsourcing Model
The application outsourcing model is the most popular ASP model. Its purpose is to replace existing software with a service offering. The benefits to the IP organization are that it can significantly reduce costs and provide access to software that would be prohibitively expensive otherwise. Figure 1 illustrates the application outsourcing model. An example of this model would be an ASP firm that offers access to an expensive application on a lease or per-use billing model. Currently, enterprise resource planning (ERP) and customer relationship management (CRM) software offerings are the most popular.

Service Outsourcing Model
The service outsourcing model, which has existed for many years, is seldom thought of or established as an ASP. The purpose of this model is to replace specific business functions with an outsource service - a service outsourcing ASP delivers a service to the enterprise rather than software. The benefits of this model are that it complements traditional outsourcing business models and extends outsourcing by keeping the enterprise in charge. A common example would be an outsource accounting service that provides online data entry and access to enterprise financials. Figure 2 illustrates the service outsourcing model. It delivers a pure service to its customers, unlike the application outsourcing model, which delivers applications only to its customers. Currently, intranet outsourcing is the most popular form of service outsourcing.

Supra-Enterprise Model
One of the most exciting possibilities that exists in the ASP industry is the ability to deliver a service that would be unavailable using any other model. The supra-enterprise services model offers just that. It's an emerging model that provides numerous benefits including significantly reducing the cost of doing business, reducing cost across numerous industries, and reshaping business processes and practices. The supra-enterprise model extends the service outsourcing model. Figure 3 illustrates the features of the supra-enterprise model. It provides service to a broader spectrum of customers and has the ability to expand services in many different directions.

An example of the supra-enterprise model is a service called Nereus provided by Delphinus. Nereus helps the health care industry reduce the cost incurred by patients who don't take their prescribed medicine. Nereus connects the physicians for a given patient so when a prescription is written and entered into the service, Nereus tests the quality of that prescription against the patient's other prescriptions, regardless of who wrote them. This check helps to eliminate adverse drug reactions that can occur when one physician is unaware of other prescriptions. The patient's primary physician issues an alphanumeric pager to the patient so reminders can be sent at the appropriate time.

Nereus offers a service that would be impossible to provide otherwise. The information is stored at Delphinus, the ASP, and the insurance company pays for the patients to be on the service. Physicians receive free access to the service. Patient prescription information is available to the physician even if the patient changes insurance companies or physicians. Figure 4 illustrates how Nereus takes advantage of the supra-enterprise model to provide this service.

Fears and Concerns
As mentioned in the introduction, most companies view the ASP industry as relatively new - few businesses are currently using ASP service offerings. There are several important reasons why this is the case: the perception that the paradigm is young and the current offerings are incomplete, and a perceived risk such as security and loss of control. In addition, application performance, quality of service and the ASP's responsiveness to changing business conditions are also concerns that IP managers have about using ASP services.

The reality is that ASPs have existed successfully for many years in niche industries. In addition, most Application Service Providers offer performance that's comparable to equivalent client/server applications within the enterprise. Information security is usually better than the security that's available within most enterprises. Most ASPs are more responsive than independent software vendors to business conditions. This is particularly true with ASPs that use the service outsourcing and supra-enterprise service model.

Change Is Good
While many IT managers haven't considered ASPs a solution to enterprise problems, this condition is expected to change. Several things that are changing IT managers' minds about ASPs include exiting applications that are becoming outdated, the attractiveness of service-level agreements with ASPs and positive statements from ASP early adopters.

In 1999 approximately 6% of U.S. companies used ASP services. This number is expected to rise to about 63% in 2002. According to Forrester Research, the approximate market value of ASP services in the U.S. was $150 million in 1999. The application outsourcing portion of the ASP industry alone is expected to grow to over $21 billion in 2001. According to Gruntal, ASPs will improve the efficiency of the U.S. economy by half a percent per year, which translates into significant increases in corporate profitability and decreases in the cost to deliver products.

The companies currently using ASP services are small- and medium-sized businesses. The primary motivation for using ASPs has been cost savings. For small businesses there's the added benefit of outsourcing job functions. The areas in which significant growth is expected over the next few years are in large businesses and with individuals. While both will realize the same types of savings that small and medium businesses have realized, other factors will influence their interest in ASPs.

Acceptance of ASP services by the industry is expected to explode over the next three to five years; there are several reasons for this. Currently, offerings are mostly limited to financial services. As ASPs develop a broader range of offerings, including those that are beyond financial services, acceptance will increase.

Profiting from ASP Relationships
A company can profit several ways from a relationship with an ASP.

  1. Understand the various types of ASP service offerings: By understanding the various ways a service can be offered, the IT manager can make informed decisions.
  2. Accurately compute the cost of providing the same services in-house versus via an ASP: It can be very difficult to estimate the cost of providing the same service in-house. One of the early arguments for purchasing particular software packages was that it would save businesses money. However, the savings that were realized were usually in fractional savings rather than discrete savings; therefore, businesses didn't realize the expected level of savings. Cost of ownership is only a fraction of the cost to provide in-house services.
  3. Understand the types of savings possible: The amount of money saved is somewhat dictated by the deployment model that's used. For instance, application outsourcing will provide the smallest savings, whereas supra-enterprise services will provide the greatest.
  4. Consider ASPs for technical service needs: Most current ASP offerings are limited to financial services, but this will change over time. Technical areas such as health care, insurance, transportation and printing will be provided by Application Service Providers.
  5. Understand your core competencies and consider outsourcing the rest: It's clear that there are many services the company must provide that are not its core competency. Strongly consider outsourcing these services to an ASP.
  6. Understand your risks: There are clearly risks associated with using ASPs. Consider those risks before entering an agreement with an ASP. Some of them include where the data is stored, what happens if the ASP goes out of business, and so on.
  7. Have a contingency plan: Consider all the points of failure when contemplating an ASP. Develop plans to address these failures so you can maintain business continuity.
  8. Be wary of "the deal": As the ASP industry grows, many companies will be offering extraordinary deals for service. Beware of deals that sound too good to be true. Remember, your business depends on the ASP to provide the services you need.
Conclusion
As Application Service Provider business models mature, the opportunities for client businesses to reduce their operating costs and expand services will grow. To realize the business advantages offered by ASPs, client businesses must understand the three models for delivering services. Each model has strengths and weaknesses that the client business needs to appreciate. In addition, the client business needs to examine their needs carefully and perform their due diligence as they would with any major business purchase. Only then can client businesses make informed decisions and truly profit from an ASP relationship.

More Stories By Michael Portwood

Michael Portwood is president of Portwood International, LLC, a technology consulting firm. He holds an MS in applied cognition and neuroscience and a BS in computer science from the University of Texas at Dallas. For over 14 years Michael has focused on developing object-oriented and distributed solutions for various industries.

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