InformationWeek: The Business Value of Technology

Two dozen vendors last week formed the Application Service Provider Industry Consortium, whose mission is to sponsor research and foster standards in the nascent market. Members include Internet and technology companies AT&T, Cisco Systems, Citrix Systems, Compaq, Great Plains Software, IBM, Marimba, UUnet, and Verio, as well as application service provider startups CyLex Systems and Telecomputing ASA. "ASPs bring together telecom and IT in ways never done before," says consortium chairman Traver Gruen-Kennedy, director of advanced business development at Citrix.

Also last week, Hewlett-Packard, Qwest Communications International, and SAP revealed plans to host SAP's enterprise resource planning applications this summer, with SAP and HP each making money every time Qwest rents an application. Qwest and HP say the service will include the industry's first service-level agreements for network-hosted apps. John Charters, VP of business development at Qwest, says there's pent-up demand for the outsourced services. "I started hearing from customers the day of the announcement," he says. Qwest is expected to disclose a similar deal with another software vendor this week.

For business and IT managers, the appeal of outsourcing applications to Internet and telecom service providers includes fewer management hassles and, potentially, lower costs. Some analysts estimate that the total cost of ownership of hosted applications can be 25% cheaper than managing the apps internally. Says David Passmore, president of analysis firm NetReference, "People have had it with trying to maintain applications on their networks."

Outsourcing applications isn't new, though few businesses have signed up for the services to date. But service providers say a growing number of companies will buy network-hosted applications as bandwidth costs decline, IT talent becomes scarcer, and a greater variety of apps become available. Forrester Research estimates the overall market for applications outsourcing will grow to $21 billion by 2001.

Sprint wants to manage enterprise applications on its network. The carrier, which already offers a workgroup-collaboration app called the Sprint Internet Conference Center, plans to offer video- and audio-streaming applications later this year. Sprint says the rentable applications could save its business customers up to 30% over what it would cost to deploy those capabilities themselves.

Another carrier, Frontier Communications Corp., last week disclosed plans to host E-mail, messaging, scheduling, workgroup collaboration, voice, fax, unified messaging, and video-streaming services in hosting centers later this year.

Systems integrators are also getting into the market. Interpath Communications Inc. is helping Blue Cross/Blue Shield in Chapel Hill, N.C., deploy a statewide IP infrastructure that interconnects hospitals, clinics, and physician offices. Interpath plans to start hosting Blue Cross/Blue Shield's claims processing, eligibility verification, and other applications on the Web this summer. "The operational responsibility will really be with Interpath," says Mike Serozi, Blue Cross/Blue Shield's director of network service.

Having an outside service provider manage and maintain its application servers should lead to better customer service, says Serozi.

"I don't think that it will necessarily reduce costs, but it will allow us to move quicker," he says. Blue Cross/ Blue Shield won't have to set up servers, monitor network connections, and perform other tasks each time an application is launched.

Medical institutions are likely candidates for application outsourcing. "The Internet is a good way for a health plan with multiple medical groups, a number of doctors, and various locations to access applications and interact," says Dr. James Snyder, director of clinical process improvement for Southwest Medical Associates Inc. in Las Vegas.

Southwest is testing an Internet-hosted clinical application-introduced last week by Object Products Inc., a software developer, and Conxion Corp., an ISP-to survey and analyze patient health data. The app will let doctors in several locations access information and compare notes. "It will lead to more consistent and appropriate care," says Snyder.

Interpath this week will disclose that it will provide and support SAP applications online. SAP financial apps will be available in the fall, followed by human resources and materials management apps later this year and in early 2000, respectively.

By deploying SAP on their servers and managing implementation, licensing, and related tasks, ASPs could make SAP apps more widely available. "Companies that have had less-than-adequate end systems are realizing that in order to participate in the electronic economy, they need more robust applications," says Michael Fox, general manager at Interpath, in Research Triangle Park, N.C.

There are still kinks. "There's no guarantee that applications sold as services will be able to interact with ISPs' billing applications," says Jeanette Kennedy, Sun Microsystems' manager of application hosting. And bandwidth isn't cheap everywhere. "Bandwidth is an enabler for this, and at the local level, it's still costly," says Qwest's Charters.

Level 3 Communications Inc. last week introduced a service that can sharply lower bandwidth costs for ASPs. Service providers deploy applications on Level 3's network and use local lines to connect to customers. The IP Crossroads Intra Gateway Exchange service is priced at a flat monthly rate of $1,500 per Gbps, or $1,000 per month for 100BaseT, compared with typical pricing of $1,000 per Mbps.

Some providers have yet to see demand, especially from large companies. "ERP applications are very bandwidth-intensive," says Laurence Huntley, executive VP of Equant, a global data networking services provider. "We're helping companies get remote access to those applications, but we're not seeing large customers wanting us to host those apps."