InformationWeek

June 28, 1999

App Alternatives

Small and midsize businesses turn to application hosting to make a big job more manageable

By Jennifer Mateyaschuk

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pplication service providers have been pushing the idea of hosted applications--and it's catching on. ASPs have signed a spate of new customers in recent weeks, evidence that the rent-an-app approach makes sense for a growing number of companies. The early adopters are mostly small and midsize businesses that don't have the IT resources or deep pockets to implement enterprise software packages on their own.

Corio Inc. said last week that it's hosting PeopleSoft financials and order-processing applications for Epiphany, a provider of Web analytic applications. Corio is also implementing hosted PeopleSoft human-resources, financials, and ordering apps for Excite@Home Inc., a $400 million cable service provider. Startup ConvergeNet Technologies Inc. enlisted Oracle Business Online to implement and host Oracle enterprise apps. And online publisher Liveprint.com Inc. contracted with USinternetworking to host its Web-site operations.

The sweet spot for the ASP market--for now, anyway--is small-to-midsize businesses, says Traver Gruen-Kennedy, chairman of the ASP Industry Consortium, formed in May. Hosted apps are ideal for these companies because they're faced with an IT labor shortage, tight budgets, and small IT departments. "ASPs can offer a viable alternative to implementing expensive ERP, HR, and customer-relationship management solutions," he says.

Managers at emerging enterprises say outsourcing their applications not only makes good business sense, but ultimately gives them a competitive edge. "By outsourcing our applications to Oracle, we can focus on building our core business and speed our time to market," says Dick Watts, CEO of ConvergeNet, a San Jose, Calif., startup that makes storage-management systems.

Oracle will finish implementing ConvergeNet's order-entry, manufacturing, financials, and service modules within the next six weeks, Watts says. Total project time is 12 weeks, he adds, far shorter than the nine to 12 months it would have taken ConvergeNet to deploy the apps on its own.

Challenges Remain
Still, issues such as pricing, reliability, scalability, bandwidth, and security need to be addressed before hosted applications appeal to a broader audience, analysts say. ASPs also need to convince potential customers that they understand the nuances of their businesses. This is especially critical if ASPs plan to win over larger companies. "The real challenge for ASPs is to offer a true end-to-end solution that customers will have confidence in," says Laurie McCabe, a senior analyst at market analysis and research firm Summit Strategies.

ASP Industry Consortium board members will meet next week to set up working committees to establish technical specifications and best practices. The consortium plans to present these specs to the International Standards Organization by year's end. Without such independent recognition of ASP standards, some IT managers won't want to risk their jobs--or their companies--by going with an ASP, admits Gruen-Kennedy.

Vendors continue to come out with products and partnerships in this emerging market. Sun Microsystems last week unveiled the Netra t1, a small but powerful carrier-grade server that ensures data integrity and security by allowing ASPs to run a dedicated server for each customer. Qwest Communications International Inc. is combining its network with KPMG LLP's management and services expertise to form Qwest Cyber.Solutions LLC, a joint venture that will provide Internet application hosting and management services for enterprise resource planning, customer-relationship management, and back-office systems.

Excite@Home turned to Corio to manage its financial and human-resources systems for its 1,800 full-time and contract workers. "We're rapidly hiring people, and when you have that kind of growth, you need a tremendous HR and financial system to support it," says Robert Lerner, corporate controller at Excite@Home, in Redwood City, Calif.

In addition to lower implementation costs, outsourcing to Corio enables Excite@ Home to be more competitive. "Managing financial applications isn't our expertise, and it's not going to be," Lerner says. "Every dollar we don't spend investing in PeopleSoft we can spend on advertising our product."

Pricing varies widely among ASPs. Corio charges a flat implementation fee on top of a monthly per-user rate that depends on the type of service. For example, an active user with daily access via a WAN can cost anywhere from $595 to $895 a month; an occasional user using the Internet to access apps would cost only about $20 a month. ASP FutureLink's clients pay application vendors directly for software licenses and pay FutureLink a monthly fee to host the apps. Initial ASP implementation fees run about $200,000, says analyst McCabe, far less than the $1 million it typically costs for a small company to implement an ERP software package on its own.

Robert Mondavi Corp. uses Oracle Business Online for its Oracle financial and human-resources applications. Karen Egan, a systems specialist at the Napa Valley, Calif., winery, says the company first considered Oracle when it learned that its payroll and HR systems weren't year 2000 compliant. Mondavi faced two choices: Perform remediation work that would take time away from its 20-person IT staff, or look for new software. Egan was interested in Oracle's apps but didn't want her staff to devote the time and resources necessary to implement them. "By enlisting Oracle Business Online, we have the benefits of the software and the time and resources to devote to our own internal application development," she says.

Next month, Liveprint.com will launch an online publishing business with USinternetworking running its Web site, including hardware, software, applications, and integration to back-end systems. "With USi, I don't have to make my primary concern how I'm going to get more bandwidth or how I'm going to get more servers," says Rick Steele, president and CEO of the Alexandria, Va., company. "I can focus on adding more value to my products."

It remains to be seen whether pure ASPs will be able to attract large enterprise customers. Analysts say big vendors such as Oracle and traditional service providers such as EDS have an easier time attracting large customers than do smaller ASPs. "It's not enough to know infrastructure and technology," Summit's McCabe says. "You need to understand the business."

--with additional reporting by Martin J. Garvey and Mary E. Thyfault