Analysts and observers are still unsure. ASPs emerged a little more than a year ago to meet the needs of small and midsize companies that want to focus resources on building their businesses, rather than on the significant IT investments required to run them. Also, a growing number of dot-com companies that run entirely on IT but can't afford substantial up-front investments are embracing the ASP model, as are more-traditional companies that are rapidly evolving into E-businesses.

Hoyts Cinema Corp. in Boston, a privately held group of movie theaters that rents PeopleSoft applications from Corio Inc., is typical. "We needed experts with in-depth knowledge and better data-backup and recovery methods than we can afford," says MIS director James Barry.

That's the sweet spot. "We have the capacity and people in place to make small and medium-sized businesses successful," says George Kadifa, president and CEO of Corio, an up-and-coming ASP in Redwood City, Calif.

It's a market with great potential. Dataquest predicts the ASP market will total $2.7 billion by year's end and reach $22.7 billion by 2003. With such opportunity in sight, the traditional IT services and software companies, including EDS, IBM, and Oracle, are rapidly expanding their newly opened ASP divisions.

But not everyone is rushing to embrace ASPs. According to an InformationWeek survey of 250 IT managers taken last month, 30% of respondents said their companies already rent or lease applications from a third party, and 14% said they plan to do so by the end of next year. But 56% of respondents said they had no intention of working with such providers; however, a little more than half of that group doesn't outsource as a policy, anyway.

In particular, large enterprise customers are holding back. "ASPs will only win over the enterprise customer if they have the internal staff who can clearly understand the needs of their clients and understand how applications impact the entire business," says Bob Rubin, CIO of Elf Atochem North America Inc., a $2.1 billion chemical company in Philadelphia.

The market was pioneered in 1998 by startups such as Breakaway Solutions, Corio, and USinternetworking. Their business model--renting access to core enterprise applications over the Internet or other networks--differs from traditional application-outsourcing services mainly in degree. Traditional outsourcing often entails hefty fees for contracted IT services. What's more, ASPs typically offer lease-to-own options on software, while traditional outsourcing models require up-front purchase of software licenses.

ASPs offer a variety of enterprise applications and services, including E-mail, project management, and sales-force automation. But most customers use them for database and data warehouse applications, E-commerce, and enterprise resource planning, according to the InformationWeek survey. Also, companies rent on average five applications, survey respondents say.

An implementation of ERP software can cost millions of dollars. So it's little wonder that an ASP's per-user monthly fee of several hundred dollars is attractive to businesses with small staff and IT operations. These companies benefit not just from the rental arrangements, but from the services included with them. According to the InformationWeek survey, the top reasons to rent applications are guaranteed performance levels, predictable costs, service expertise, and guaranteed application uptime, in that order. Other benefits include scalability, automatic upgrades, fast implementation, and data-backup and recovery capabilities.

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Illustration by Chris Gould
Photo of Barry by Kent Miles