March 27, 2000

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Solution Series: Customer Strategies
Users Take Cautious Approach To Application Service Providers
Providers can offer a fast track to growth, but they aren't demonstrating enough benefits to users

By Mary E. Thyfault

he IT crunch is on. Today's companies are pressed for time, labor, and money to get business-critical applications up yesterday. That's why Simplexis.com, when it offered its electronic marketplace for educators early this month, turned to Corio Inc. "We wanted to build a best-in-class solution ASAP," says Amar Singh, Simplexis.com's founder and CEO. Corio finished a beta of the Simplexis.com Web site in just over a month. Neil Shepherd, another Simplexis.com founder, now says "the fastest way to grow is through an ASP."

Corio is one of 100 or so application service providers vying for the attention of dot-coms and established companies alike. These providers--new businesses them- selves, in many cases--buy and then lease software and offer support, usually for a flat monthly fee. For Simplexis .com, Corio is hosting Commerce One Inc.'s BuySite

E-procurement application and providing access to Commerce One's MarketSite Global Trading Portal. The applications are letting Simplexis.com create an online market for educational institutions where customers can issue requests for proposal, then quickly buy and sell supplies online.

JDS Uniphase Corp., a $282 million San Jose, Calif., company that designs, develops, manufactures, and distributes fiber-optic products, also took the ASP route. JDS is growing at about 80% a year, largely through acquisitions, but none of those acquisitions provided it with an infrastructure for a large financial system. So late last summer, JDS turned to Qwest Cyber.So- lutions, a Denver ASP, to implement Oracle financials.

"We didn't have the time, infrastructure, or people to do it on our own," says Joe Riera, VP and CIO of JDS Uniphase. The company started implementation in January and will go live May 1. For Riera, it wasn't an issue of saving money, but of prioritization. "It lets us focus on running the business rather than the bits and bytes," he says. "This is a great solution for a growth company."

Freeing IT staff and fast time-to-market are two of the top reasons that companies choose ASPs, according to an InformationWeek Research survey of 655 IT professionals. And as Simplexis.com and JDS Uniphase concluded, the survey found that 62% of the 200 companies that use ASPs want them to develop and host Web-site applications, an IT talent they have not developed in-house.

ASPs' offerings hold promise: applications in less time than it takes to find, hire, and train an internal IT team. Moreover, ASPs purchase, develop, and lease applications, ranging from E-mail to enterprise resource and customer-relationship management, so users don't have to. Even better, some ASPs reduce implementation costs by 40% compared with an in-house solution. Still, with all these benefits, why aren't users lining up at the doors of ASPs?

The InformationWeek Research telephone study of IT managers who share at least some management or administrative responsibility for their companies' business applications, conducted last month, revealed that only 26% of the respondents are using an ASP, and just 9% are considering one in the next year. Fully 65% have no plans at all to use an ASP. Even factoring out the 38% of respondents who said it's their company's policy not to outsource at all, users seem to be taking a cautious approach.

Of those not considering ASPs, 30% say they're not a cost-effective solution, and another 29% see custom applications as a competitive advantage. Large companies in particular want to own their applications and have them interface with other systems. Security and lack of control figure highly. Some companies aren't working with ASPs because of concerns about their long-term viability.

It's no wonder that analysts are scaling back the hype they generated last year with huge growth projections. Dataquest had pegged the ASP market to grow to $22.7 billion by 2003, up from $889 million in 1998. But now, analyst Ben Pring says he overestimated those numbers by 25% to 30%. Pring says analysts thought users were eager to buy, "but now it appears they are just starting to wake up to this. The ASPs have to do a better job of selling the benefits." That's especially true when it comes to companies that have an IT staff and infrastructure.

Clearly, the market is nascent. Interest far exceeds usage at this time, and several companies that looked at ASPs have found them lacking.

That was largely true for Kenneth Stott, senior VP and CIO of $119 million Azurix Corp., a Houston company that owns and manages water and waste-water assets. When he came to Azurix in mid-1999, Stott thought he would be turning to ASPs a great deal. "I thought I could quickly get complex services for minimal capital in the least amount of time," he says.

But Stott discovered that in many cases, "the ASP market isn't quite ready to serve us." Stott first turned to Oracle Online for financial and ERP applications, but didn't think the reference list he received was sufficient. Oracle says it has more than 40 ASP service customers.

continued...page 2, 3

Read sidebar story, "The Next Frontier: Full-Service Providers."

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