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March 27, 2000

Solution Series: Customer Strategies
Users Take Cautious Approach To Application Service Providers
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A bigger factor was that as Stott brought on IT staff, it made more sense to deploy a complex application such as ERP in-house. In another case, Stott turned to ASP Luminant Worldwide for Internet and intranet applications systems development, but he subsequently decided that Azurix should own and manage those critical applications as well.

JM Family Enterprises Inc., a $6.5 million diversified auto-services company, also looked for a compelling reason to use an ASP--but couldn't find one. The Deerfield Beach, Fla., company, which offers vehicle distribution processing, finance, warranty services, and insurance, worked with systems integrator Cambridge Technology Partners Inc. to develop six Web initiatives. During the last few months, executive VP and CIO Tom Maguire and John Brilliant, director of the Office of the Web, evaluated ASPs for the projects, but ASPs may not meet the company's needs.

"They'll operate our server in their data center for us, but I've already got several hundred servers that I operate," Maguire says. "They need to provide me with better leverage." Specifically, Maguire and Brilliant say, many ASPs only rent out floor space and can't provide "womb-to-tomb" application development, hosting, and support. Moreover, there weren't sufficient cost savings to justify the move.

"Some ASPs weren't any more knowledgeable than we were," adds Brilliant. And in many cases, subcontracting relationships that ASPs use to round out their offerings are too new for JM Family Enterprises executives to trust. "With some of these partnerships, they are introducing themselves to each other in the parking lot on the way in the door," says Maguire. As a result, the company will keep services in-house for several more years, hoping the ASP market matures.

Although factors such as predictable costs, guaranteed performance levels, and freeing IT staff are the most important reasons companies choose an ASP, reliability, quality, and customer service have to follow. When asked what difficulties companies have had with their ASP, 58% listed quality of customer service.

chart Today's ASP model is built around minimal customization--meaning that most ASPs resell essentially the same, off-the-shelf application over and over, creating economies of scale for their businesses. This model isn't a problem for startups or small companies that lack IT resources. "We're on a rocket moving very fast," says James Dybalski, chief technology officer for LoanCity.com Inc. in San Jose, Calif.

LoanCity.com, which is building an online market for mortgage brokers and lenders, turned to Corio to provide PeopleSoft, Siebel, and marketing applications because it couldn't afford to hire and develop its own IT staff. "In business-to-business, you want to get it right the first time," says Dybalski. Additionally, LoanCity.com will spend only $35,000 per month, compared with the $3 million it would have spent to provide the service in-house.

Certain ASPs, including Oracle Business Online, won't change core software code or the front-end graphical user interface nor will they change applications to work with a user's back-end systems. Corio, on the other hand, will change the look and feel of the user's front end and will integrate apps with back-end systems. Users may like these extras, but it will cost them more in terms of time and money.

Corio also offers template applications for vertical industries such as PeopleSoft Express that it can roll out in 10 days instead of three to six months. Qwest Cyber.Solutions offers a full range of application integration and customization; however, some say that such services border more on traditional outsourcing arrangements.

"For the ASP, the sweet spot is a very generic, very repeatable application," says Audrey Apfel, VP and research director at Gartner Group. "But that misses the concept of the business process," she says. ASPs can provide 80% solutions easily, but it's the final 20% of an application that requires the customization that adds the most value for the customer, and it costs a lot to develop.

Providing more support and integration may be critical if ASPs want to become a true force in the enterprise market.

"The 'I will not change it, will not integrate it' stance is going to work well for the first customers, but that won't last," says Dwight Krossa, group manager for application hosting at Microsoft's developer division. One of the things that is missing from the market is integration, says Krossa. "Until they can put it all together, we won't see a lot of large companies jumping in." However, it may get easier for ASPs to offer integration as enterprise application integration technologies such as XML and Microsoft's BizTalk become more readily available, he says.

Azurix's Stott hasn't ruled out ASPs altogether. He's looking for an ASP to host financials and sales applications for a small spin-off company. "If the business doesn't last, we can pay a terminating fee and be done with it, and we aren't stuck with the infrastructure," he says. Stott is also more willing to give up customization when it comes to what he considers generic applications, such as payroll and human resources, because they aren't core to revenue generation. "We wanted to get rid of those distractions," he says.

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