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March 27, 2000

Solution Series: Customer Strategies
Users Take Cautious Approach To Application Service Providers
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Stott is also considering ASP ebaseOne Corp. for a sales and accounting application, saying that it will quickly and more cost-effectively provide Azurix with additional functionality such as applications for remote offices via a virtual private network service over the Internet. The cost will be 70% less than bringing it up in-house. "The operating fees are clearly below what I can do in-house," says Stott.

In some cases, an ASP makes sense because it lets customers increase the size of their systems as the company grows. PointClick.com Inc., a Web-site portal that pays consumers to surf its merchant partners, requires a massive financial infrastructure that can scale very rapidly. "We didn't want to run out of steam right away," says PointClick chief technology officer Craig Brown. Brown knew that the company didn't have the skills or the capital to build a high-end financial application on its own, estimating that an in-house Oracle implementation would have cost at least $250,000, including hardware, software licenses, and consulting fees. "There's no way I could have afforded that," says Brown. While a lower-end financial application would have cost less, it wouldn't have enough horsepower.

With 450,000 registered users, PointClick is recording 1 million clicks per day. Each click is a transaction record in Oracle Financials. Oracle will translate that information into cash rewards for customers and customer information for PointClick's partners. If 100,000 users click every day for a month, then PointClick generates about 3 million records in Oracle. "I wouldn't even begin to try something like this in a smaller system," says Brown.

ASPs may also make sense when several narrow applications may be bundled together for vertical markets. For example, Niku Corp. in Redwood City, Calif., offers applications that let professional services firms collaborate using the Internet. Often, the applications are sold directly to business units having trouble getting attention from an overburdened IT department.

Customer service was the area Specialized Bicycle Components Inc. in Morgan Hill, Calif., knew it had to address aggressively when the overall market for bicycles started shrinking by as much as 15% a year. Specialized Bicycle turned to ASP RightNow Technologies Inc. to provide an automated customer self-help service for its customers.

"We did it with zero help from IS for less than $50,000," says Mike Regan, director of global E-marketing for Specialized Bicycle. Before RightNow, Specialized Bicycle didn't respond to customers who contacted the company on its Web site. RightNow Web provides a frequently-asked-question section, a search mechanism, and an E-mail contact interface. If the FAQ doesn't provide answers, customers type in a query and RightNow searches a database. If the answer to the customer's question isn't there, the system offers them the opportunity to E-mail their question to the company.

Single-application implementations of ASPs are fairly common. In the InformationWeek Research survey, 30% of ASP users said they are using only one or two ASP applications; 21% are using five or six.

Niche ASP USA.net Inc. is offering an E-mail application for travel agents affiliated with online travel service Galileo International Inc. USA.net is hosting the entire E-mail system for 12,000 U.S. travel agents. USA.net owns the application and will set up the accounts, bill the agents, and operate the system. For its part, Galileo is escaping the purchase of software licenses and a new in-house-billing system by using the ASP. "We're huge in data services, but managing E-mail isn't part of our core competency," says Craig Cartwright, director of agency point of sales for Galileo, in Rosemont, Ill. "This lets us put resources behind our core business."

Indeed, it appears that many companies don't feel the need to own E-mail: It was the No. 2 application rented by enterprises after Web-site hosting.

Looking ahead, many wonder whether ASPs are strictly meeting an immediate need as E-business ramps up or whether they will be long-term solutions. John Lavin, chief operating officer of StarCite Inc. in Philadelphia, implemented a meeting-planner Web tool with Breakaway Solutions Inc. Although Lavin plans to bring in a chief technology officer and developers, he may also rely more on an ASP. "In the long run, it might make really good business sense. It all comes down to focus," says Lavin.

Others say that today's ASP applications may be tomorrow's core focus. ERisks.com, a New York subsidiary of Oliver, Wyman & Co., a management-consulting firm for the financial-services industry, hired Breakaway Solutions to build a site that includes educational information and news, risk management tools, benchmarks, and best practices in risk management. But now that the site is up, eRisks founder and president James Lam says he'll likely bring more of his work in-house, hiring a chief technology officer and developers. "We want to control our destiny with people on-site," says Lam.

Of course, if there's an ongoing lack of IT talent, ASPs may be in greater demand. For most users, the appeal of ASPs is the ability to let someone else build and manage an application. "This isn't about hosting hardware, it's about a skills shortage, especially for startups and smaller companies," says Daniel Sholler, an analyst with the Meta Group.

And when all of today's young startups grow up, ASPs may well find still newer niches to fill.

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