InformationWeek
Defining The Business Value Of Technology
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July 24, 2000 |
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Growing Pains
ASPs and their customers still face challenges with pricing, performance, and training
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n an industry fueled by hype and famous for bandwagoneering, the enthusiasm surrounding the emergence of the vendor category known as application service provider was remarkable. And why not? The potential upside--particularly for vendors and the small to midsize customers they planned to target--was significant. No longer would businesses have to find qualified IT staff, dole out huge lump sums for software, or worry about application performance around the clock. On the vendor side, the ASP model seemed to fulfill the promise of the Internet economy: virtual organizations, economies of scale, and Internet speed.Now, a couple years into the market, reality has tempered many of those expectations. Pricing has proved far more complicated--and far less of a slam-dunk in terms of savings--than most people expected. Performance issues, involving both networks and applications, have proved contentious. Responsibility for downtime and bugs in the system can be a political football tossed among ASP, network service provider, application developer, hardware vendor, and data-center provider. Even the Internet proved to have limited applicability when it comes to enterprise-level requirements.
That's made IT managers more realistic about what to expect from ASPs. "Going to an ASP isn't a magic solution," says Colin Britton, VP of technology for Engage.com, a $7 million provider of online marketing services in Andover, Mass. "It just alleviates some of the headaches associated with implementing and deploying IT."
Most ASP users continue to be small companies and midsize businesses to a lesser degree. A few thousand small businesses use ASPs now. That number is expected to grow to 136,000 by 2001 and more than 3 million by 2004, according to Cahners In-Stat, a market research firm. Application hosting and subscription revenue is projected to be $343 million, less than 2% of the $18.3 billion enterprise resource planning market this year, says AMR Research.
Businesses are attracted to the ASP model, in part, by the promise of cost savings. But IT managers must carefully examine all the factors involved in pricing to ensure the model adds up for them. ASPs typically offer two types of pricing plans: rent or lease. With a rental, customers never own the application license; with a lease, they eventually do. Rentals usually appeal to small businesses that need one-time or occasional access to an application. Leasing is used in most enterprise ASP relationships.
Steve Jolly, president of Web design company Impact Now Inc. in Norcross, Ga., recently used Personable.com's online services to access Microsoft Front Page. Jolly was redesigning a Web site for Huddle House, a restaurant company in Atlanta, whose site was designed with Front Page. It would have cost about $600 to buy Front Page, but Jolly was able to rent the application from Personable.com for $14.95 for one month. "There are a lot of applications that I own but don't use on a regular basis," Jolly says. "If I could rent them only when needed and then keep the 15 I use all the time, I would."
In some cases, the rental model is a "giant flop," says Rod Johnson, services director for AMR Research. That's because the cost of renting the software over time adds up to more than buying the application up front. For example, customers can rent an accounting package from ASP Intacct Inc. for about $50 a month for two users. However, Intuit's Quickbooks 2000, a small-business accounting package, is priced at $370. If a company is planning to use the software for more than eight months, renting costs more.
That's one reason some of the larger ASPs have steered clear of renting applications. Corio Inc. is one of the few service providers that rents an ERP application. It charges $700 to $900 a month per user for each module of PeopleSoft Inc.'s application suite. By comparison, a typical license fee for PeopleSoft is about $30,000, so rented fees surpass the cost of buying after 33 to 43 months.
ASPs such as Breakaway and USinternetworking, and ERP vendors that offer application services, such as Oracle, PeopleSoft, and SAP, have developed financing plans that let customers pay for software licenses over a three-year period. License fees range from $4,000 to $30,000 per module. The drawback is that customers end up paying interest, which varies depending on the ASP and its financing plan.
There's more to the equation. In addition to the software license fee and the financing costs, most of these ASPs charge $150 to $900 per month per application for their services, which include management and monitoring, customer support, and troubleshooting. PeopleSoft, for example, charges about $600 per user per application for its service on top of the license fee of about $30,000 per application module.
Some businesses need ASPs to create interfaces to link the leased applications with their own packaged or homegrown applications. ASPs are handling those requests in a variety of ways, but IT managers usually can count on paying more for the integration work. Not surprisingly, the more integration a customer requires, the higher the price.
A theoretical goal of the ASP model was to get the service portion of enterprise apps down to about $200 a month. But with integration, the price rises to about $1,000 a month, more closely resembling conventional services contracts, AMR Research's Johnson says.
Another cost factor is network access. Most ERP applications require faster, more predictable performance than what's available over the Web. Consequently, businesses must pay for access lines, typically frame relay, for their hosted applications. Depending on the speed, that can cost another $500 to $1,000 a month for each site.
Illustration by David McLimans
Photo of Jolly by Mark Escher
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