VideoOf all the Big Ideas spawned during the Internet boom, perhaps none blossomed so promisingly yet wilted so quickly as that of renting enterprise software over the Web. By some accounts, upward of 1,000 self-proclaimed application service providers, or ASPs, were launched during 1999 and 2000, with venture capitalists betting more than $1 billion on the seemingly foolproof but unproven business model. Within two years, the great majority of those start-ups fell victim to their own hype, leaving investors in shock and the ASP model widely repudiated as an inherent loser. In many minds, the term ASP came to mean "a stupid proposition."
Lately, though, the notion of handing over the installation, administration, maintenance, and delivery of large-scale, mission-critical software to specialist outsourcers has been showing surprising signs of life. Tweaking their business models and acquiring smaller rivals to build mass, several of the original ASPs have emerged from the gloom as promising and even profitable outfits.
Surebridge, for instance, has been in the black since mid-2002 and, with help from two acquisitions, saw its first-quarter 2003 revenues leap 87 percent above those of a year earlier. Leading suppliers of enterprise software, such as IBM, Oracle, and J.D. Edwards, have been enjoying considerable success with captive ASP efforts. And such major corporations as Kinko's, NBC, and Rohm and Haas have turned to ASPs for help with vital applications like financial accounting, messaging, and human resources.
"Choosing to use an ASP is no longer as much of a mental hurdle for CIOs or CFOs," says Amy Mizoras, a program manager who tracks the resurgent ASP sector at market researcher International Data Corp. "The ROI and payback are [now] proven."
Just ask RiverBend Medical Group, a western Massachusetts group practice with 85 physicians. It did away with most of its in-house IT staff and now relies on two ASPs: Surebridge for a set of Microsoft's financial applications and The TriZetto Group for medical-practice software. "The capital investment to do all this ourselves would be very high," says Michael Callahan, RiverBend's CFO. Using ASPs "gives us a huge advantage because we have many other things we can use that capital for."
IDC estimates that worldwide spending for software deployed as a service is currently growing at a compound annual rate of about 30 percent, from $2.3 billion in 2002 to an estimated $8 billion in 2007. IDC's calculations cover not only the hosting by ASPs of traditional applications but also Web-native applications (software created specifically to be sold in an ASP model — see story below) and the emerging genre of so-called hosted Web services applications, which typically entail the provision of isolated software functions that augment or are combined into full-blown applications.
While the past few years have been tumultuous, there is now a solid case to be made for ASPs. According to Mizoras, a study of 52 companies well along in their use of ASP services found that they were attaining an average five-year ROI of 404 percent. A good deal of that sizable return derives from substantially improved business processes in both IT and the firms' core activities. The average total cost savings over five years, measured solely in terms of hard-dollar IT expenses such as hardware purchases, software maintenance, and training, works out to a solid 19 percent.
One major driver behind the ASPs' newfound success: the growing complexity of enterprise software, which is fast outstripping many midtier corporations' ability to keep up. Besides the push to integrate different applications so that they smoothly exchange data, there's the growing requirement to make them available through PCs, Web browsers, and even rich-functioned, customer-specific Web portals. Building all that on top of old-style, terminal-based software creates a tremendous strain, because suddenly there are myriad more moving parts, each one evolving along its own path and at its own pace.
"Their Problem, Not Ours"
"From the standpoint of the CIO, it's a great comfort to have experts working for you who deal with that kind of technology all the time," says Mark Federle, CIO at The Weitz Co., a $750 million general contractor in Des Moines. Weitz licenses its ERP package from J.D. Edwards but hosts the software through WTS Inc., a Seattle-based ASP.
Federle says that fixed IT costs were a major selling point: its contract ensures that Weitz will pay the same monthly fee for the next three years, even if the company reaches its goal of nearly doubling in size during that period. "If they need to add disks or memory to the servers to handle the extra load, it's their problem, not ours," says Federle. "Technology is one of the most variable costs you face, but I can assure our CFO that it's fixed for three years or more."
Also working to the ASPs' advantage is a growing realization that even the most expensive software provides little competitive differentiation. Says Joshua Greenbaum, head of Enterprise Applications Consulting in Daly City, California: "It makes as much sense to own [various core] applications as it does to write your own payroll checks. There's a large and growing body of software functionality to be handed off" to hosting companies.
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