ASPs are hot, but will the fire cool?: Page 2

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Commercial NetLease Realty Inc., in Orlando, Fla., a real estate investment trust (REIT), turned to Oracle Corp., Redwood Shores, Calif., and its Oracle Business Online (BOL) ASP business unit when it decided to implement Oracle Financials. The company was moving from a mixed bag of old, nonintegrated real estate industry applications that no longer met its needs. "When you step up to the tier-one application environment with a product like Oracle, you are moving up in complexity. We simply didn't have the resources to do it ourselves," explains David Lachicotte, director, information systems.

In addition, the ASP model saved the organization from the need to purchase new hardware, which would have been required to host Oracle Financials in-house. That is a savings estimated at tens of thousands of dollars.

Time-sharing revisited?

The ASP model is simply another form of outsourcing. It harkens back to the time-sharing that was prevalent in the computer industry in the 1970s. Back then, organizations would sign up with a provider who ran big, complex, core business applications on a mainframe computer. In those days, the cost of computer processing and the cost of storage were so high that many organizations could not justify the investment in a mainframe computer--and the entire glass-house infrastructure required to support it.

"In the time-sharing days, the limiting factor was hardware. You just couldn't afford enough mainframe processing power," recalls Kirk Krappe, senior vice president, Corio Inc., a Redwood City, Calif. ASP. The goal was to connect as many users as possible to amortize the high cost of mainframe MIPS (millions of instructions per second of CPU power) and the high cost of storage.

But times have changed. Moore's Law, which predicts that the processing power of computer chips doubles every 12-18 months, has inexorably worked its magic. Today, a commodity home PC has far more processing power than the mainframes of the time-sharing heyday. And almost every organization, no matter how small, can manage to support a Windows-based file server and a small network. Similarly, the cost of storage, once calculated in dollars per megabyte, has fallen to pennies per megabyte.

"Today the limiting factor is not hardware or even software but people. Organizations need highly skilled people," Corio's Krappe continues. Companies find themselves hard-pressed to fill IT positions. Stamford, Conn.-based Meta Group Inc. reports that the demand for IT professionals in 1999 exceeded supply by 400,000 jobs and projects that continued demand will result in 1.2 million unfilled IT jobs by 2005. The number of IT graduates, estimated at about 30,000 per year, can scarcely make a dent in the expected demand.

The result: Organizations that can easily buy a well-configured Intel-based server cluster running Windows 2000 for as little as $20,000 still cannot find, hire, or retain the skilled IT professionals necessary to run such equipment. Add the complexity of the applications hosted by ASPs--Oracle, PeopleSoft, SAP, Siebel--and the skills shortage becomes even more acute.

The difficulty in hiring and retaining skilled people certainly played a key role in driving Clarent Corp., in Redwood City, Calif., to Corio when it made the transition to PeopleSoft from Intuit Corp.'s QuickBooks Pro. "Corio was hiring better resources than I could," admits David Blumhorst, Clarent's director of IT. In addition, the entire task of setting up an internal data center capable of supporting a rapidly growing organization running a mission-critical application was too daunting to attempt. "We would have had to really think about things like security and backup in addition to personnel," he says.

The Internet also makes a big difference between the time-sharing of the past and the ASP offerings today. The Internet supports truly distributed computing. Users working from a standard browser anywhere can connect via the public Internet to the ASP and run feature-rich applications. Through the use of VPN technology, the connections can be secured and protected. By comparison, time-sharing relied on slow, cumbersome network links, costly leased connections, and dumb terminals. The resulting green-screen applications were hard to learn, difficult to use, and inflexible.

Hype and reality

Anticipated applications purchased from an ASP upon initial implementation
Source: Zona Research Inc., 2000
Given the benefits promised by ASPs--fast implementations, reliable services, knowledgeable service, reduced costs, and reduced headaches--International Data Corp. (IDC), in Framingham, Mass., expects the ASP market to take off. In 1999, IDC pegged the ASP industry at a paltry $296 million worldwide. By 2004, IDC predicts $7.8 billion in spending on ASP services, which represents a whopping 92% compound annual growth rate from 1999 to 2004.

Fueling this growth, according to IDC, is the momentum ASPs are enjoying in signing up new customers, who are turning to the ASP model to gain access to new applications without initial investments in application licenses, servers, people, and other resources. In addition, the ASP model has gained credibility from the entrance of some of the industry's biggest players, including AT&T, IBM, Microsoft Corp., and Sun Microsystems Inc., as well as packaged application heavyweights like Oracle, SAP, and others.

At this point, however, the ASP phenomenon is more hype than reality, at least for large companies running enterprise applications. "There are organizations running enterprise applications in ASP mode, but are they running their entire enterprise that way? I doubt it," says Greenbaum.

Adds AMR's Caruso: "The reality is that some are running their business using ASPs, but these are smaller companies." SAP, he notes, is having its ASP success serving the midsize and small business markets.

The ASP mantra--cheaper, faster, easier--also doesn't quite match the reality. Certainly it will be easier because the ASP is doing the work for you. As far as being faster and cheaper, the ASP may not have much advantage.

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