Application service provider outsourcing

Technology-driven change did not start with the internet but its evolution has resulted in an exhilarating, if frightening, lifestyle for senior IT managers. Managing an IT department of any size has always been a difficult job but the arrival of the internet appears to be making it a lottery. How can you plan for even the near future when new internet ventures appear to challenge the existence of everything you are working with and offer the prospect of doing everything quicker, better and more cost effectively, and yet, so far, relatively few of these magical solutions are proven and available?

One such solution, application service provider (ASP), might make the ERP concept of organization-wide integrated systems ultimately work for the many rather than the few. The big problem with enterprise resource planning systems is that because organizations need to customize between 15 and 30 per cent of the system, the implementation can take years rather than months. Normally implementation also involves costly outside help and causes considerable internal disruption. In any ERP implementation there is clearly a relationship between the time taken, the resultant attempts at short cuts (usually described by other names) and the risk of failure.

The ASP concept has an outsourcing service provider delivering internet-based applications for a range of clients. Most current scenarios anticipate the ASPs developing from small and medium sized firms of consultants who specialize in a single or a small number of software packages. Against that, EDS also describes itself with every justification as an ASP. EDS maintains around 300 ERP related arrangements on a worldwide basis and appears very excited about the opportunities that Web hosting of major software products provides.

the ASP concept has an outsourcing service provider delivering internet-based applications for a range of clients


In the arrangements that have been put together so far, the ASP finds and builds the relationship with the client and supplies any ’local’ hardware required. The link through the internet is then secured by entering into a partnership with the relevant software house and an internet service provider.

In this way the ASP takes responsibility for the implementation of the software, future system updating and support. In theory, this offers the client an ’externalization to outsourcing specialists’ deal of enormous flexibility:

This added flexibility is due to a number of factors.

  1. The ASP would be able to work for more clients per number employed than in a conventional outsourcing arrangement.

  2. There is less need and justification for the very detailed work normally considered essential in setting up an outsourcing arrangement, i.e. all the work involved in the transition from producing service level agreements to the contract itself would be simplified because a system leasing deal is in place.

  3. Compared with a conventional outsourcing, the ASP would benefit by doing much of the work on a repetitive basis for past, present and future clients and it would not be anywhere near as disastrous to lose a client.

  4. The transitional consultancy time ought to be reduced.

  5. Although much of the implementation of the new system and the ongoing running of it will have been outsourced, it will not feel like an outsourcing to the internal staff.

  6. The opportunity will be there for the ASP to be made responsible for continuous improvements to the system. In fact, continuous improvements ought to occur almost automatically as the ASP works with new clients, then finds better and improved ways of working and updates existing clients with all improvements.


Taking these benefits into account, a number of ASPs have offered deals which have allowed their clients considerable flexibility in terms of contract length and have removed some or all up front costs in favour of a regular fee. The client connects to a server maintained by the ASP and uses the required software from that server on a monthly or annual fee basis. In theory the only software that will be required on the client’s PCs will be a web browser. The ASP’s server will run the application and so create the so-called ’thin’ client solution.

Many of the world’s leading computer companies such as Microsoft and IBM and communications giants like AT&T have taken, or are taking, steps to get involved with this marketplace. Most of the leading software vendors are either firmly entrenched or are playing with the concept. Some observers have expressed surprise at this interest because ASP deals will require renting or leasing arrangements instead of the highly profitable up front licences that have been one of the lynchpins of the packaged software industry to date. In reality, though, the major software vendors have no alternative but to cover each new development as it arises – if they don’t, someone else will. The probability is that most major ERP software vendors are all frantically working to make their software packages Web-enabled server centric so that they can deliver thin client solutions. The thin client model is now the preferred software recommended by industry gurus to reduce the ever increasing total cost of ownership of fat client systems.

Against that, some industry observers firmly believe that at least two of these large software suppliers are desperately hoping that the ASP concept fizzles out somewhere along the way and well before they have been forced to invest heavily in it. To a large extent it will depend on how the software vendor perceives its own immediate future. Web enabling of software offers the large vendors a number of potential benefits including a possible reduction in the pirating problem, smoother, less costly marketing of updates and gives the customer, in theory, a chance to try the product before buying.

Some people argue that there are still significant problems to be faced, because the time taken to download the applications necessary with a major ERP currently makes the practice questionable in certain situations. Against that, there are many high speed downloading alternatives to the 56K modem and it would be surprising if downloading time turned out to be a limiting factor in the long run.

For the reasons given, the small and medium sized marketplace (SMEs) has been the main target for ASP activity and consequently the most enthusiastic software vendors are those supplying products for SMEs. However, even these software vendors don’t appear to be totally convinced that they are taking a step that will be beneficial to them over the long term. It is fair to say that some of these software vendors fear that the development of the ASP concept will allow Microsoft to take a major share of this market. Equally, some of the fledgling ASPs fear that they could lose out in the long run to both the software vendors and the internet service providers. Considering this caution, it may be that the ASP concept would have not got going if it had not been for the dramatic 1999 downturn in business software sales.

Some of the internet service providers (ISPs) that direct their services to business users appear to be making a big effort to develop the ASP market. As it will be a relatively easy task for them to host major software applications, it appears too big an opportunity to ignore. Considering the facts available, it is difficult to see why the ISPs should not be successful in their attempts to build a major new market providing they get the desired interest from the marketplace. If they do not get such support they could be tempted to build their own software and create their own ASP teams. However, there is an enormous difference between managing a group of servers and providing business applications to the larger end of the business world. A new ASP will have to provide adequate support services from day one.

some of the internet service providers (ISPs) that direct their services to business users appear to be making a big effort to develop the ASP market


Despite the promises of a rich new market for ISPs, software vendors and hardware suppliers, and cheaper and far shorter implementations, we cannot yet be certain that the ASP concept will achieve its undoubted potential. It will, after all, require a major effort by leading companies to bring about the necessary changes and many of the current leading players in this market, such as the large consultancies, are not really sure they will benefit from these changes.

If it does succeed, it will almost automatically provide clients with an advantage not found in any internal performance improvement projects and most outsourcing arrangements – the opportunity to remain competitive in the function or functions concerned. This will depend on the nature of the deal reached between the parties and the ASP’s ability to regularly make improvements to the system. Nevertheless the opportunity would be there.

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