ASPs: Headache or Cure?
Veteran ERP giants see gold in the ASP business. While IT units can cut
hardware and personnel costs aplenty, the ASP model inhibits customization and
raises security fears.
Craig Kinyon calls it "the Tylenol factor" — the headaches his organization
avoids by outsourcing its enterprise applications to an application service
provider (ASP). "We don't worry about hard drives failing, memory being adequate
or server speed," said the vice president and chief financial officer at Reid
Hospital and Health Care Services, Richmond, Ind. "We don't want to employ and
retain database administration people, and we don't want to worry about operating
system obsolescence. We don't want to own software, we just want to use it for
a while," said Kinyon.
Reid Hospital is "using" Lawson Software's enterprise resource planning (ERP)
software, in a LawsonTone-hosted model, through Lawson partner Shared Medical
Systems (SMS) Corp., Malvern, Pa. Kinyon's organization is among a small but
growing population that is choosing to outsource the hosting and management
of ERP applications. The move allows internal technical staff to focus on the
core business rather than wrestle with the 10,000-pound gorilla that an ERP
implementation, with its ongoing maintenance and upgrades, can represent.
Top-tier ERP players, like Lawson Software, St. Paul, Minn., PeopleSoft, Pleasanton,
Calif., SAP, Newtown Square, Pa., Oracle Corp., Redwood Shores, Calif., and
J.D. Edwards & Co., Denver, have all jumped on the ASP bandwagon. With the exception
of Oracle, most of the ERP players' initial forays into this model are via partnerships
with "pure play" ASPs such as Corio Inc., Redwood City, Calif., and USinternetworking
Inc., Annapolis, Md. However, throughout the first quarter of this year, ERP
vendors have announced significant and aggressive enhancements to their offerings
in this space, with some now offering hosting themselves. They, like many start-up
companies in this young market, are hoping to capitalize on what Framingham,
Mass.-based International Data Corp. (IDC) projects will be a $7.8 billion market
by 2004, growing leaps and bounds from just $296 million in 1999.
Small- to mid-size companies, along with "dot.coms" — which lack the infrastructure,
technical know-how and personnel, as well as the time for a lengthy ERP rollout
— are a natural fit for the ASP model. "The interesting thing about the ASP
approach is that it gets industrial-strength, enterprise-level applications
down to much smaller organizations," said Terry Rollo, vice president of sales
and marketing and business development at Oracle Business OnLine (BOL), an application
hosting service that Oracle launched just over a year ago.
However, the ASP model can also appeal to large companies as well. "Our target
is all across the board," said Rollo. "If you take the rapid time-to-market
hypothesis, clearly there's lots of appeal for dot.coms — they have no IT infrastructure,
they've got a Web page but they need back-office applications to do order management,
etc. We link into the back end of these sites and provide, on a hosting basis,
the back-office stuff. Large organizations are also interested in our hosting
approach. A lot of them are tired of the internal IT development cycle: You
wait nine months, spend $700,000 and end up with not what you asked for. Rather
than doing the departmental thing, they're saying, `Why don't we push out into
a hosted environment, and get [application development] done quicker and faster?'"
For PointClick.com Inc., an Internet shopping portal founded in 1999, Oracle
BOL enabled the company to get up and running quickly with enterprise-class
software — and without breaking the bank. PointClick.com was already running
the Oracle database for the back end of its Web site, and was looking at Oracle
Financials. "We knew we needed something at the Oracle level, but we were unsure
how we could afford it," said Craig Brown, CTO at the American Fork, Utah-based
firm. "We were five guys and had limited financing."
PointClick.com did a cost comparison between bringing Oracle in-house or having
it hosted. "Up front, at least a 50% cost savings could be realized," noted
Brown. "We could save $60,000 to $70,000 in hardware costs, plus personnel costs.
At the time, I didn't have a lot of manpower." In addition to a hosting fee,
Oracle BOL requires customers to purchase the software license. PointClick.com
was able to finance that fee by spreading the cost out over time, said Brown.
PointClick.com's BOL contract runs for three years, which is pretty standard
for an ASP model. Brown said the firm also has a standard service-level agreement,
with scheduled downtime. "If they [Oracle BOL] incur other outages, we get a
monetary rebate," he said.
Most impressive, said Brown, was that the barrier to entry had been lowered.
"There were five of us sitting down with Oracle, telling Oracle what great and
wonderful things we'd do some day," he said.
With the services of Oracle Consulting, PointClick.com's basic installation
took about two weeks. Accounts Receivable, Accounts Payable and General Ledger
are now in place, with plans to bring Asset Management online as well.
Oracle BOL is a single-vendor solution today and does not offer any third-party
products; nor does Oracle allow other ASPs to host its products. "It's our stated
policy to do that ourselves," said Rollo at Oracle BOL. "It's hard to support
a range of applications written by a range of people. The advantage of BOL is
that these are all Oracle applications, and we are the best people to support
them; plus, we back it up with Oracle Consulting for implementation and customization.
We're coming as close as possible to a one-stop shop."
Brown said PointClick.com has had a good relationship with Oracle BOL to date.
"When we were negotiating, we wanted [Oracle BOL] to understand where we're
trying to take this thing," commented Brown. "They've given us the confidence
that they can handle it. If they can't, since we have the licenses already,
we can bring it in-house at our discretion [for an early cancellation fee].
So I've got my options."
The value proposition
Dot.coms may focus on speed of installation as the selling point for going
with hosted enterprise applications, but for small- and mid-sized brick-and-mortar
companies, reduced risk of failure is another compelling factor.
Stratum Med Inc. is a two-year-old physician management company in Champaign
Urbana, Ill. The company has 14 physician groups as shareholders and, initially,
each group had a different business system. Bob Mulcahey, COO at Stratum Med,
said the company decided it was time to standardize its HR, materials management
and financials. Initially, Stratum Med intended to host its new PeopleSoft applications
at one or two of its own larger sites, starting with the clinic in Springfield,
"Through our experience at Springfield, we determined we ought to look at an
outside source," said Mulcahey. "It was more complex than we thought, and it
was dif-ficult to recruit database administrators. There's nothing like having
a test run. After about six months, [the CIO] said we needed to look at alternate
models and cost it out. He was working a lot of hours himself and couldn't staff
up to meet the demands of the product."
Stratum then did a five-year cost analysis of outsourcing, and talked to a
variety of ASPs. They ended up going with PeopleSoft's eCenter app hosting program,
launched this March. "We selected the PeopleSoft ASP because we felt most comfortable
with their service attitude; they sold us on ... high-quality services," said
"We're trying to provide mid-sized customers enterprise quality of service
and a concierge level of service," said Deepak Gupta, vice president and general
manager at PeopleSoft eCenter. In the ASP arena, PeopleSoft has a dual strategy,
noted Gupta. The first is to continue offering its integrated suite of products
through its established ASP partners like Corio. The second half of the strategy
is to offer ASP services directly to customers through eCenter.
"The value proposition we provide is different than what partners provide;
most partners provide multivendor solutions," explained Gupta. "eCenter is primarily
PeopleSoft applications and some selected, complementary products. If a customer
wants a combination of Siebel and PeopleSoft, they will go to [a] partner because
we don't do that."
While this is Stratum Med's first outsourcing experience, all has gone well
so far, said the firm's Mulcahey. "Any installation has problems," he said,
"but the first couple of issues we ran into were resolved [on] a timely basis,
which is why we went with PeopleSoft in the first place." Stratum Med already
owns its license and pays a per-user, per-month subscriber fee. eCenter defines
several levels of users, ranging from a $3-per-month self-service user to a
$700-per-month power user. When the installation is complete, Mulcahey expects
to have thousands of users.
But what about companies that may have tens of thousands of users? Are they
looking to ASPs? Large companies today are "buying ASPs for a point solution;
they're not giving the whole infrastructure away," said Gupta at PeopleSoft
eCenter. "For point solutions, they're looking for a credible player with good
financial backing. People confuse an ASP with somebody running your machine.
An ASP is running your business."
Tyco International Ltd., a global manufacturer and supplier of industrial products
and systems, is a $25 billion company targeting four markets: electrical and
electronic components, health-care and specialty products, fire and security
services, and flow control. Tyco, with U.S. headquarters in Exeter, N.H., operates
a number of businesses, many of which have ERP solutions from SAP AG, said Brad
McGee, senior vice president. One difficulty, noted McGee, "is our ability to
drive scale. It's difficult for us to build an SAP application in some of our
For that reason, Tyco decided to go with a hosted solution for its smaller
businesses, hosted by SAP partner HostLogic Inc., Boca Raton, Fla. "They do
the implementation for us, and we pay a fixed price per seat," said McGee. "We
can get some technology in the ERP area without having to make a large-scale
He continued, "We've gone through SAP implementations, and I can tell you war
stories. It nearly crippled our health-care business last year." Once up and
running, however, Tyco can make an investment in a SAP implementation pay off
quickly for large-scale operations. "But to replicate that in a smaller business
or the international pieces, the scale isn't quite there," said McGee. "[Hosting]
prevents us from having to replicate knowledge across the company. There's a
tendency to believe [a large company] is a homogeneous entity, but we have businesses
within that are fairly independent."
In addition to hosting the software, HostLogic also provides expertise to
Tyco in vertical areas of business, noted McGee. Another critical factor, he
added, is that "HostLogic is not married to SAP."
HostLogic is one of eight certified ASP partners offering SAP solutions. The
others are Corio; EDS, Plano, Texas; eOnline Inc., Cupertino, Calif.; IBM Global
Services, White Plains, N.Y.; Interpath Communications Inc., Research Triangle
Park, N.C.; Qwest Cyber.Solutions, Denver; and Siemens Business Services, Mis-
SAP also offers mySAP.com Application Hosting through its own newly formed
global solutions-hosting company in St. Leon-Rot, Germany. Announced in Feb-
ruary, SAPHosting offers two service models. In the Application Hosting model,
customers buy and own the software license. In the ASP model, customers will
be charged on a per month/per user basis and do not have to purchase the license.
SAP, J.D. Edwards — through its recently announced JDe.sourcing program — and
Lawson Software allow customers to "rent" their software rather than own the
license. Oracle and PeopleSoft require customers to buy the software license
at this time.
Whether a company rents or owns its software license, there is no agreement
on whether or not an ASP model can save a company money over the long run.
For Spyder — a Boulder, Colo.-based manufacturer of ski apparel, as well as
a sponsor of the U.S. ski team — outsourcing its JDE solution through hosting
partner Prentice Technologies Inc., Englewood, Colo., saved the company "$100,000
worth of hardware," said IS Manager Kevin Smith. It also saved Spyder from hiring
another IT staff member and "decreased our risk of project failure," noted Smith.
Decreasing project risk was also part of the cost factor for Stratum Med's
Mulcahey. "We decided the risk swung more the other way; it was riskier for
us because there was no one with PeopleSoft experience in our locations," he
said. "It's probably slightly more [expensive] to outsource, but you have to
calculate the cost of hiring and training in this job market. Retaining [people]
is becoming a challenge. There is less risk associated [with outsourcing] as
long as you have the proper controls in place."
He jokingly added, "People who are least likely to like outsourcing are chief
financial officers — they want to go downstairs and hug their server every night
before they go home."
Reid Hospital's Kinyon said that when you factor in personnel, "Over the long
run [outsourcing] is definitely cheaper. Consider the salaries, benefits and
recruitment of database administrators, then how many years before the operating
systems and hardware would need to be replaced. The technology curve has gone
A look at the underbelly
While taking the ASP route can tame the technology beast for many companies,
there are some trade-offs and risks associated with outsourcing critical business
To make the ASP model cost-effective, as well as speed implementation, providers
often encourage customers to minimize application customization and stick to
a more vanilla implementation.
"Our philosophy is that no two customers are the same," said Gupta at PeopleSoft's
eCenter. "A template version is not going to fly; but at the same time, the
ASP business is about economy of scale, so we need a balance. We categorize
customization into four areas. At the highest is configuration; everybody needs
that and we support it 100%. The next is extensions, such as reports; everybody
needs that and we support that 100%. Then there are modifications, where you
start modifying the functionality of the application. We don't encourage that.
The fourth is interfaces, application A to application B; we support all interfaces.
So we support 95% of their requirements.
"It's not that ASPs don't want to support customization," added Gupta, "but
you cannot provide the highest quality of service. If things fail, it takes
time to figure out what happened. If you start customizing, it's difficult to
scale operations." That is OK with Stratum Med's Mulcahey. "We made a decision
that we wanted to standardize the groups' activities and remain standardized.
We're holding firm to a plain vanilla installation. The [PeopleSoft] software
is very robust anyway, more than we need. It is causing us to change business
practices, but that's good. We had people doing things all different ways, so
this fits with our objectives." Security is also a concern for those looking
into the ASP model, and most are going with a private network connection to
the ASP host. But Reid Hospital's Kin-yon said an ASP can be more secure than
an in-house shop.
"Some think it must be less secure because someone [else] is hosting your data,"
said Kinyon. "But once you see that [providers like] SMS are set up like Fort
Knox, and they have staff in place look- ing at every blip in the screen, then
you look at your own shop and say, `We're a cakewalk if someone wanted to do
something to us.' We feel secure about who's guarding our data. Once our group
took a look, everybody was extremely satisfied that it was a good move for our
Of course, there is the risk that your ASP could go out of business or be acquired
— especially if it is a start-up — or that the relationship will not work out.
Taking this type of risk with something so core to your business can be disconcerting
to some, said Spyder's Smith. "People may ask, `How can you outsource something
core to your business?' Well, the buildings are also core to [our] business,
and we rent those. Through our [ASP] agreement we try to make sure we're covered,
the same way as with a building lease."
Part of the contractual agreement that PointClick.com's Brown sees evolving
is the service-level agreement (SLA). "I think you'll see stronger SLAs coming
into market. To me, SLAs will be a bar that will be raised as a differentiator."
But no venture is risk-free. "I'm not sure you can ever eliminate that risk;
it's the nature of the relationship," said Tyco International's McGee.
Where will application hosting lead? ERP vendors targeting this area are placing
a stake in the ground in two areas: software distribution and delivery, and
online trading communities.
The immediate value proposition for companies includes cash flow benefits and
infrastructure savings, said Oracle's Rollo. But he said software delivery is
another compelling benefit of ASPs. "The whole software industry is locked into
an 18-month development cycle, where people `beaver away' for 18 months, install
it, etc., then beaver away for another 18 months and do it all again. The ASP
model opens up the possibility of changing that.
"We at Oracle believe software will be delivered in an ASP model, not on a
CD-ROM," added Rollo. "We're looking at this as the next delivery mechanism.
You can make enhancements to a software product and deploy them very quickly
in the ASP model. You can impact a huge number of users with small changes.
We think this is a superior mechanism, and will all but eliminate the 18-month
rhythm the industry has got itself into."
PeopleSoft's Gupta agrees that both the Internet and ASPs are making software
distribution a different game. But he also sees ASPs evolving toward e-business
hubs. In PeopleSoft's case, "eCenter is a platform for e-business; it's where
we want to connect all employees, customers and suppliers. It's definitely a
portal play. ASPs will become the hub of e-business activities," said Gupta.
|I've walked a mile in your shoes ...
For IT shops considering ASPs, the early adopters offer some advice:
"There are no guarantees. There are a lot of vendors out there, and you
don't want to go with a Johnny-come-lately. You want a well-established
—Craig Kinyon, VP and CFO, Reid Hospital and Health Care
"Spend time in due diligence on who the host is: How stable are they?
Will they be bought out? In my view, there will be some shakeout in this
industry, and you want to be with someone who's in it for the long run.
Also, make sure the lines of communication are open and people understand
each other; you do a lot of phone and E-mail, and things do get miscommunicated."
—Bob Mulcahey, COO, Stratum Med Inc.
"Find somebody who is not going to provide a cookie-cutter approach.
It's more important to get people who know your industry and business
so they can apply the principles tailored to your needs, and do something
better than automating your current situation."
—Brad McGee, senior VP, Tyco International Ltd.
"You've got to analyze your business model, figure out what kind of reliance
you'd have on an ASP, and translate that directly to what kind of service
level you'd need. If it's time-critical, make sure you've got multiple
connections to them, [as well as] backups and redundant data centers."
—Craig Brown, CTO, PointClick.com Inc.
"Talk to someone who's outsourced that particular ERP system. Check how
they're architected. Do a cost/benefit study, and look at the outsourcing
scenario you'd be going into. Talk to other customers and find out what
they're saving in terms of consulting resources [and so on]; find out
what you need to put into an outsourcing agreement. Don't underestimate
the time required to put an agreement together. Going into it, you don't
know what you don't know. And you've got to make decisions, like who's
responsible for the network. You have to identify those components in
the outsourcing agreement."
—Kevin Smith, IS manager, Spyder