What is the Role of an Application Service Provider (ASP)/Host?

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1 CHAPTER 9 What is the Role of an Application Service Provider (ASP)/Host? There are many areas you should consider when determining if application outsourcing is the best approach for your business. This chapter intends to present these considerations at a high level to help you determine what is happening in the Application Service Provider (ASP) marketplace and determine if working with an ASP is an appropriate option for your company. Benefits of Hosting To begin, it is important to understand what general benefits you can expect to receive by using an ASP. Initially, the target market for the ASP model was small and medium-sized enterprises who saw value in utilizing an ASP to overcome the following business issues: Business environments inexperienced with computers, in a time when there is an increasing scarcity of people skilled in running high-end systems. Inability to get systems and services up and running quickly when time-tomarket is critical. Ability to outsource non-core competencies in order to concentrate on core business competencies. Inability to justify spending $50,000 or more on a mid-range or higher solutions (for example, accounting, customer relationship management, e-business), although these types of systems may be required to enable the company to grow. As an alternative to buying financial systems, ASPs can provide the predictability of a monthly cost. And, as there is only a monthly fee at stake, the customer is not forced into making the wrong system work in their business environment. 53

2 What is the Role of an Application Service Provider (ASP)/Host? CHAPTER 9 Other driving forces behind the development of the ASP model include: ASPs can achieve economies of scale in their support model that a single customer cannot. ASPs can provide total solutions to specific customer problems and one-to-one customer contact between the customer and its ASP. ASPs can sell and deliver software directly to end users, potentially enabling the independent VAR to be eliminated from the supply channel. (This has not turned out to be the case, and VARs are actually increasing in their importance to customers.) Definition and Six Characteristics of an ASP The ASP Industry Consortium, formed to promote the industry, has created the following formal definition of an Application Service Provider (ASP): An ASP deploys, hosts and manages access to a packaged application to multiple parties from a centrally managed facility. The applications are delivered over networks on a subscription basis. This delivery model speeds implementation, minimizes the expenses and risks incurred across the application life cycle, and overcomes the chronic shortage of qualified technical personnel available in-house. Though it seems that everyone defines an ASP differently, especially emerging ASPs who are trying to differentiate themselves in an already overcrowded ASP market, there are six common characteristics to help us see what an ASP really is: 1) Delivers and/or sells software applications directly to multiple end users. 2) Acts as a single point of contact, responsibility and accountability for the client. 3) Hosts and manages applications centrally (although the ASP may or may not use data center partners to do this and may or may not include access as part of the solution). 4) Offers prepackaged services applicable to most customers, with little to no customization to the end user. 5) Uses subscription based pricing (the ASP owns/buys the software license directly from the software vendor). 6) Offers users access to the applications via a public or private network and a browser. Evolution of the ASP Concept Outsourcing is not a new concept to enterprises. At one time, a computer service bureau would provide data processing for companies that chose not to own or could not afford to buy the expensive mini-computers or mainframes of the day. This concept has evolved into a business model that rents software to its customers over a network versus performing data processing for its customers. Even so, the ASP business model continues to evolve. The chart on the following page depicts the evolution of the ASP: 54

3 CHAPTER 9 What is the Role of an Application Service Provider (ASP)/Host? The software industry s movement towards a) Web-based standards, b) shorter development cycles, c) subscription pricing verses license pricing, and d) the end user s desire for simplicity have given the ASP market an opportunity to develop. Companies want the ability to focus on their core business as they increasingly play in a global marketplace where speed to market is critical. The need for reduced costs, reduced software complexity and highly skilled IT personnel in an era of IT skill shortages are key drivers of ASP industry development. Characteristics of the Typical ASP Customer Most ASPs target small to midsize enterprises as these enterprises lack some of the resources larger companies have, making them prime candidates for an ASP s services. For example, midsized firms are often unable to justify paying the up front cost for business management solutions, not to mention the implementation, training and yearly maintenance costs involved in the purchase. However, they may require the functionality of a current day system to enable them to grow their business. The high cost of the initial software purchase and the complexity of running traditional mid-range solutions is a good example of why this size company fits into the sweet spot of an ASP. ASPs can provide affordable access to technology via their subscription based pricing models. The low cost of entry for applications provided by this type of pricing model allows small to midsized enterprises to avoid the up-front capital investment not only in applications, but in hardware and IT staff recruitment and retention as well. Also, ASP customers can usually expect shorter implementation cycles as the customization of ASP hosted applications is usually minimal, allowing the ASP to provide its applications to many customers. Question: Does your company fit the profile of today s typical ASP customer? 55

4 What is the Role of an Application Service Provider (ASP)/Host? CHAPTER 9 Likely Candidates Use the following profile of today s typical ASP client to determine if you are a candidate for an ASP s services: If you answered yes to three or four of the characteristics on the chart above, then an ASP is an option you should probably investigate. Answering No to most of the characteristics would suggest that this model may not be right for you at this time, although this industry is rapidly changing and these characteristics may change or develop over time. The ASP model is a viable model but has not matured yet. If by reviewing this chart you believe that an ASP is a good solution for getting an appropriate accounting/finance package into your company, be wary of certain issues outlined below and perform the necessary due diligence with any ASP you may consider. 56

5 CHAPTER 9 What is the Role of an Application Service Provider (ASP)/Host? Discerning the Types of ASPs in Today s Marketplace There are over 500 companies calling themselves ASPs today. Everyone wants to be an ASP, including hardware providers, software vendors, telecom network companies, technical outsourcers, consulting firms, business process outsourcers and new companies set up specifically to be an ASP. Companies considering an ASP are concerned about getting involved with this constantly growing and changing, potentially unstable market. Companies considering an ASP should understand the six types of ASPs prominent in the industry today: 1) Resellers Resell another ASP or wholesaler s network hosted application services. Can re-brand a wholesaler s service or provide added value, such as desktop support, systems integration, billing, etc. 2) Aggregators Integrate application services from different service providers, i.e., leverage their partner s infrastructure and expertise. Usually, applications are accessible through a portal with a single logon ID. 3) Pure Plays One stop shop; owns and operates all infrastructures; relies the least on partnerships to provide services. 4) Business Process Outsourcers May be a Reseller, Aggregator or Pure Play, but packages business process outsourcing services. Business strategy control remains with the customer but procedures are outsourced, e.g., shipping, accounting, HR. 5) Web Hosting ASP Primarily Web hosting, but can host almost any application. Owns and operates data centers, guarantees availability and high performance, limited business expertise and implementation services. 6) ASP division of a Broader Organization An organization whose primary focus is software development, for example, and has created an ASP division to host its own software solutions and possibly other software solutions. Other examples that fall into this category include telecom network companies. Complicated ASP Partnerships While ASPs provide services to consumers, AIPs (Application Infrastructure Providers), for example, provide services to the ASPs. With the exception of the Pure Play ASP, most ASPs have formed partnerships for expertise in different areas and then concentrate on being the customer s single point of contact. Because many partners may be involved with an ASP, the end user should understand exactly who is partnering with the ASP and how strong a partnership really exists. In fact, when negotiating your Service Level Agreement (SLA) with the ASP, it is especially important to understand what your ASP s partners are promising to provide. Also remember that because these partnerships are new, the theory of the ASP as one stop shopping may be just that, a theory. Traditional software resellers may not have resolved territorial issues between themselves and the software 57

6 What is the Role of an Application Service Provider (ASP)/Host? CHAPTER 9 vendors ASP, meaning pre sales, software demonstrations, software and maintenance contracts, and implementation may be split in various ways between the software reseller and the ASP for that software. In such a case, understanding who to go to for all your questions may not be as simple as it is advertised. ASP Related Acronyms Some of the commonly used ASP acronyms are useful to know because it helps you learn about the different types of ASP models: AIPs (Application Infrastructure Providers) AMOPs (Application Maintenance Outsourcing Providers) BPOs (Business Process Outsourcing ASPs) CSPs (Capacity Service Providers/Collocation Service Providers) IBSPs (Internet Business Service Providers) ISPs (Internet Service Providers) ISVs (Independent Software Vendors) MASPs (Managed Application Service Providers) MDCPs (Managed Data Center Providers) OSPs (Operations Service Providers) PSPs (Process Service Providers) RAI (Rentable Application Integrators) SLAs (Service Level Agreements) Remember, there is more to outsourcing your software applications than picking an ASP. You must research your ASP and all of its partners to understand how the business partnerships or lack of partnerships will come together to give you the benefits expected to be gained by outsourcing your company s applications. Question: Who are the partners of your prospective ASPs and how strong are those partnerships? Deciding to Use an ASP For the purposes of this guide, an ASP can be seen as a type of implementation option for the applications you have selected. Once you have determined that you are a possible candidate, you should then weigh your ability to manage the software application in-house vs. outsourcing that function. It is important for prospective ASP customers to consider these critical questions: 1) Can you achieve a higher level of performance than an ASP could? Consider, for example: Is your IT staff sufficient or are current technical resources strained? Will the proposed application be using the Internet to communicate with remote users and overwhelm circuits that are already at operating capacity? 58

7 CHAPTER 9 What is the Role of an Application Service Provider (ASP)/Host? 2) Can you achieve a higher level of performance for the same price as an ASP? Consider the strain this level of performance may put on your current IT staff or cost of additional equipment and space required to house the equipment. Would maintaining that higher level cost you more in IT staff and retention? Next consider whether a level higher than that of an ASP that is dedicated to such services is really necessary. 3) Will you require significant customization by the ASP? If yes, you want to be sure to partner with an ASP that is able to fulfill your customization needs. 4) Will the ASP s applications need to be integrated with your existing systems? Although most ASP offerings may routinely support basic integration with enterprise systems, they may not be able to provide the depth necessary as explained by this guide in Chapter 4 on Integration. If you determine outsourcing versus managing applications in-house makes sense for you, other initial questions to consider include: 5) Is it money issues that stop you from purchasing certain business-critical software? If so, outsourcing the application through an ASP on a subscription basis (monthly payments) may be the low cost alternative you are looking for. 6) Have you considered hardware co-location? Hardware co-location is purchasing new or refurbished servers yourself and paying a hosting provider to house and connect them to a network or the Internet. This may be a less costly alternative to an ASP. 7) Can you experiment with the ASP model on less mission critical functionality until the ASP market shakes out? The answers to these questions reflect your expectations of an ASP and will serve as a guide when evaluating the Service Level Agreements (i.e., service contract) of prospective ASPs. Determining Which ASP to Use The ASP marketplace is new and therefore potential buyers should perform the necessary due diligence. Due diligence will give you comfort in an ASP s ability to integrate with legacy applications or other existing applications and in an ASP s stability and outlook for (a) longevity, (b) security, (c) reliability, (d) performance and (e) uptime. Buyers need to understand that one ASP s Service Level Agreement, or contract, may not look like another s due to the newness of the market. Buyers should also consider if they want a contract lock-in for extended periods of time, i.e., greater than one year, in an industry as new as that of the ASP. Also, buyers need to be comfortable with and prepared for the applications and/or hardware being in a location not on their premises. When asking an ASP for its references, request that they be references of at least one year. Finally, perhaps the most important piece of due diligence to be performed is to understand the strength of the ASP s partnerships and what your ASP will do for you if it does not survive the predicted market shakeout. Provided on the next page is a Due Diligence Checklist to use as a starting point when evaluating an ASP opportunity for your company. 59

8 What is the Role of an Application Service Provider (ASP)/Host? CHAPTER 9 60

9 CHAPTER 9 What is the Role of an Application Service Provider (ASP)/Host? The Service Level Agreement (SLA) The purpose of the Service Level Agreement is to define the responsibilities of the Service Provider and the users of that service. A SLA is a written agreement between the customer and ASP that may cover network, system, application and support services for the customer s ASP application. At the very least the SLA should: Identify and define the services provided as well as the supported products, measurement criteria, reporting criteria and quality standards for the service. Clearly outline the rights and obligations of the parties. Due to the newness of the ASP industry, there are few documented or benchmarked trends to serve as industry standards. Define specific and measurable performance (e.g., server uptime/availability, network performance, help desk response time, backup schedules, time to restoration/problem resolution) metrics and include both the metric definitions and measurement processes. Detail the change process and issue escalation mechanics. Describe financial reimbursements and/or contractual waivers for nonconformance, (e.g. Can the relationship be terminated with the ability to choose another ASP without penalty? Will a refund be given and under what circumstances?). For example, if your SLA states that you will receive a refund after any period of consecutive downtime, say 15 minutes, understand that if you experience 14 minutes of consecutive downtime every day, you may not be entitled by your SLA to receive any type of refund. Clearly separate your property from the ASPs, for example, domain names, licensed applications and data. Ensure that the SLA establishes that you are not liable if the ASP fails to license software properly. If the ASP requires a commitment term, make sure you can walk away free if the ASP does not deliver on its promises. ASPs usually screen workers for criminal backgrounds and conduct a drug test, as they will handle your company s sensitive data. Arrange regular deliveries of backup tapes, removable media or network dumps of your application data. Because there are always unforeseen circumstances or matters where the parties genuinely cannot agree, have a separate clause referring to dispute resolution. Finally, understand how the ASP plans to ensure that it is meeting the requirements of the SLA and that it is clearly stated within the SLA. Is the burden of proof on the ASP or the ASP s customers? If the burden of proof is on you, what tools will the ASP provide to you for monitoring purposes? Finally, have a lawyer or SLA contract review specialist approve the wording of the SLA. 61

10 What is the Role of an Application Service Provider (ASP)/Host? CHAPTER 9 Future Direction and Trends Analysts agree that the predicted market shakeout of the ASP market is underway. This means that for the hundreds of ASPs that popped up in the market while it was still hot many will not survive. That is not to say that the ASP market is going away, but that: Niche players are being acquired. Applications built from the ground up using Web technologies and meaning to be deployed in an outsourcing model are developing the functionality to meet business needs. Partnerships must continue to prove themselves to be strong. Surviving ASPs will have something concrete to offer and will have demonstrated that the ASP model is viable. Fewer ASPs will make up the market. Once this market consolidation has occurred, the market differentiators and competitive focus between ASPs will be more concentrated on their application portfolios and Service Level Agreements. Analysts expect the following categories of ASPs will become the norm: Single/Low Package Provider Less expensive, simple, reliable. Pre-Integrated Multi-Package Provider The Aggregator, i.e., in-depth knowledge to provide the best-of-breed with good integration and strong partnerships. Niche Specialist The industry or process specialist, providing expertise for more complex applications. In the meantime, however, it will take sometime for the adoption of the ASP model to take hold in middle market sized companies and for the credibility of the ASP industry as a whole to strengthen. SUMMARY: The ASP concept is evolving. Certain businesses seem to be more likely candidates for ASPs than are others. Because there are so many companies and types of ASPs today, with complicated partnerships and collections of services, prospective customers need to use due diligence in deciding whether to use an ASP and which one to use. Is the ASP solution viable in the long term? Yes, because the idea of outsourcing applications is fundamentally sound and therefore will not go away, even though the model will continue to evolve in the future. However, buyers must be aware that in the short term, many of today s ASPs may not survive the predicted market shakeout. 62

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