Y2K is over, and IT teams all over the world are being pressured to upgrade their infrastructures to support their new e-business strategy. But dot-com startups are snagging their best and brightest, forcing them to hire new, less-experienced workers who are likely to be lured away as soon as they’ve established a track record. The META Group’s latest estimate of unfilled IT jobs in the United States is now at 400,000. The current—and growing—shortage of skilled IT workers, coupled with the vigorous demand for Internet solutions and the stability of today’s telecommunications infrastructure, make the burgeoning new application service provider (ASP) industry an attractive solution for maxed-out IT departments. In 1999, analysts estimated the ASP market to be about $5 billion. Today’s estimate is that the ASP marketplace will explode, reaching more than $22 billion by 2003. A good number of them are likely to be AS/400 shops, particularly those facing costly and labor-intensive hardware and software upgrades.

Challenges Driving the Shift to ASP

Initially, ASPs targeted small startups and dot-com companies. These are typically organizations that don’t have the staff, time, or budget—some don’t even have offices—to purchase, implement, and maintain their critical business solutions. ASPs can help these types of companies tremendously, at least for the short term, as they deploy generic, noncustomized solutions in a basic infrastructure. But, as ASP customers grow and find success, their computing needs become more sophisticated. The question will be whether the one-size-fits-all ASP solution an organization used when it was a $500,000 company with a staff of five will work when revenues rocket to tens or hundreds of millions of dollars and the entire workforce can no longer meet for lunch around a single table.

But it is not just small, startup companies that are moving to the ASP model. Today, midsized to large companies are also looking to ASPs to solve their IT problems. They are facing many of the same challenges: a shortage of skilled IT workers, the constant demand for the latest and greatest technologies, limited budgets, and a need to quickly implement solutions for newly acquired departments or companies. As a result, organizations of all sizes are now eyeing ASPs as a viable alternative to hosting their own applications.

The difference is that larger companies have extremely complex requirements. They need applications with deep and proven functionality, with e-business enhancements, and with the tools that allow them to customize solutions to match their business processes and requirements. (See the enabling, technical, and business factors pyramid from Cherry Tree & Co. in Figure 1.) They also want to be able to reallocate their critical resources to more strategic efforts. Some ASPs are leading the way, offering high-value solutions that can be tailored to meet each customer’s unique business needs.

What This Means in the AS/400 World

Application hosting addresses needs that span all industries, regardless of system infrastructure. As a result, AS/400 shops of all sizes are as likely to be intrigued by ASPs as organizations running on Microsoft Windows NT, UNIX, Linux, mainframes, or any other platform. The bottom line is this: The ASP market makes the choice of platform a nonissue. Because organizations will be choosing an ASP based purely on application function and service level, they need not make a strategic decision about the platform. Of course, for the ASP, the platform is of great importance, and the scalability and reliability of the AS/400 have good synergy with the demands of a rented application supplier.

Infinium is one ASP that has included the AS/400 in its ASP model. Infinium chose the AS/400 for the most fundamental reasons: The AS/400 is stable, proven, powerful, and secure. Yet Infinium’s philosophy is that the customer should be able to run whatever system it chooses on its own site to maximize the efficiency and productivity of its individual users, regardless of the platform in use at the hosting centers.

Changing the Channels

One of the unknowns in the marketplace is the impact application hosting will have on the business models and distribution channels of hardware and software vendors. For example, companies will be relying on ASPs for infrastructure, but does that mean they will not be purchasing the same quantity of PCs, servers, and software licenses? If so, what is the impact on hardware and software suppliers? Although they may not be selling as many individual units, they will have an easily identified target market of rapidly growing ASPs, potentially reducing the cost of sales and marketing.

According to META, the global 2000 ASP market will mature later than that of the midmarket but will still achieve strong growth of 100 percent to 150 percent from 2002 onward, representing a $5 billion to $6 billion opportunity in the 2003 time frame. META believes that, by 2003, the total server revenue directly associated with the ASP market will be in excess of $4 billion. Of this, its research indicates IBM may be able to capture $300 million to $500 million with the AS/400. The total software and services revenue across the ASP channel of AS/400-based ASPs will be $2 billion to $3.5 billion by 2003. This revenue will reflect a 10 to 15 percent market share for the AS/400 in the ASP arena by the end of 2002.

Still, the best news may be for the developers and sellers of point solutions. At times, the market seems so cluttered with software that it is extremely difficult for even the best solutions to stand out in the crowd. But, if an ASP discovers a particular point solution, that ASP can roll it into its offering, making it available to a much greater number of users than would have been possible in a traditional market. For example, the ASP may find a narrow solution that addresses a very specific pain point in the retail, transportation, or other industries. The ASP can partner with the vendor of that point solution and introduce that solution to its customers and prospects in the appropriate industries.

Evaluating ASPs: What Is Really Important?

Figuring out which of the variety of ASP models available will best fit your needs is no easy task. Some ASPs are consortiums of many different types of vendors, one providing the applications, another the network, perhaps a third, the data center. Another model may

deliver only one aspect of the ASP, such as the data center, network, or support. Still another model may cover every facet of a hosting environment but limit customer choices in areas such as applications, platforms, or consulting services. In addition, all have varying approaches to issues such as security, pricing, and support.

There are some clear characteristics that will lead to a successful partnership between you and an ASP. To be fully accountable to its customers, the ASP should be the single accountable source, with an end-to-end solution. It must have a track record of successful relationships; it must offer tailored, high-value solutions; and customer care must be a focal point of the organization.

Tim Williams, director of IT at the Hard Rock Hotel and Casino, described his company’s search for an ASP. “When evaluating our ASP options, we were looking for highest value through the combination of single-source solutions management, service, and support and a track record of delivering proven, reliable enterprise applications tailored specifically for our unique business requirements and those of the hospitality and gaming industry,’’ Williams said.

“We could not imagine handing over our business-critical data to a multitude of unproven ASPs and third-party vendors with generic applications.”

The ASP Offerings

When reviewing ASPs, you need to evaluate the total solution and fully understand whether or not it meets your needs. The critical success factors are as follows:

• Service—Choose a single-source, fully accountable ASP. Anything less than personalized attention on a 24/7 basis, with a formal service level agreement, is unacceptable.

• Applications—You should expect easily customizable, true Web applications with deep functionality and a proven track record for enterprise resource planning (ERP), customer relationship management (CRM), supply chain management (SCM), and e-commerce.

• Data center—Make sure this is wholly operated and managed by the ASP so that the service and support staff has a vested interest in the customers’ success. The data center should also be enhanced with physical and electronic security to protect your applications and data.

• Pricing model—Rental and subscription models eliminate the up-front expenditures associated with traditional software licenses. If you won’t actually own the software, why should you have to pay license fees?

Service should be at the center of all ASPs. Your ASP should be your partner, helping you identify how the solution can best support you in achieving your business goals. Remember: The best ASP solutions are not one-size-fits-all but, rather, can be tailored to empower individual enterprises to operate most efficiently and strategically. Will you have your own account manager? Does the company have a proven record on service and support? How will your ASP handle issues with its partners?

Service level agreements will be a major indicator of an ASP’s commitment to service. The agreement should address key issues such as performance, availability, scalability, bandwidth, and data and network redundancy. Certain components of many ASP solutions are provided by third-party vendors, so be sure that every aspect and player in your hosting arrangement are covered in the agreement and that each can offer proof of being able to deliver on promises of support and service. In an ASP where the emphasis is on service, if there’s ever any question—about your network, your applications, your contract—it will be answered in real time, 24/7, through a single point of contact.

Solutions

Another aspect that companies need to consider is the functionality that the ASP can deliver. The ASP must be able to host proven Web-based applications that add real business value to your organization. You shouldn’t have to go shopping around for the software, hardware, and tools; they should be available directly from your ASP.

In addition to basic ERP applications, you need CRM, SCM, analytics, and, of course, the ability to do e-business. As for the architecture, it must be conducive to a hosting environment in order to help you become more strategic. Does it support easy customization? If a member of your staff can’t do the customization, does the ASP have an experienced, knowledgeable staff with a track record for fine-tuning solutions quickly and efficiently—or are you on your own? Are the applications available on a thin client or fat client? Are these true Web applications built on dynamic hypertext markup language (DHTML)/Extensible Markup Language (XML) technology and easy to integrate or customize? Will you have a direct connection with your applications, or will you need to install middleware at your own site for access over the Web? Do the applications reside on a zero-administration desktop, or will your company’s individual PCs require regular attention for upgrades and implementation? If an ASP arrangement still requires “sneakerware” from a customer’s IT team, it’s missing out on one of the key benefits of application hosting.

Data Center and Security

One of the most important factors in determining the level of security your ASP can offer will be the data or hosting center that the ASP has developed. There are many problems that exist when the ASP doesn’t own the data center. You’re going to lose a certain amount of accountability if the people you sign your contract with aren’t the same people who are servicing and supporting your applications and data. Find out who is running the center. What are their qualifications? Is their work insured? And what happens if the company that runs the data center breaks its relationship with the ASP? Who will then take care of the data? Hosting companies that manage and operate the data center have a vested interest in keeping their customers satisfied. Their customers, as a result, will get better services and support. And, if there is a problem, you know who to go to for help.

The physical setup of the data center is also crucial. Don’t assume that every ASP data center has the level of security that you would require on your own site. Go on a tour, either virtually or in person, and see what it’s all about. Who is able to get into the building? Is the power system completely redundant? What about fire, floods, and other natural disasters? The Infinium facility, for example, has an independent power supply that would allow the center to operate for four weeks if traditional power supplies were not available. While it’s highly unlikely that the center would ever need that kind of backup power, this is the kind of extreme measure you want your ASP to take to protect your data and your ability to operate—no matter what.

Extremes aside, natural disasters do happen. One of the advantages of using an ASP is the protection that is offered by a state-of-the-art hosting center. In some communities that are prone to violent weather, the threat of a storm alone scares many companies into shutting down operations rather than risk losing important data through physical or electrical damage. Even if the storm never hits, it will cost the company tens of thousands of dollars a day as it waits for the threat to pass. But, if that same company’s solutions are being hosted by an ASP, the company can continue running its business as usual, knowing that the applications and data are safely ensconced in a secure hosting center, come rain or shine.

What about security? The solutions you outsource should receive at least the same level of protection they would receive in one of your own facilities. Whether it’s your payroll/accounts payable system, CRM solution information, or business analytics, you need to be sure that your data is safe, secure, accurate, and available to you—and only

you—on demand. To achieve this security, an ASP’s infrastructure must be as secure as Fort Knox. A true ASP will offer a physical and electronic security system that features multilayered, redundant power supplies; state-of-the-art fire and flood protection; real-time monitoring; and application- and database-level controls.

In terms of reliability, if an ASP can’t guarantee uptime of more than 99.7 percent, excluding scheduled downtime, it probably isn’t running on the AS/400. In most cases, if your business can’t afford to operate on anything less than 99.7 percent uptime, you can’t afford to do business with an ASP that doesn’t operate from an AS/400.

The final consideration is price. Application hosting shouldn’t necessarily be thought of as a cost-saving measure, although, for some companies, using an ASP will offer savings. The stronger economic reason for considering an ASP is that it can provide companies with more predictable, stable costs with limited up-front expenditures compared to supporting applications in-house. Most ASPs charge their customers a monthly rate based on the number of applications, services, and users. Implementations, upgrades, and regular IT maintenance of the software and hardware fall on the ASP, which has worked those costs into your contract. So you don’t have to set aside a large reserve of funds for the inevitable, unexpected costs your infrastructure incurs.

By the same token, it’s important to examine the pricing structure. Look at what you’re paying for. Although the inherent definition of an ASP is a company that rents or leases software and services, many new ASPs are charging licensing fees as though the software were being installed on the customer’s site. On top of that, these ASPs are charging a monthly usage fee based on the number of users and applications. Doing business with an ASP may not be the least expensive option, but neither does it mean you should be paying double.

Ready or Not, ASP Is Here

If the analysts’ predictions come true, the emergence of the ASP market is going to have a profound impact on the IT industry as a whole. It will impact IT jobs. It will impact sales of all kinds of hardware, software, and tools. It will impact all kinds of vendors that never anticipated themselves participating in a hosting environment. Ultimately, it will have a positive impact on companies using the ASP model, freeing them from technology maintenance so they can focus on expanding their businesses. It will have a profound effect on your business if you are a Business Partner or on your shop if you are an AS/400 customer.

Price

Figure 1: The ASP industry is driven by enabling, technical, and business factors.