BUSINESSWEEK ONLINE : DECEMBER 4, 2000 ISSUE
FRONTIER -- DIGITAL MANAGER

ASPing for Trouble
Application service providers haven't lived up to their hype. But don't write them off yet

For the past year, the hype has been hot and heavy: Application service providers (ASPs) were about to transform the way small companies did business.

Well, you can add ASPs to your list of burst techno-bubbles. These services, which rent expensive programs over the Internet, have received an appropriately cool reception from entrepreneurs. Business owners are rightly worried about data security, the stability of ASP vendors (both technically and financially), and how well the programs work. At the moment, less than 12% of entrepreneurs would consider an ASP, says a recent study by Cahners InStat Group.

Those who would have plenty of choices. About 500 ASPs offer online access to programs that can do almost any computing chore, from spreadsheets to sales-force automation to setting up e-commerce sites. More than 100 specifically target small business; there are even niche ASPs that cater to accounting firms and dentists. All insist they can cut both costs and time spent on technology.

But the cure may be worse than the disease. A survey by InfoTech, a Phillips Group research firm in Parsippany, N.J., found that satisfaction with off-the-shelf programs is the most frequently cited reason for not using an ASP. ''Does it make sense to outsource a stapler?'' asks Ronald Schmelzer of ChannelWave Software, a Cambridge (Mass.) company that creates Web software to link companies and vendors. The result of this skepticism: Cahners expects fewer than 3,000 small businesses to use an ASP this year, spending a paltry $7 million.

The original ASPs were anything but the equivalent of staplers. The offerings that burst onto the scene two years ago were mostly huge, custom-built programs for corporate back-office operations, poorly rewritten to run over the Web. They included corporate enterprise-resource management and customer-relationship management software.

While their marketing extolled the benefits of monthly payments, automatic upgrades, no licensing fees, and fewer technical staff, these programs were hardly plug-and-play. Implementation could take weeks or months. The programs were hard to run, often impossible to customize, and vexing to learn. ''The problem was outsourced but not solved,'' says John Dillon, CEO of salesforce.com, a San Francisco startup that offers online services for salespeople. ''Putting lipstick on a pig doesn't necessarily make it any more attractive.''

A new generation of ASPs claims their programs are designed for small companies and run efficiently on the Net. Even so, unless you have broadband Internet access, don't consider an ASP. And if you get broadband to support an ASP, remember to add it to the cost. A superfast T1 line, available anywhere, runs from $700 to $2,000 a month, depending on the quality of the connection. A slower digital-subscriber line (DSL) for business--where it's available--will chew up about $500 a month. And what happens when the line goes down? You're cooked. ''I advise against ASPs for any application you can't live without for a few hours,'' says Ben Reytblat, president of Quadrix Solutions Inc. in Piscataway, N.J., a Web-hosting company whose clients include small-business ASPs.

Then there's the nagging question of data security. An ASP that assures heavy-duty encryption or a virtual private network--wherein your computer and the ASP communicate using an agreed-upon encryption scheme--is a must for any company that puts its data on an ASP's server.

But hacker attacks aren't the only nasty possibility. Some ASPs use ''shared servers.'' Your list of key customers or salaries could be dumped into a database containing the same information from 50 competitors renting the same program. With a little skill, someone could gain access to it. ''It's not those Jolt-drinking, late-night vigilantes that should frighten an ASP customer, but the customer's next-door neighbors on the ASP's server,'' says ChannelWave's Schmelzer.

Possibly the biggest worry is putting part of your business in the hands of an unproven startup. Most industry watchers foresee a massive shakeout and consolidation. Gartner Group Inc., for one, predicts that by the end of next year, 60% of ASPs will be history. And if yours goes belly-up, you could too. ''Can you walk into your ASP, pick up the equipment, and carry it out of the building without getting arrested?'' asks Kirby Wadsworth, vice-president of Storability, a Southborough (Mass.) company that provides data-backup services. ''If not, kiss your data goodbye. The only thing between you and a data disaster is control.''

So, is ASP technology DOA? Probably not. Market analysts are convinced that the present turmoil is nothing more than industry growing pains. Yankee Group expects spending by small business on hosted applications to soar to $1 billion by 2004. A much more bullish InStat pegs spending at a staggering $7 billion.

Widespread adoption of ASPs will depend on several things. The first is low-cost, accessible broadband. The second: software designed to run smoothly over the Web--something major companies such as Sun Microsystems, Cisco Systems, Oracle, IBM, and Microsoft are pursuing. Indeed, as common applications are made Web-compatible, some analysts envision small companies renting a small but costly program, such as QuarkXPress, for a day or a month from an online business-services store. (Microsoft recently began licensing its programs for distribution by ASPs.) Small businesses told InStat that they would pay a maximum monthly fee of $35 per user to access applications they now own but use only occasionally.

Meanwhile, companies that did create applications for the Web are distancing themselves from their kin with a new moniker. ASPs now calling themselves IBSs (Internet business services) include Employease for human resources, Managemark for expense reporting, Intacct for accounting, and salesforce.com for customer-relationship management. ''They're starting with a clean sheet of paper,'' says John Menkart, vice-president of WEGO, a hosted-portal service for ASPs in Redwood City, Calif.

Web-ready or not, the newly anointed IBSs haven't stood the test of time, either. So if you decide to take the plunge, ask hard questions about security, data backups, data ownership, reliability, and business stability. Negotiate a tough service-level agreement--preferably one with a short duration. And have a disaster-recovery plan in place from the outset. While an ASP might be your company's savior, it might also be a similarly named serpent--the one whose bite did in Cleopatra.

By ALAN HALL

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