A look at the impact of ASPs on the emerging EAI industry

ASPs (Application Service Providers) have grown like wildfire, with such vigor that they have become the hottest IT issue since the advent of the Internet itself. These new service offerings are supposed to revolutionize the e-commerce and EAI worlds. Some ASP pundits have made the bold prediction that ASPs will eliminate the need for in-house ERP implementations and EAI all together..

ASPs: An Overview

Application Service Providers present companies with a cost-effective way to outsource IT infrastructure and services. ASPs have become cost effective by leveraging IT infrastructure and skill sets across multiple customers. Presently, ASPs offer services ranging from simple web hosting to complex offsite ERP management and integration. Now, companies are moving their data and applications onto the site of the ASP, and the communications infrastructure is the Internet. Fueling this phenomenon is the shortage of talent, forced by the Internet itself.

Qualified information technology professionals are such a hot commodity that companies can’t find or afford the talent they need to run their mission critical applications. Even when they do find the talent, they are under a constant threat of losing those specialists to headhunters. To compound the problem, CIOs are being asked to implement electronic commerce initiatives in weeks, not months, and be ready to adapt or architect completely new strategies at a moment’s notice.

The ability to adapt quickly to business forces, the shortage of qualified individuals and the emergence of broadband networks, has set the stage for ASPs to emerge and take their proper place in the industry. Let us host, manage and secure your applications, they say, and you can concentrate on what you do best -business. Outsourcing has become a contending business today; the Gartner group estimates the current ASP market at $2.7 billion and $22.7 billion by 2003. That is a revenue increase of 72 percent. It is clearly evident that the ASP market has a lot to offer, and the promise to grow into a mature, stable “e-industry”.

The demand for such services is rising so fast that computer software and hardware companies are scrambling to form strategic alliances and get in the game. Big names ranging from Intel, Microsoft and Qwest to consulting firms such as KPMG and EDS to computer companies such as Hewlett-Packard and IBM have laid a claim to a share of the ASP pie. In fact, in one year, the underlying question has changed from “What is an ASP?” to “Who isn’t an ASP?”

ASPs offer companies a cost effective, outsourcing mechanism, especially now, by leveraging IT infrastructure and IT skill sets across many clients. This translates into several clients enjoying the benefits of high-end systems that they could normally not afford. The ASP can defer the costs of this infrastructure by diluting them over several customers. Furthermore, ASPs can attract and highly compensate skilled IT professionals. ASP proponents sell the idea that outsourcing in house systems, will free corporations from spending millions of dollars incurred during system implementations and application integration costs. Companies such as Oracle, SAP, Microsoft and Verio have invested millions of dollars in ASP/web portal development and research. Everybody who is anybody in the data infrastructure, application development, high-tech consulting and systems integration businesses is joining the fray. The list of companies that now brand their business as an ASP reads: AT&T, Cable & Wireless, Digital Island, Exodus, Global Crossing, GTE Internetworking, Intel, NaviSite, Qwest, Sandpiper Networks, UUnet to name a few. Qwest, announced last spring that it would build seven CyberCenters across the country in partnership with KPMG and HP. Quest said it was now doubling the effort based on market response. The CyberCenters were also being expanded to include data warehouses that would feed the applications hosted by Qwest. John Charters, head of Qwest’s ASP initiative, said as much as $1 billion worth of ASP contracts are now in the pipeline. “It seems like all of the components [to offer ASP services] and industry drivers are coming together at the same time.” Charters said.

The reality of ASPs and their impact on the emerging EAI industry

It is clearly evident that the ASP market has gained a strong market presence, and it is here to stay. What does this dramatic growth mean for the emerging EAI industry? Are these businesses going to be relics of the past as some ASP proponents declare? Will the ERP industry with a market capitalization of $600 billion have to change from selling software packages for an up-front licensing fee be reduced to running a hosting service on a monthly revenue cycle?

The answer to all these questions is no. Despite the tremendous hype surrounding ASPs, rumors of ASPs replacing traditional ERP and EAI efforts are greatly exaggerated. ASPs do make sense for small, medium and large sized businesses, but in different contexts. They make sense for small and medium sized companies that have not invested in a technological infrastructure. For large corporations, with an existing IT infrastructure, and IT staff, ASPs play a completely different role. Outsourcing existing IT infrastructure and applications may not make good business sense for established corporations because they have already invested millions of dollars in attempts to integrate and streamline their enterprise application systems. However, there is an emerging trend that is taking a strong foothold in IT intensive corporations.

These large corporations, with their IT infrastructures, and staff, are moving to outsource new technologies and integrating them with their existing application systems with the help of the ASPs. This has several advantages: Firstly, these companies can still benefit from the value and return on investment costs from their existing infrastructure, while outsourcing newer technologies to the ASPs. Secondly, this may be a better alternative for the corporations because the burden of integrating the new infrastructure lies on the shoulders of the ASPs. The ASP has to provide seamless integration of the outsourced infrastructure with the existing systems. As any CIO will tell you, most of the costs incurred when implementing new applications or systems are during the integration phase. This way, the corporations save millions of dollars in implementation costs and valuable time, by putting the burden of integration on the ASPs, provided that the ASPs can deliver. As a direct result of the ASPs providing integration services, EAI firms have now partnered with the ASPs to implement application integration infrastructures. Therefore the statement that ASPs will eliminate the need for application integration is not altogether valid. ASPs are actually fueling the increased need for Enterprise Application Integration. Several companies now realize the true value of EAI, as a direct result of the ASP paradigm. The EAI firms and the ASPs are now in a relationship of symbiosis. The ASPs rely on the technical expertise and methodologies of the EAI firms to see the enormous integration efforts of their clients through to the end. This in turn means increased exposure and partnering opportunities for EAI firms. Their collective clients are the ones that truly benefit the most from this relationship. The ASPs in this way, have become the catalysts for application integration. Integration was once a very painful and complicated ordeal; it is now a well-structured and defined process that is actually affordable, not to mention manageable, due to the joint efforts of EAI firms and ASPs.

In the case of small and medium sized corporations, that do not yet have an existing IT infrastructure, ASPs are a blessing as well. These companies do not have to invest in costly infrastructure or ERP packages. The ASPs can again, with the help of EAI firms, provide expertise and guidance for these corporations. This helps small and medium sized companies reduce their startup costs, while still enjoying the infrastructure benefits that are realized by their bigger competitors. ASPs can design and host the infrastructure and applications for these companies. All these companies need is a client, the ASPs provide the hosting service (backend systems, infrastructure) most importantly the EAI firms bring the integration know how needed to establish communications between Client’s native systems and the ASP’s hosted systems.

Independent industry analysts believe that software vendors and enterprise application integration firms will continue to have a sizeable hold on their markets. With the ASPs on the scene, the EAI market is expected to increase dramatically. Large companies will continue to support their existing I.T. infrastructure while outsourcing new technologies. Small and medium sized business will enjoy reduced startup costs and reduced maintenance expenditures as a direct result of outsourcing to the ASPs. It is a “win-win” situation for everyone; the real change that will occur is to whom ERP software makers sell to. ERP software companies can still market their products in packages for an up-front licensing fee to the ASPs. This way, the ERP business that is sluggish at the moment, can also build up momentum, as a result of ASPs entering the scene.

The ASPs have become the new middlemen; they have become channels for delivering packaged software to small and midsized corporations. This seems to be a mutually beneficial relationship. However, it is a significant development because it means ASPs are replacing software vendors as the customer’s point of contact. Analysts believe that software companies will have to seriously rethink their business models to accommodate these new intermediaries. Still, it’s so early in the game that nobody knows exactly what the new business model will ultimately look like. To find out, many software vendors have forged alliances with ASPs to get acclimated to this new business model.

In conclusion, the current market is seeing the birth of many types of Application Service Providers. Furthermore, all these ASPs, have their advantages and shortcomings. The ASP market is in its infancy, but already it has the potential to revolutionize the way that businesses utilize Information Technology in their daily functions.

In reality, ASPs will become the catalysts for promoting EAI, bringing EAI and ERP services to corporations that could previously not afford them. For bigger corporations that can afford in-house development; ASPs with the help of EAI firms bring expertise and the “know-how” to integrate and streamline existing technology with the latest and greatest. Accepting and utilizing ASPs will result in better return on investment ratios for all types of corporations: big and small. It means reduced risk of implementing and integrating new technology. Most importantly, it provides some level of comfort and stability for companies that would not have the resources to undertake ERP/EAI projects alone. It will be the ASPs that will bring the concept of EAI to a much wider audience.

All this means greater revenues and an increased demand for both EAI services and ERP software for those companies that choose to work with the ASPs to provide customized cost-effective solutions for any sized company.