Application service providers—are they the greatest thing since fresh ground coffee… or old fashioned service bureaus in disguise? Learn the advantages and disadvantages to outsourcing your organization’s software applications.

Back in the days when just one mammoth computer filled up a whole room, the idea of every small and medium-sized company maintaining their own hardware and software made as much sense as buying an airplane to visit the relatives in Florida. To reduce expenses, organizations often outsourced their information processing functions to companies called service bureaus.

Today it’s a lot cheaper to purchase software licenses and computer hardware, but the cost and difficulty of hiring top notch IT talent to maintain and upgrade them has become relatively more expensive. Instead of returning to the service bureau concept, many companies have turned to their hipper young cousins -- application service providers (ASPs) -- which deliver current and reliable software solutions over the Internet.

An application service provider is a company that delivers software applications to multiple users over the World Wide Web or other network. Instead of purchasing software licenses directly from vendors or re-sellers, companies rent the software from an ASP, which hosts, maintains and upgrades software applications and computer hardware.

In some ways, the ASP is like the local Pizza Hut which buys pizza ovens, hires cooks, and stays current on the latest recipes for pizza -- which it then delivers to multiple hungry customers (or end users).

Of course, in the case of the ASP, end users access their software applications via a web browser or other thin client rather than a pizza delivery person.

Almost everything on the menu can be found via the ASP model…. from such trendy apps as e-commerce and customer relationship management (CRM) to trusty old workhorses such as payroll and accounts receivable. While some organizations opt to keep mission critical applications in-house, others outsource everything they can, including enterprise resource planning (ERP) systems.

Depending on the software company, some act as their own ASP, while others contract with third parties to host and deliver their software..

One of the main benefits to receiving software via an ASP is not having to maintain a large in-house IT staff. With knowledgeable, skilled IT professionals a challenge to find and retain, it can be tempting to delegate staffing headaches to an ASP which can more easily afford a highly trained, well paid staff. Some areas within an organization may contract with an ASP as another avenue if the IT department does not have sufficient resources to support their goals.

An ASP can help organizations stay current with software trends and upgrades. ASPs are usually bound to upgrade to the latest version of each software application as part of their contract with users.

ASPs can also offer considerable up front cost savings, especially for newer cash poor companies or underfunded departments within an established organization. Many software applications would be cost prohibitive if an organization had to pay hefty initial licensing fees, but can be more easily budgeted for with either monthly or "per drink" (per use) payment options. Capital that is not tied up in technology can be used for other activities such as R&D or marketing.

Because IT staff does not have to be trained to implement new applications, companies can often jump into new applications more quickly with the ASP model. And if the ASP provider contracts with multiple software vendors, they can usually integrate different packages so data is shared among applications. (Be sure to check references to ensure the ASP has successfully integrated these applications for other customers.) Ideally, the ASP should also be able to integrate the data from its web-based software with applications already hosted in-house.

Many ASPs also offer guaranteed service levels or up time (see Service Level Agreements below), assuring higher performance than might otherwise be achieved.

Data security is often the main concern of companies considering an ASP. Customer names and private information is placed in the hands of an outside company whose staff members are virtual strangers with no loyalty to the end user company. One of the ASPs employees could share the data with a competitor… or a competitor could access a rival company’s data through an insecure fire wall. A reputable ASP company will use security software to validate users and provide encrypted connections (i.e. using a secure socket layer such as https vs. http) so that hackers cannot access sensitive information.

Redundance is also important to ensure that floods, earthquakes and other natural disasters do not spell disaster to end users hundreds of miles away. ASPs with multiple data centers can store backed up data at another site and restore lost data when necessary. Some companies have gone so far as to purchase their own back up servers or to own the servers hosted by the ASP.

It is also important to make sure the hardware and software is scalable to the end user company’s needs so that if an organization grows or shrinks it will still be able to use the same software applications, with costs shifted up or down accordingly.

Just as with any software vendor, a company will not want to contract with a fly-by-night ASP, but rather should engage a reputable company with a solid customer base. Standard due diligence procedures apply with ASP selections, including a Request for Proposal (RFP) to identify that the software applications will meet functional needs. The ON-LINE CONSULTANT vendor selection tool can be used with ASP selection projects to help identify the best solutions. In addition, a complete set of customer references should be provided to ensure contacts are not limited to only the most satisfied hand-picked customers.

Customization is another issue to consider when choosing an ASP vendor. Unless an end user is willing to accept an out-of-the-box solution, the ASP must be willing to customize the software just as if it were a traditional software vendor. A long-term contract is usually needed to make the arrangement worthwhile to both parties since custom programming is costly. As with any software proposal, time and expenses related to modifications should be agreed to in advance as part of the contract.

In some cases, cost savings may not be as great as anticipated since a company will still need to maintain its own network servers for standard applications such as e-mail.

Although sharing the same name as the group that kidnapped Patty Hearst, an SLA is actually a good thing in the ASP world. The SLA (or Service Level Agreement) is a contract between the ASP and end user that covers allowable downtime, security issues, connection speed, bug resolution and other performance areas, as well as penalties for when the agreement is not adhered to or, in a worst case scenario, a contingency plan if the ASP goes out of business. (Many ASPs have merged or filed bankruptcy since the concept’s heyday in the late 1990s.)

While some organizations are reluctant to jump onto the ASP bandwagon, others are eager to enjoy the time and labor savings promised by this delivery model. In some cases an organization’s culture dictates whether it is comfortable allowing an outside party to host important applications, much as some families insist on cooking their own turkey at Thanksgiving while others pick up ready made "home cooked" meals at the supermarket.

Sometimes an organization will experiment with the ASP model by outsourcing less consequential applications as a way to test the waters before diving in head first. If convenience, capital preservation and scare IT talent are driving forces, then delivery of software via the Internet may pose an attractive alternative.

Copyright 2004 On-Line Consultant Software

See also ASP Trends
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