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Application Service Providers - INTRODUCTION, BACKGROUND, MAIN FOCUS, FUTURE TRENDS, CONCLUSION

applications asps business asp

Vincenzo Morabito
Bocconi University, Italy

Bernardino Provera
Bocconi University, Italy

INTRODUCTION

Until recently, the development of information systems has been ruled by the traditional “make or buy” paradigm (Williamson, 1975). In other words, firms could choose whether to develop particular applications within their organizational structure or to acquire infrastructures and competences from specialized operators. Nevertheless, the Internet’s thorough diffusion has extended the opportunities that firms can rely upon, making it possible to develop a “make, buy, or rent” paradigm. Application service providers represent the agents enabling this radical change in the IS scenario, providing clients with the possibility to rent specifically-tailored applications (Morabito, 2001; Pasini, 2002).

Our research aims at analyzing ASPs in terms of organizational characteristics, value chain, and services offered. Moreover, we analyze the set of advantages that ASPs can offer with respect to cost reductions, technical efficiency, implementation requirements, and scalability. Finally, we describe the major challenges these operators are currently facing and how they manage to overcome them.

BACKGROUND

ASPs are specialized operators that offer a bundle of customized software applications from a remote position through the Internet, in exchange for a periodic fee. ASPs provide for the maintenance of the system network and for upgrading its offer on a continuous basis. The historical development of ASPs follows the diffusion of the Internet. Early actors began to operate around 1998 in the U.S., while a clear definition of their business model has only recently come to shape. As opposed to traditional outsourcing, the ASP offer is based on a one-to-many relationship that allows different clients to gain access to a defined set of applications through a browser interface (Factor, 2001).

MAIN FOCUS

Information and Communication Technology (ICT) is widely believed to represent a crucial determinant of an organization’s competitive positioning and development (Brown & Hagel, 2003; Varian, 2003). On the other hand, companies often face the problem of aligning corporate strategies with ICT resources and capabilities (Carr, 2003), in order to rely on the necessary applications at the right time and place, allowing for the effective implementation of business strategies. The inability to match corporate strategy and ICT capabilities might lead to efficiency and efficacy losses. In particular, Information Systems are among the organizational functions most affected by the organizational and strategic changes induced by the Internet. Historically, firms could rely on two possibilities for designing and implementing Information Systems. The first option is to develop applications internally with proprietary resources and competences. The second possibility is to acquire such solutions from specialized market operators. Despite the conceptual relevance of this distinction, the range of applications currently available on the market is ample and encompasses a series of hybrid solutions that lie on a continuum between the make and the buy option (Afuah, 2003; Bradach & Eccles, 1989; Hennart, 1993; Poppo & Zenger, 1998). In that sense, standard outsourcing relations hardly ever take the shape of pure spot solutions. On the contrary, outsourcing contracts often develop into long-run partnerships (Willcocks & Lacity, 1999). Therefore, the ASP model can be conceived as a hybrid solution located on the continuum between market and hierarchy (Williamson, 1975). Nevertheless, as shown in the following paragraphs, the ASP option presents particular, stand-alone peculiarities and features such as to make it different from traditional make or buy models and to acquire a level of conceptual legitimacy in itself.

The ASP model is based on two key technologies: Internet and server-based computing. The first technology represents the building network of the system, while server-based computing allows many remote clients to obtain access to applications running on a single server. The functioning mechanism is quite simple: the server manages as many protected and separate sessions as the number of logged-in users. Only the images of the interface, client-inserted data and software upgrades “travel” on the Internet, while all applications reside on the server, where all computations also take place. Figure 1 provides a visual representation of the functioning of a server based computing system.

Client firms can rent all kinds of business applications, ranging from very simple to highly complex ones, as described below:

  • Personal applications, allowing individual analysis of basic, everyday activities and tasks (e.g., Microsoft Office).
  • Collaborative applications, supporting the creation of virtual communities (e.g., groupware, e-mail, and video-conference systems).
  • Commercial applications, aimed at creating and maintaining e-commerce solutions.
  • Customer Relationship Management systems (e.g., customer service, sales force automation, and marketing applications).

  • Enterprise Resource Planning, applications aimed at the automation of all business processes, at any organizational level (e.g., infrastructure management, accounting, human resources management, and materials planning).
  • Analytical applications that allow for the analysis of business issues (risk analysis, financial analysis, and customer analysis).

Along with these applications, ASPs offer a wide array of services, as reported below:

  • Implementations services that are required in order to align applications and business processes. These services include, for example, data migration from previous systems to the ASP server and employees’ training.
  • Data centre management services, aimed at assuring the reliability and security of hardware and software infrastructure, as well as transferred data.
  • Support services, delivered on a non-stop basis, in order to solve technical and utilization problems.
  • Upgrading services, aimed at aligning applications with evolving business needs and environmental change.

ASPs can hardly be fit into a single, monolithic categorization (Seltsikas & Currie, 2002). In fact, operators can be grouped into different classes, according to their offer system and market origins (Chamberlin, 2003). The first category includes enterprise application outsourcers, which are traditional operators in the field of IT outsourcing that deliver ASP services. They can rely on profound process knowledge, sound financial resources and wide geographic coverage. On the other hand, their great size can have negative impacts on deployment time, overall flexibility, and client management.

The second category of actors refers to pure-play ASPs, that usually demonstrate the highest degree of technical efficiency and competency in application infrastructure design and implementation. As opposed to enterprise application outsourcers, they are flexible, fast at deploying solutions and extremely attentive towards technology evolution, although they might be hampered by financial constraints and limited visibility.

The third class of operators includes independent software vendors, which can decide to license their products in ASP modality. These firms are extremely competent, technically skilful, and financially stable. On the other hand, they often lack experience in supporting clients in a service model and can be really competitive only when offering their own specialized sets of applications.

The final category of actors refers to Net-Native ASPs, smaller operators extremely agile and flexible, offering standard repeatable solutions. On the other hand, ASPs offer point solutions, are often financially restrained, partially visible and unable to customize their offer.

In order to ensure adequate service levels, ASPs must interact with a complex network of suppliers, that include hardware and software producers (or independent software vendors), technology consultants and connectivity suppliers. Software vendors generally offer ASPs particular licensing conditions, such as fees proportional to the number of users accessing the applications. Moreover, in order not to lose contact with previous clients, many software producers engage in long-term business partnerships with ASPs. Hardware vendors often develop strategic relationships with ASPs too, as the latter are interested in buying powerful servers, with advanced data storage and processing capabilities. Technology consultants are important actors as they can include ASPs’ solutions in their operating schemes. Connectivity suppliers as Network Service Providers can decide whether to team up with an ASP or to offer themselves ASP solutions. In conclusion, ASPs rely on a distinct business model, which can be defined as “application renting”, where the ability to coordinate a complex network of relationships is crucial.

The ASP business model (or “rent” option) is different from that of traditional outsourcing (or “buy” option) due to three main reasons (Susarla, Barua & Whinston, 2003). First of all, an ASP centrally manages applications, in its own data centre, rather than at the clients’ location. Second, ASPs offer a one-to-many service, given that the same bundle of applications is simultaneously accessible to several users. On the contrary, traditional outsourcing contracts are a one-to-one relationship in which the offer is specifically tailored to suit clients’ needs. The third main difference, in fact, is that ASPs generally offer standard products, although they might include application services specifically conceived for particular client categories.

Adopting the “rent” option allows firms to benefit from a wide set of advantages. First of all, the ASP model can remarkably reduce the operating costs of acquiring and managing software, hardware and relative know-how. In particular, the total cost of IT ownership notably decreases (Seltsikas & Currie, 2002). Second, costs become more predictable and stable, as customers are generally required to pay a monthly fee. These two advantages allow for the saving of financial resources that can be profitably reinvested in the firm’s core business. The third benefit refers to the increase in technical efficiency that can be achieved by relying on a specialized, fully competent operator. Moreover, with respect to developing applications internally or buying tailored applications from traditional outsourcers, implementation time considerably decreases, allowing firms to operate immediately. Finally, ASPs offer scalable applications that can be easily adjusted according to the clients’ evolving needs.

In conclusion, the ASP model leads to minimize complexity, costs, and risks, allowing also small firms to gain access to highly evolved business applications (as, for example, ERP systems) rapidly and at reasonable costs. Nevertheless, the adoption of an ASP system might involve potential risks and resistances that must be attentively taken into account (Kern, Willcocks & Lacity, 2002). We hereby present the most relevant issues, as well as explain how ASPs try to overcome them (Soliman, Chen & Frolick, 2003).

Clients are often worried about the security of information exchanged via the Web, with special reference to data loss, virus diffusion, and external intrusions. Operators usually respond by relying on firewalls and virtual private networks, with ciphered data transmission. Another key issue refers to the stability of the Internet connection, which must avoid sudden decreases in download time and transmission rates. In order to ensure stable operations, ASPs usually engage in strategic partnerships with reliable carriers and Internet Service Providers. Moreover, clients often lament the absence of precise agreements on the level of service that operators guarantee (Pring, 2003). The lack of clear contractual commitment might seriously restrain potentially interested clients from adhering to the ASP model. Therefore, many operators include precise service level agreements clauses in order to reassure clients about the continuity, reliability, and scalability of their offer. Finally, the adoption of innovative systems architecture on the Internet might be hampered by cultural resistances, especially within smaller firms operating in traditional, non technology-intensive environments. In this case, ASPs offer on the spot demonstrations, continuous help desk support, attentive training and simplified application bundles not requiring complex interaction processes.

FUTURE TRENDS

Regarding future development, some observers have predicted that, by 2004, 70 percent of the most important firms in business will rely on some sort of outsourcing for their software applications (Chamberlin, 2003). The choice will be between traditional outsourcers, niche operators, offshore solutions, and ASPs. Moreover, according to a research carried out by IDC and relative to the United States alone, the ASP market is to grow from $1.17 billion in 2002 to $3.45 billion by 2007. Similar growth trends are believed to apply to Europe as well (Lavery, 2001; Morganti, 2003). Other observers believe that the ASP market will be affected by a steady process of concentration that will reduce competing firms from over 700 in 2000 to no more than 20 in the long run (Pring, 2003).

CONCLUSION

In conclusion, we argue that ASPs represent a new business model, which can be helpful in aligning corporate and IT strategies. The “rent” option, in fact, involves considerable advantages in terms of cost savings and opportunities to reinvest resources and attention in the firm’s core activities. As many other operators born following the rapid diffusion of the internet, ASPs also experienced the wave of excessive enthusiasm and the dramatic fall of expectations that followed the burst of the Internet bubble. Nonetheless, as opposed to other actors driven out of business due to the inconsistency of their business models, ASPs have embarked upon a path of moderate yet continuous growth. Some observers believe that ASPs will have to shift their focus from delivery and implementation of software applications to a strategy of integration with other key players as, for example, independent server vendors (Seltsikas & Currie, 2002). As the industry matures, reducing total costs of ownership might simply become a necessary condition for surviving in the business, rather than an element of competitive advantage. ASPs should respond by providing strategic benefits as more secure data, better communications, attractive service-level agreements and, most important, integration of different systems. The ASP business model might involve a strategy of market segmentation, including customized applications from more than one independent software vendor, in order to offer solutions integrating across applications and business processes.

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