Application service providers (ASPs) host business-class applications in their data centers and make them available to customers on a subscription basis over the network.1 Among the business functions commonly outsourced in this way are customer relationship management (CRM), financial management, human resources, procurement, and enterprise resource planning (ERP).

The ASP owns the applications, and subscribers are charged a fixed monthly fee for use of the applications over secure network connections. Wireless ASPs (WASPs) provide hosted wireless applications so that companies will not have to build their own sophisticated wireless infrastructures.

An ASP enables customers to avoid many of the significant and unpredictable ongoing application management challenges and costs. Following the implementation of software applications, performed for a fixed fee or on a time and materials basis, customers pay a monthly service fee based largely on the number of applications used, total users, the level of service required, and other factors.

By providing application implementation, integration, management, and various upgrade services and related hardware and network infrastructure, the ASP reduces information technology (IT) burdens of its customers, enabling them to focus on their core businesses and react quickly to dynamic market conditions. Traditionally, organizations have installed, operated, and maintained enterprise software applications internally.

The implementation of enterprise software applications often takes twice as long as planned. Moreover, the ongoing costs of operating these applications, including patching, upgrading, training, and management expenses, are often significant, unpredictable, and inconsistent and may increase over time.

The emergence of the Internet, the increased communications bandwidth, and the rewriting of enterprise software to be delivered over IP networks are transforming the way enterprise software applications are being provided to companies. Instead of in-house installations, these applications are beginning to be hosted by third parties, in which the hosting company maintains the applications on an off-site server, typically in a data center, and delivers the applications to customers over the Internet as a service.

In addition, competitive pressures have led to a renewed focus on core competencies, with many businesses concluding that building and maintaining IT capabilities across their entire set of applications are not core competencies. In response to these factors, companies are adopting hosted applications rather than managing them in-house. An ASP typically can complete a standard implementation of its services in 2 to 14 weeks.

This allows customers to avoid the longer implementation times frequently experienced with installing and integrating customized, sophisticated applications. This enables customers to achieve the desired benefits quickly by reducing the time required to establish or augment IT capabilities with wire or wireless infrastructures of their own.

To address this market, many types of companies are setting themselves up as ASPs in this relatively new market, including long-distance carriers, telephone companies, computer firms, Internet service providers (ISPs), software vendors, integrators, and business management consultants. Intel Corp., for example, has built data centers around the world to be ready to host electronic business sites for millions of businesses that will embrace the Internet within 5 years.

Another ASP, Corio, enables businesses to obtain best-ofbreed applications at an affordable cost. Corio is responsible for maintaining and managing the applications and ensuring their availability to its customers from its data centers. For a fixed monthly fee for the suite of integrated business applications and services, businesses can achieve a 70 percent reduction on average of total cost of ownership (TCO) in the first year versus traditional models and a 30 to 50 percent TCO reduction over a 5-year period.

Among the WASPs are Etrieve and Wireless Knowledge. Etrieve combines the reach of wireless, information processing technology, and voice recognition to provide mobile professionals with the right information, at the right time, in the right format. As an extension of the desktop, Etrieve enables mobile professionals to manage their critical office information—e-mail, calendar, and address book—by voice, by text, and by importance. Wireless Knowledge, a subsidiary of Qualcomm, provides mobile access to Microsoft Exchange or Lotus Domino groupware.

Past Attempts

Application outsourcing has been around for nearly 30 years under the concept of the service bureau. In the service bureau arrangement, business users rented applications running the gamut from rudimentary data processing to high-end proprietary payroll. Companies such as EDS and IBM hosted the applications at centralized sites for a monthly fee and typically provided access via low-speed private-line connections.

In an early 1990s incarnation of the service-bureau model, AT&T rolled out hosted Lotus Notes and Novell NetWare services, complete with 24 × 7 monitoring and management. Users typically accessed the applications over a Frame Relay service or dedicated private lines. AT&T’s Notes hosting effort failed and was discontinued in early 1996. The carrier lacked the expertise needed to provide application-focused services and did not offer broad enough access to these applications.

The lesson: Large telecommunications companies are focused on building networks, which is quite different from implementing and managing enterprise applications. In 1998, there emerged renewed interest in this type of service with a new twist—that of providing an array of standardized services to numerous business customers. Economies of scale could be achieved in this “one to many” model by cost reductions incurred in service delivery; specifically by relying on managed IP networks.

Further cost reductions could be achieved by developing implementation templates, innovative application management tools, and integration models that can be used for numerous applications across a variety of companies and industries. To help sell the benefits of applications outsourcing, 25 companies have formed the Applications Service Provider Industry Consortium.

The consortium includes a wide range of companies, including AT&T on the service-provider side. Compaq Computer, IBM, and Sun Microsystems are representative of the systems and software vendors. Interconnect companies such as Cisco Systems are also members. The consortium’s goals include education, common definitions, research, standards, and best practices.

Several trends have come together to rekindle the market for applications outsourcing. The rise of the Internet as an essential business tool, the increasing complexity of enterprise software programs, and the shortage of IT expertise have created a ready environment for carriers and other companies entering the applications hosting business.

The economics of outsourcing are compelling, and new companies are being created to deal with customers’ emerging outsourcing requirements. As wireless technologies become popular, WASPs have emerged to bring applications to mobile devices, saving companies the trouble and expense of doing it themselves.