Developer

Net worth: Assessing value in ASPs

You've heard all the hype—now how do you find value in application service providers? Are you better off running your application in-house or outsourcing to an ASP? Read on for some expert advice on cost analysis.


You’ve probably heard enough hype about application service providers (ASPs) in the last year to make your head spin. You know that by leasing Web-based applications instead of licensing and implementing these systems in-house, an ASP model can cut spending, expedite systems deployment, and help to integrate applications.

You may be considering outsourcing some of your applications to an ASP to free up IT staff for an e-commerce project or to eliminate the need to hire additional employees. But how can you determine the long-term value of the ASP approach? Would you be better off running the application from your IT department or sending it out to an ASP? We talked to experts in the biz for their take on it. Here’s what they said.

Finding the true savings
Recent studies estimate that the cost to small and midsize companies of leasing applications through an ASP may be one-half or less than licensing the same in-house business systems. The Stamford, CT-based Gartner Group, Inc., for instance, reports savings of 50 to 70 percent in the enterprise ASP space.

Until recently, however, there has been little research on the longer-term comparative costs of hosted versus traditional licensing approaches.Thus, potential ASP customers will still want to perform their own cost analysis to prove—or disprove—the anticipated savings.

One challenge in determining value is simply understanding what an application service provider offers. Meredith McCarty Whalen, a research analyst with Framingham, MA-based International Data Corporation (IDC), noted that the sheer number of vendors operating in the ASP space tends to confuse potential customers.

“There are hosting companies, systems integrators, outsourcers, all of them saying they’re offering ASP service, but there’s a very different offering from each of those types of vendors,” Whalen said. “Customers are getting mixed messages about what truly is an ASP offering and what its benefits are.”

Indeed, vendors know that customers want the straight facts about ASPs. Edwin Csukas, director of data services and CIO of Cortel Business Services, Inc.—a New York-based systems integrator and telecom and data management provider—is working to move his firm into the ASP market. He emphasized the importance of an accurate cost analysis that has been missing from the model in many cases.

“It’s become obvious to me that we have to be good at knowing the formula,” Csukas said. In the research he has conducted and in his dealings with existing ASPs, “some of the TCOs look too good to be true.”

You want to see the numbers
When shopping for a provider, expect to see a cost analysis from each. Without one, it’s impossible to evaluate the savings based on in-house versus outsourced applications. Here’s a cost analysis from apps4biz—an Andover, MA-based ASP vendor that offers supply chain, manufacturing, and financial applications.

Assume that typical, one-time, in-house costs for software and hardware, in addition to the application software itself, would include:
  • NT server—$9,000
  • Server software—$10,000
  • Battery backup—$1,000
  • Firewalls and backup—$15,500

Suppose your firm has five users and the software can be licensed for $4,000 per user at a cost of $20,000. These costs add up to more than $50,000. On top of those costs, add in these expenditures:
  • Maintenance contracts (18 percent of license costs per year)—$10,800/3 years
  • 24x7 technical support—$331,200/3 years
  • Backup and storage—$21,600/3 years

This brings the total cost for this example to more than $400,000 after three years, not including expenses such as customizing and installing the software, training end users, network hardware and connection fees, and Internet access charges.

Now consider the ASP option. Assume your company wants a dedicated server and direct hosting of the application with an ASP firm. After some shopping around, you may be able to come up with a pricing scenario that looks like this:
  • Hosting fees—$4,000 per month ($144,000/3 years)
  • Low-end NT server—$4,000
  • Application rental fees—$45,000/3 years

Along with these reduced charges, the customer would incur no server software, battery backup, firewalls and backup, or up-front application software costs. Likewise, there’s no IS-related backup and storage, 24/7 technical support, or maintenance costs. Therefore, the total ASP-related costs come to less than $200,000 after three years.

Get it on paper
In addition to the immediate cost savings, there are other benefits to the ASP model. For one thing, you gain the advantage of investing into your own business—particularly into core competencies—the money that would have gone into up-front licensing and information system costs. Along with that, ASP customers are usually offered discounted application hosting fees, because ASPs generally obtain volume discounts from companies providing the hosting services.

But be forewarned that startup ASPs might not have the wherewithal to truly deliver the cost savings they promise. Like many of their clients, they are growing a business and may need to increase fees they charge to offset other operational costs.

Your best bet as an ASP customer, then, is to get the cost analysis—preferably one that uses your own data—in writing. Experts say a compelling ROI analysis is one that is truly quantified, not just bulleted in a slide show presentation or data sheet.

IDC’s Whalen recommends comparing cost analysis with other ASP customers, forming a supply chain of sorts. As that practice grows, potential buyers will line up to contract with ASPs more quickly.

“Customers will be slowly and steadily coming on board and building this market,” Whalen said. “We think that it will take time to build a customer network, where they will pass on the word to one another.”
Are you planning an ASP implementation? Have vendors provided you with a cost analysis? Are you satisfied with what you’ve seen? Give us your thoughts by posting a comment below. If you have a story idea you’d like to share, drop us a note.

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