Enterprise customers in growing numbers are taking a look at application service providers and Web hosting companies as they seek ways to make their IT operations more efficient by using on-demand services.

Analysts say the ASP and Web hosting markets are seeing a rebirth as bigger outsourcers such as HP and IBM focus on utility computing, where customers get IT services on a pay-as-you-go, as-needed basis. The maturing and consolidation of the markets to a few, stable providers also is helping turn the tide for what were considered risky options just a few years ago.

"ASPs, managed service providers and Web hosting providers have served as a stepping stone to overall utility computing," says Jeff Kaplan, managing director at ThinkStrategies, an IT consulting firm. "At the Utility Computing World Conference I heard CiOs from major companies talking about Web hosting and ASP models like Salesforce.com, which they equated to utility computing. It's fascinating to hear them use these terms interchangeably They see them all as being interrelated."

Despite lingering challenges, the ASP market is expected to more than double from $1.6 billion last year to $3.5 billion in 2008, according to IDC. The Web hosting market also is predicted to see strong growth, expanding from $5.5 billion in 2003 to $10.4 billion in 2008.

The research firm expects the biggest growth to happen for service providers that deliver Web-native and Web services applications, such as Salesforce.com and Salesnet, with revenues skyrocketing from $666 million in 2003 to $3.7 billion in 2008.

"Interest in Web hosting and ASPs has been ramping up over the past eight to 12 months," says Ted Chamberlin, a principal analyst at Gartner. "A lot of clients had cut back for a long time, pared down their staff and been very conservative. Now they have to drive revenue and make their businesses run and move forward. Web and application hosiers are just a really good logical choice, and now they're a much safer alternative."

Getting in Deeper

For example, diversified industrial firm Ingersoll-Rand, of Woodcliff Lake, N.J., became a customer of Corio in 2001 and has recently expanded its use of the ASP's outsourcing services.

"We started off small with a couple of applications to test the water," says CIO Barry Libenson. "We had successful results and got a lot of benefits with things that we didn't do well ourselves like really reliable disaster recovery 24-7 monitoring. And we have access to a team of developers that are skilled at applying Oracle patches."

Happy with the initial partnership, Libenson began moving more Oracle applications to Corio and today has only "10% of the equipment on-site that I had three years ago." That means fewer headaches and the ability to dedicate IT staff to other, more business-focused tasks, he says.

He estimates he's saving between 20% and 40% by having Corio host and manage his Oracle application environment.

"The other beauty is that it's a variable-cost model so 1 can grow or shrink that environment on an as-needed basis," he says. "I don't need to worry about hiring people or doing reductions if we downscale."

Such experiences are once more driving businesses toward ASPs and hosting service providers, analysts say.

"The service delivery capabilities of the vendors are getting reasonably stable and reasonably reliable, and the pricing is getting competitive," says Mary Johnston Turner, an analyst at Summit Strategies. "And there's been enough of a track record now that these things do work, that they do stay up, that people's businesses don't crash and burn. It's not quite mainstream yet, but it's a normal question to ask for many companies now. You look at outsourcing vs. do it yourself, and [ASPs and Web hosiers are] another piece of that discussion."

Market Consolidation

Another factor is the consolidation of the markets. In Web hosting over the past year, Sawis Communications acquired the hosting assets of Cable & Wireless, Equinix acquired Sprint's hosting customers, MCI completed its acquisition of Digex, and NaviSite acquired lnterland and Conxion. Meanwhile, managed hosting providers such as Rackspace continue to see a growing customer list.

Customers are coming to providers with hosting needs that go beyond simple Web sites and e-commerce.

"What we're doing today that we weren't doing two years ago is we're running more and more highly critical applications that are Web facing, but they're not Web sites," says Graham Weston, CEO at the hosting firm Rackspace that saw revenue jump 54% in the past year. "Really managed hosting has grown up to where it really is the mainstream way of hosting a critical application."

For its part, the ASP market, which included hundreds of players during the dot-com boom, is boiling down to two major providers: USinternetworking and Corio. BlueStar also remains, and bigger outsourcers such as IBM and HP are starting to place greater investments in application management offerings.
The software makers also recognize a growing demand to have software delivered as a service: Oracle, PeopleSoft and Siebel Systems all have on-demand offerings.

Oracle says the hosted portion of its business is its fastest-growing division.
Customers buy the Oracle license as they would with a packaged deployment, but then pay $150 per month per user for the management and maintenance of the application, says Glenn Lim, vice president of Oracle On Demand. Oracle also offers a satisfaction guarantee that will refund customers 20% of the monthly fee if they are not satisfied with the service.

While the ASP market is enjoying "steady but modest growth," hurdles remain to widespread adoption of ASP services. For example, internal IT staff are concerned that they will lose control over applications hosted by third parties, says Amy Mizoras Konary, an analyst at IDC.

Complex Infrastructures

"Most customers have pretty complex infrastructures today. They've got customization, they've got integration, and they're concerned that their ability to maintain those integrations, those customizations, may be limited," she says. "In most cases it's not going to be. And in my opinion working with service providers makes the cost of those more visible and easier to manage."
Kyle Lambert, vice president of information solutions at agricultural firm John I. Haas in Yakima, Wash., agrees. He began using Oracle's hosted service about three years ago when he moved over his firm's Oracle ERP package.

Recently he transitioned Internet portal and e-mail applications to Oracle's hosted model.

Because Lambert is working with the application developer, he will be able to more easily integrate the three application services, a task that he says would have been a management headache for in-house staff.

"We are working together to come up with a way we can more tightly integrate them so that we have single sign-on for all of our services," he says. "We want to have data move transparently from one technology stack and service to another technology stack and service so that from my user standpoint they don't see that there is any difference in the environment."

By Jennifer Mears, Ecommerce Times