The ASP trend, commonly called application outsourcing or application hosting, has generated a significant amount of “buzz” in the marketplace based on the premise that it offers a new paradigm for the delivery of IT solutions. Almost every major ISV and IT service provider has announced some form of ASP strategy, either by evolving their business model to become an ASP themselves or by partnering with other organizations to offer application hosting services.
Even technology providers are jumping on the bandwagon. Cisco Systems recently announced the Cisco Hosted Applications Initiative (CHAI), which will facilitate the development of the ASP market. Scott McNealy, the CEO of Sun Microsystems and another big proponent, believes that the equipment business will be fundamentally reshaped by the ASP model. He stated, “Five years from now, if you’re a CIO with a head for business, you won’t buy computers anymore. You won’t buy software either. You’ll rent all your resources from a service provider.”

The attention on the ASP model has not gone unnoticed in both the private and public equity markets; no venture capitalist today will fund an enterprise application software startup that does not have an ASP strategy. Likewise, the public markets have rewarded new companies with sound ASP-centric business strategies. Both Breakaway Solutions and USinternetworking had very successful IPOs in 1999; we should expect to see other private ASPs aggressively pursue the IPO path in 2000.

The ASP model has its roots from the mainframe era, when the cost of computing power made it prohibitively expensive for most companies to purchase and use mainframe computers. Then, smaller companies would rent time on these machines – otherwise called “time sharing” – from larger organizations or third-party providers. Similarly, the ASP model today is most applicable to small and medium-size businesses that have neither the resources nor the staff to support the growing complexity of applications.

As defined by the ASP Industry Consortium — an advocacy group of companies formed to promote the application service provider industry by sponsoring research, fostering standards, and articulating the benefits of this new delivery model — an ASP is an organization that manages and delivers application capabilities to multiple entities from data centers across a wide area network. The essential difference between an ASP and a traditional outsourcer is than an ASP will manage the application and its components in a central location, rather than on a customer’s site. Applications are accessed over a network, and are typically used through a standard Web interface. In such an arrangement, applications can be scaled commensurate with demand, upgrades and maintenance can be centralized, and the necessary human resources can be effectively leveraged.

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