Having ‘played dead’ after the dot-com bust, companies supporting the hosted model of application provision are engaged in a fresh assault on the licence-selling software giants with applications developed for the web from the ground up. And this time, those apps are so easy to adopt and deploy that they are sneaking past IT policy-makers through clandestine user adoption. As analyst Erin Kinikin of Forrester Research observes: “[They] are the new departmental applications. They spread like viruses.”

Although the practise of using third parties to host core applications has been around for half a decade or more, a handful of upstarts such as Salesforce.com (sales force automation), RightNow (customer service management) and NetSuite (financial management) have spent years designing hosted applications that deliver core aspects of the functionality offered by major business software packages such as Siebel, Oracle, PeopleSoft and SAP as a web-based service.

Such ‘net native’ applications are a radical departure from so-called first-generation ASP offerings, say the new breed of vendors: the first attempts at application service provision amounted to little more than applications outsourcing – organisations still had to commit to paying a licence fee up-front, but typically shared some of the day-to-day costs with their service provider’s other customers. But trying to make applications designed for in-house use work across the Internet was a challenge – and neither did it obviate many of the challenges of a major application implementation.

On the other hand, as a recent survey at Aberdeen Group highlights, the key lure of the new model is the fast implementation, low commitment, low (initial) cost that goes with such online applications. Users can sign up to a Salesforce.com service, for example, individually, as groups, as whole companies – and just as easily drop the software service.

That is a huge advantage. But the question for mid-sized and large businesses boils down to this: Is such instant gratification matched by the kind of functionality, scalability, reliability and availability that they need? The answer lies with the couple of thousand customers that have so far adopted such technology services to any significant extent.

Going into such an arrangement, early users voice the same concerns: ‘If it is provided from one applications source, then it must be ‘vanilla’ and will lack any means of tailoring the service to meet specific business processes and needs; as it is centrally located, then any downtime will result in a loss of service to the organisation, with no real control over its recovery; and, in terms of data security, how can the organisation obtain regular copies of its data and ensure it has not been compromised?’

As serious as some of those concerns sound, the early feedback from customers amounts to a swift dismissal of those ‘myths’.

Tailoring the hosted ‘instance’ to handle customisation – from the corporatisation of the front-end through to more serious reworking of screen fields – are now fairly straightforward.

The user consensus is also that the latter two concerns are so key to ASPs’ business model that security and continuity capabilities have to be watertight. In fact, with so much riding on them they are almost certainly better than anything the customers could afford.

And that sometimes shows up. “There have been times when our [own company’s] servers have been down but we’ve still been able to keep [the sales unit] running by using Salesforce over the web,” says Robert Allbright of JMJ Associates, a consulting company in Austin, Texas.

Not surprisingly, all of the new set of ASP vendors claim uptime of over 99% (that of course assumes that users’ Internet connection is up 100% of the time) and most offer some elements of their software that can be worked on offline and later synchronised. Fears over the business viability of the vendors themselves – a hangover from when the first-generation ASPs crashed in the dot-com bust – also seems to have been dissipated by the cash reserves and financial prowess of the first batch of new wave ASPs to go public – RightNow and Salesforce.com.

Nonetheless, prospective customers should investigate such concerns to their own satisfaction before handing over their data, says Quocirca analyst Clive Longbottom. He recommends that customers should take advantage of the application service but if the ASP is handling mission-critical information, then the customer should insist on storing their data on a network attached storage system of their own, located at the ASP’s premises. A twist on that risk management is undertaken by the UK building society Nationwide. It is a user of RightNow’s hosted customer service application but also stores the knowledge base being interrogated in a separate format in its own offices, conducting security checks on its contents regularly.

Cost of freedom

Another more subtle downside – and one often noted by licence-centric vendors – is the calculation (by analysts at the Meta Group among others) that the total cost of paying ASP subscriptions over three years exceeds traditional software licence costs.

But in one case alone – CRM – with many companies aware of the amount of software they have lying on the shelf, the ease of adoption of the ASP service and the ease with which it can be dropped makes any comparison invalid. “Sales people always hate sales force automation,” says Erin Kinikin. “Doing CRM right is hard and it’s easier to blame the tool than get the culture and processes right. In some ways, hosted CRM allows people to fail faster, then move on to something else [online].”

As that stresses, the new model depends on customer satisfaction, says Richard Purchase, director of service development of Innovex, a company that provides sales teams to many of the UK’s top pharmaceutical companies. One of the most appealing aspects of using Salesforce is the ability to switch vendors at the drop of a hat, he says. “If they don’t keep me happy and they don’t keep moving the game on, I’ve got no huge financial ties to them,” he says.

But walking away may not be as easy as it sounds, warns Longbottom: “It is possible, but you’ve got to get the data back out of them and import that into a new solution.” That may mean tricky data conversion to an in-house system or a means of loading it into a different hosted service. Moreover, he says, that would involve reconfiguring environments and retraining people. “It costs an arm and a leg. It’s no different to application vendors: the end user is where the cost resides,” he says.

However, given the ease of adoption and dissension, it is perhaps not surprising that some industry watchers estimate customer churn rates to be over 30% – though none of the vendors publish such numbers.

And not surprisingly, that is an issue that the traditional CRM vendors, such as PeopleSoft and Onyx, are quick to point out. On plenty of occasions executives from their ranks dismiss the hosted sector as a minor irrelevance to the wider applications market.

However, that talk has been somewhat silenced by Siebel’s November 2003 purchase of early application service house UpShot, putting Siebel in the unique position of being able to offer both traditional and hosted applications. Such a ‘hybrid’ model can arguably exploit the advantage of both approaches, especially for larger companies – the flexibility of hosted software for the end user but with more complex integrated elements held on site.

So far, only a handful of organisations are taking this approach, admit Siebel executives. Rather, the hosted service is being used as an entry point. Projects that need to get off the ground immediately, fast-emerging companies with budget restrictions, or just overstretched IT departments can take a hosted ‘starter kit’, before later graduating to a fully fledged software implementation without sacrificing familiarity or skills, the company claims.

Siebel also has another card to play: the vertical specialisation of the UpShot technology. “When hosted products start having vertical industry versions, people will change again,” says Forrester’s Kinikin. “The way to be successful is to solve the specific problems of an industry. Customisation assumes the user knows what they want but most sales people don’t know what they want until they see it.” Siebel expects to start selling versions of the hosted service for the automotive, insurance and pharmaceutical industries by the end of 2004. Versions aimed at other vertical markets will follow.

New demands

Marc Benioff, CEO of Salesforce.com, likes to taunt Siebel with claims that his company is targeting Siebel’s enterprise customers. But the two companies are actually addressing different markets. “The more [ASPs] stick with small companies who don’t need sophistication, the more successful their hosted offerings will be,” says Kinikin. Although Salesforce can point to (among others) a 500-seat contract with Cisco, hosting remains a largely SMB phenomenon. That shows in the fact that at the mid-year in 2004 point Salesforce had 11,100 customers signed up for 168,000 user subscriptions, an average of 15 seats per customer.

Having no direct technical responsibilities for the system makes maintaining a close relationship with service providers vital. Both Salesforce.com user Innovex and NetSuite customer Forest YMCA (see box) claim they are on such good terms with their vendors that they have been able to contact high-level board members when ’emergencies’ have occurred. Moreover, their demands for new features have regularly resulted in these being incorporated into the next release of the service. But other customers have had problems with more everyday communications, such as helpdesk calls that are diverted to voicemail and insufficient help with basic training.

When Innovex’s Salesforce.com implementation hit a crisis with the system’s crucial ‘data junction’ tool, which moves customer data in and out of the application, Richard Purchase rang Benioff personally to demand a solution. A senior executive jumped on the next plane from San Francisco to Bracknell where they were engaged in the Innovex problem for more than five days. Purchase calls it a “very encouraging sign” but acknowledges that maintaining that level of service will be Salesforce’s biggest challenge as it expands.

In this case, the problem itself is more significant than the solution. Extracting data from the hosted application is crucial, allowing organisations to use it internally with other applications, share it with partners or even move it to an alternative ASP. Kinikin warns organisations not to get too hung up on ASPs’ simple deployment at the expense of the service they provide. “Installation is the tiniest part of an CRM implementation – just 1% or 2%. The big part is establishing business processes,” says Kinikin. “Collecting the data is the uninteresting part – using it to make better decisions or find the real value of customers brings the real benefits.”

Conscious of criticism that ASP users are missing out on this functionality, Salesforce.com is trying to ease integration with its Sforce development platform. But the work required to put it into practice can undo the savings in time and effort that flows from having the application hosted.

AgVantis, a $20 million US company providing technology services to the financial industry, chose an Onyx CRM package over Salesforce.com for this very reason. “[Salesforce’s] ability to customise and integrate with the back-end systems was not an option,” says Dennis Hunsberger, AgVantis’ VP of application systems. “They were [offering] a one-size-fits-all approach, whereas Onyx’s approach was more to work with us to make a product that fitted our needs specifically.”

Nevertheless, for SMBs, self-contained departments in larger companies or anyone who would not consider IT a core competence, the cost and management advantages of hosted applications are obvious. With some consultants arguing that only 10% of implemented IT systems actually bring competitive advantage, the role of ASP applications is expected to grow exponentially. Observing that, James Nicola at JNA Consulting predicts that in 10 to 15 years the majority of applications will be delivered by ASPs.

The choice of which IT functions to ‘outsource’ to an ASP comes down to distinguishing between tactical and strategic processes (see box). Paul Coby, CIO of British Airways, a RightNow customer, has the right approach: “Our aim is to take the complexity out of the business. This isn’t about technology, it’s about effective business process change.”

And, along with ‘No software’, ‘A war on complexity’ could just as easily be the mantra of the guerrilla ASPs.