Caution: apps on tap

The skills shortfall is putting the screws on labour-intensive, in-house systems development

The skills shortfall is putting the screws on labour-intensive, in-house systems development

Increasing numbers of US chief information officers are turning to application service providers to host their corporate applications. One way UK CIOs could prepare for the inevitable ASP sales blitz that will soon cross the Atlantic is to consider the experience of their Stateside counterparts. As usual, US companies are ironing out all the teething problems of a new business model - in this case, uncertainty about pricing and about the Internet as a delivery medium.

So far North American companies have made by far the biggest use of ASPs, accounting for 90% of the $150m spent on hosted and managed enterprise applications last year*. Many US CIOs have had to entrust their application hosting to suppliers as a widening skills shortfall puts the screws on labour-intensive, in-house systems development.

And there's no shortage of ASPs to choose from as the so-called 'pure plays' (firms like Corio and USinternetworking, which created the 'software for rent' business model in 1997-8) are joined by mainstream suppliers such as Oracle and computer services firm, Breakaway Solutions. Market growth has convinced established software houses to invest heavily in ASP practices, alongside recent services and consulting ASP entrants, such as EDS. The seriousness of Silicon Valley's intent can be seen from PeopleSoft's financial projections, which predict that 50% of the company's total income will come from hosted, managed versions of its ERP applications by 2003.

But the ASP market is far from fully formed, and the business model is constrained by the lack of Web-enabled applications and users' security concerns about entrusting mission-critical applications to a public network vulnerable to outages and hacking. A recent poll found that just 27% of ASP customers used Internet-hosted applications. Nonetheless, the prospect of cost savings from using the Internet rather than a virtual private network as a delivery mechanism remains enticing.

Meanwhile, pure-play ASPs are chafing against the per-seat pricing policy of software suppliers whose applications they distribute. This outmoded pricing model prevents them offering innovative usage or transaction/revenue-based deals that charge a fairer price to users. 'Apps on tap' offer a convenient option, but UK users might do well to tread carefully in the shifting sands of this appealing but immature business model.

* All statistics from IDC's latest market research analysis

Read more on IT outsourcing