When the application service provider (ASP) model burst on to the scene a few years ago it was touted as a panacea for companies which were reluctant to invest in software licences but wanted access to heavyweight applications such as enterprise resource planning.
However, when the hype had subsided and the smoke cleared, it became clear that there were some major problems, not least with the actual delivery.
These difficulties were compounded by the widespread confusion in the industry about the technology involved and the potential benefits of the model. This confusion was highlighted in a report by market intelligence firm Rhetorik published in October 2000. The company surveyed 306 IT directors across the UK, France and Germany and found that 39% were not aware of the term ASP and 30% were unable to name a service provider company.
But although the fledgling ASPs have come in for much criticism since then, last month they received some good news in a report by the Aberdeen Group, which predicted that the market would increase in value from $3bn (£2bn) in 2001 to $16bn in 2005. Although other analysts may disagree on the numbers many are predicting a substantial jump in the size of the market over the next four years.
But what exactly is an ASP?
In the ASP model, software and applications are hosted by the service provider on secure servers instead of being installed in-house by the user. Access to these services is provided over the Internet, which the users access via closed networks. The idea is that users receive the same service they would get if they had invested in implementing the software in-house but without the associated costs and risks or the burden of providing support.
As Aveva Consulting's president Tony Christian explains, "An ASP provides a software-based service to multiple customers over a wide area network. Instead of selling licences for software, an ASP allows its customers to pay according to how much they use - just as they pay for other services, such as electricity."
Despite all the tales of delivery woes, ASPs can be an attractive proposition for small companies with limited budgets and small IT departments or organisations that wish to focus on their core business instead of worrying about IT and software considerations.
By choosing the ASP option, companies do not have to buy costly software licences or provide a support function. Bills can be paid annually or in monthly instalments to help ease the burden.
In theory, what the ASP model offers companies is flexibility - both financially and logistically. It enables small companies to be more competitive and responsive to new market trends by giving small and medium-sized organisations access to new technology and upgrades. It could even be argued that ASPs have helped smaller companies to launch e-strategies that would have not otherwise got off the ground.
But the ASP model is not just limited to smaller firms and is increasingly being adopted by larger organisations as part of a wider outsourcing strategy.
The model is also evolving. Traditionally ASPs have focused on areas such as human resources, billing and finance but some are branching out into more specialised areas. Others are targeting specific industries and repositioning themselves as vertical sector providers, instead of taking an industry-wide approach, which has been criticised as too broad. Some industry wags have claimed the A in ASP stands for "all"(although others prefer the alternative "anyone still paying?").
"Vertical sector ASPs are one of the more interesting aspects of the growth of ASPs," says Martin Tennant, a consultant at Compass Management Consulting. "In sectors such as health and logistics, niche players have created offerings that go right to the heart of the enterprise."
By combining an understanding of the software with a grasp of the industry sector and the business issues involved, vertical service providers claim they offer products and services that are more tailored to a company's needs. Although Tennant admits that in many cases the capacity of these niche players has yet to be tested, he points to the potential for diversity in the vertical ASP model. "[They] show what is already available to organisations looking for radical solutions to their needs," he says.
A much-hyped recent development in the market is the wireless ASP. These work on the same principle as regular ASPs but enable customers to access services from a variety of wireless devices, such as mobile phones or personal digital assistants.
Another related model is the management service provider which manages IT infrastructure services such as server, network and application management for other companies. However, in practice, most ASPs also provide such services in addition to hosting applications.
Levels of awareness about management service providers in the UK are low but, according to Beth Rogers, solutions marketing manager at professional services group Logical, "The hassle of managing multiple ASP suppliers could be an inhibitor to realising the advantages of the ASP business model," and this will push some companies towards management service providers.
Whatever third party a firm chooses, there are still issues that need to be considered beforehand to get the most out of the model, although mostly it is a matter of common sense.
As Russell Luke, sales and marketing director of performance software firm Precise UK says, "The key concerns that an IT director has with ASPs are trust, performance and reliability." To address these concerns, it is essential to extract a tight service level agreement.
The model is still evolving and companies have not yet reached the stage where they can receive all their applications from a third party. Industry sentiment has not been helped by the recent spate of negative coverage but for IT departments coming under increasing pressure to justify or reduce their budgets in these lean times, ASPs might well be worth a second look.