ASPs Wither, Web-Based Services Endure

ASPs Wither, Web-Based Services Endure

Debbie Gage

The world of banking is a conservative one, not exactly the place you’d look first for innovation.

But Rodric O’Connor, chief technology officer of Putnam Lovell National Bank Financial, an investment bank in San Francisco, is daring. O’Connor’s betting on the Internet, putting his money on 15 companies to host and manage Putnam Lovell’s software.

In 2002, that hardly seems the way to solve the cost and operating challenges of running the information systems of a major bank. But O’Connor hires young, agile Web-service providers to handle the bulk of the bank’s management functions, like dealing with personnel issues or financial reports. The company’s trading system remains safely behind firewalls on private networks, under the company’s control.

So, for instance, workflow-software company BlueMatrix sends out the bank’s research reports to customers electronically. To get that done, BlueMatrix asks another service provider, Salesforce.com, for a customer list through middleman Grand Central Communications. A portal provided by Jamcracker lets employees sign on once to all Web applications.

“There is one reason I’m doing this: money,” O’Connor says.

So, while the Internet itself has lost its glamour, judicious use of applications run by companies that provide their services wholly over the Web may be finding favor by companies such as Putnam Lovell. For instance, Putnam Lovell relies on a number of vendors that didn’t even exist four years ago.

That’s when a first wave of Web hosting companies burst onto the market. Calling themselves Application Service Providers (ASPs), they maintained customers’ software on their own computers and rented it back to them.

The idea was that the customers, then primarily dot-coms, would be freed of purchasing and maintaining software and could use their dollars elsewhere, perhaps to bolster their marketing budgets and build their brands. And the rent would provide ASPs with a steady source of income.

But two things went wrong. First, there were few companies that thought renting was a good idea. Most wanted to own an asset as important as software, and they were not about to turn over anything that controls their critical business processes to an outsider. Second, the Internet stock-market crash wiped out most of the customers.

Parts of the original idea survived, however, and are bolstered now by customers willing to give Web-delivered services a try. It’s hard to tell, however, just how many customers there are.

Who’s Using Web Services?

Summit Strategies, an industry analyst firm, has no estimate of how many companies are participating now. “I’ve been tracking this market for four years, and still almost weekly I see something I didn’t know about,” says Vice President Laurie McCabe.

Salesforce.com, which now claims to serve 5,000 customers, has been at the forefront of this wave, providing customer-relationship management not as software, but as a monthly service. Small, free upgrades are made as often as every few weeks.

Because these vendors do not have to write software for multiple platforms—Sun, IBM, HP, Microsoft, etc.—their development costs are lower, and they pass those savings on to customers. Vendors also take responsibility for maintenance, support and security, charging customers a single subscription fee.

ASPs, by contrast, host applications on their own equipment. As such, they have to retrofit software originally designed to be run by each customer to work on that equipment. So managing, upgrading and supporting the software takes more time and is more expensive. ASPs do offer somewhat more flexibility to customers than an Internet service such as Salesforce.com, because the customer can get some customized code. But it costs.

O’Connor’s strategy is possible because of emerging Internet standards, which are now solid enough to support the development of software that behaves in new ways.

IBM’s Director of e-Business Standards, Robert Sutor, believes the industry is halfway through a five-year battle to establish the plumbing for Web services. Just as the post office allows people to exchange letters, Sutor says, so Web services infrastructure allows applications to exchange data over the network. Ultimately, applications should be able to conduct complex transactions, although essential pieces like security are still being defined.

O’Connor is generous about publicizing Putnam Lovell’s work, and in return he tries out new features and gets lower prices consistent with his risk. He has contingency plans for each vendor, and is careful to protect Putnam Lovell’s data. For example, sales contacts are synchronized into an Exchange public folder, which ensures that the data will be available should the Internet or a vendor go down.

There are trade-offs for avoiding the bugs and costs associated with big enterprise software packages. Salesforce.com, for example, provides 80% of the features of a big customer-relationship management package at 20% of the cost. After surveying employees, O’Connor decided Putnam Lovell could do without the missing features—and the big up-front costs of installing a conventional CRM package on his company’s own hardware.

Two of his vendors, Resource Phoenix and First VPN, went out of business. But they did give O’Connor six weeks’ notice, enough time to transfer the bank to other providers without the software going down. O’Connor knows the chief financial officers of all his vendors, and he calls them regularly.

“I ask them their cash-burn rate, what cash is in the bank, how long is their runway before they have problems,” O’Connor says. “Normally a company does know, and you want them to tell you. It’s not the most comforting environment to operate in, but it’s manageable.”

How An Early ASP Adapted

One of the very first ASPs, Corio, survived by changing its business model, although its focus on providing enterprise software—from PeopleSoft, SAP, Oracle, and Siebel—did not change. Corio just acquired the ASP customers and assets of Qwest CyberSolutions, a failed joint venture launched by Qwest and KPMG in 1999. (See Dossier: Qwest Cyber.Solutions,” November/December 2001.)

But the company taking credit for Corio’s transformation is a customer. Carlson Companies, a provider of travel, hospitality, and marketing services, chose Corio to implement PeopleSoft human resources and payroll software for 35,000 employees rather than try the implementation itself. The project has been under way for a year and is scheduled to go live in December.

Carlson negotiated several exceptions to Corio’s usual contract, in part to protect itself in case something happened to Corio. Carlson was already hosting software internally—its Shared Services division provides common processes like HR across all other Carlson divisions, and it wanted to continue hosting on-site. Carlson also owns its own hardware and software, has its own people on the development team, and manages everything below its Oracle database—including the operating system and the network—for Corio. Corio handles Oracle and PeopleSoft applications.

Project manager Joe Ziglinski declines to state an exact return on Carlson’s investment in hosted software, although he cites “significant savings,” especially in storage. Indeed, PeopleSoft now finds the Web services market so attractive that it has allied with Hewlett-Packard to compete against Corio, in which it made an equity investment in 1999. Sanjay Katyal, senior director of PeopleSoft’s eCenter, which now relies on HP’s data center to host customers, says PeopleSoft’s software is already designed for the Web. He calls the newer Internet applications “niche products.”

But Putnam Lovell’s O’Connor is sticking with those products, and he has convinced Putnam Lovell’s new owner, National Bank Financial, to do the same. After the acquisition was completed in June, some of NBF’s employees fell under O’Connor, and he provisioned them for Salesforce.com. Because the software runs on the Internet, he says, he finished the job in two weeks rather than the two months he would have required had Putnam used a more traditional product.

Banking on Web-Based Services

Putnam Lovell NBF, an investment bank, uses services on the Internet to handle many basic company functions, such as keeping general ledger accounts. Here’s what it figures its costs would have been to keep some of these functions in-house; transfer them to equipment housed and maintained by other companies (application service providers); or, to use services delivered on the Web that can’t be customized.

What You Should and Should Not Do: About Using Hosted Software

Research before you decide. Understand your needs and study vendors, providers and technologies before you make a decision

What You Should Do

Research before you decide. Understand your needs and study vendors, providers and technologies before you make a decision

Make it your own. Think through and negotiate your own Service Level Agreements; don’t adopt someone else’s

Start small. Don’t outsource everything all at once

Take control. Own your key hardware and software

Be proactive. Back up and protect your data

What You Should NOT Do

Don’t assume too much. Build relationships inside your providers so you can monitor their financial health

Don’t outsource without a contingency plan. Make one for each provider in case any run into trouble or go out of business

Don’t ignore the technology. Some Web standards are still in flux or not established

Don’t risk the family jewels. Processes that are critical to your company are still safer inside your firewall

Don’t forget security. Make sure the provider’s managers follow industry best-practices and an ongoing secure model

Don’t scrimp. Think through how to deploy your technology assets. For example, if you’re saving money on software, build up your network infrastructure

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in Baseline.