SOFTWARE HOSTING

The pace of technological evolution is particularly quick in the Information Age. After purchasing new computer systems, consumers soon find them outdated. The same is true for corporate enterprises that invest large sums to purchase and implement new hardware and software solutions, only to find that continual upgrades and modifications are necessary. For reasons like these, in the early 2000s many companies were turning to application service providers (ASPs) for hosted software solutions. ASPs are third-party organizations that host software programs at one or more of their own facilities, and on their own equipment. They charge clients to use these applications remotely, either via the Internet or some other form of network access.

By using hosted software solutions from ASPs, companies—especially small and medium-sized companies with limited financial means—found a sound alternative to purchasing and implementing applications on their own. This was very important, because in addition to the licensing and product fees associated with software, companies often need to spend additional monies integrating new applications with existing ones, buying special equipment like servers, performing regular maintenance and upgrades, and so on. Depending on the situation, most of these issues are normally handled by ASPs, leaving client companies free to focus on their core business competencies.

Although integration with existing systems and compromised security were leading drawbacks, ASPs were growing in popularity because they provided companies with turnkey solutions that enabled them to avoid hassles and enter new markets quickly. They also provided scalability, which was very important for e-commerce companies in an era of constantly fluctuating market conditions. Hosted solutions can be easily scaled up or down, depending on a company's size or situation.

Virtually any software application can be offered on a hosted basis, and those related to e-commerce were especially popular. A February 2001 report from Zona Research, commissioned by the ASP Industry Consortium, found that among those using ASPs, communications, financial/accounting, and e-commerce were the three most popular uses. Other uses included human resources, customer relationship management, project management, education and training, and sales force automation.

The arrangements between clients and ASPs were very diverse in the early 2000s, much like the e-commerce industry itself. While some companies purchased a small number of hosted software applications, others looked to ASPs for total information technology solutions. Furthermore, different fee schedules and payment models existed, ranging from monthly subscription arrangements to ones involving charges per user or per transaction. Some agreements included the simple provision of a hosted application, while more sophisticated arrangements also included customer service and technical support as part of the deal.

In addition to a myriad of arrangements, diversity flourished within the ASP industry itself in terms of the range of ASP models employed. In addition to those companies that offered hosted software as one additional distribution method, "pure-play" ASPs licensed software from many different companies and then offered it as suite of programs for clients. Additionally, some ASPs were quite general, while others offered experience and applications specific to a particular industry. One common thread was that most new software companies were involved with software hosting in some way. According to some industry analysts, beginning in 2000, many venture capitalists were reluctant to or would not provide funding for new software companies that didn't at least offer hosting as an option.

One organization using hosted software in the early 2000s was the Salvation Army, a leading evangelical and social services provider known for its sound fiscal management. The Salvation Army's southern territory, which includes 2,314 centers of operation in 15 states, was able to realize a number of concrete benefits by using hosted applications from ASP ManagedOps Inc. instead of purchasing a new accounting system outright. The hosted solution met the Salvation Army's needs by connecting 1,000 geographically distributed users and enabling them to quickly consolidate financial data. At the same time, it saved them the expense of hiring 50 information-technology professionals to operate the new system.

The outlook for ASPs and software hosting was very bright in the early 2000s. July 2001 research findings from the Aberdeen Group, which included most of the aforementioned categories in which hosted software is used, projected global ASP revenues would increase from $3 billion to approximately $16 billion by 2005. Findings from IDC Research, released about the same time, projected ASP revenues would climb to $24 billion by 2005, with the United States representing the largest market. Wireless technology was an emerging area for ASPs. Information-Week presented figures from International Data Corp. that estimated spending on wireless access to ASPs would climb to $732 million by 2004. Another sign that ASPs are here to say was the formation of a trade association. With more than 700 members in 30 different countries, the ASP Industry Consortium was a "global advocacy group promoting the application service provider industry by sponsoring research and articulating the strategic and measurable benefits of this delivery model."