August 17, 2004

Your IT staff is over-worked, your budget isn’t expanding anytime soon and you’re backed-up on projects that needed to get done last week, last month … last year. One way to free up resources and give your staff a break is to unload some applications on a third-party provider.

Yes, hosted application vendors (formerly known as ASPs – application service providers) are still around and some are thriving. San Francisco-based Salesforce.com, for example, signed up 900 new customers in May and June, according to Marc Benioff, the company’s chairman and CEO.

Company’s like Larry Ellison’s NetSuite are doing well in the SMB (small- to mid-size businesses) space. And even the enterprise software vendors have jumped on board and are offering solutions via third party providers like IBM, said Melanie Posey, a hosting analyst for Boston-based IDC.

Okay, maybe this isn’t necessarily new news to many, but with the market for hosted applications solidifying (and apparently here to stay) the question becomes one of deciding whether or not to take advantage of it. If you do, there are few things to consider before signing away control of formerly in-house-only applications.

Candidates

The best apps to unload are those that do not have a large tie-in or reliance on legacy databases or applications to function smoothly, said Bob Suh, Accenture’s chief technology strategist. Applications with a large, distributed user base like email (which is largely a burden on IT and runs on its own server stack) are also good candidates for hosting.

CRM is also becoming a very popular application to unload, as Salesforce’s recent numbers and listing on the New York Stock Exchange, attest.

Basically, any application that won’t create too much controversy with higher-ups or lead your staff to believe they are being outsourced is probably a good candidate of unloading on a third party — provided an SaaS vendor exists with an alternative.

Of course, there is the option of having your instance of an application simply hosted by a third party but this eliminates the fiscal benefits of pay-as-go, per-seat licensing models that puts the onus for performance (via SLAs – service level agreements) on the SaaS vendor, while saving you maintenance and licensing fees, said Posey.

“It’s not SaaS if they just take your stuff and run it somewhere else,” she said.

ERP applications are a good example of what not to consider. But modules of ERP, such as HR self-service applications, are probably good candidates for a SaaS vendor to provide you with services.

Underutilized applications are also good candidates for replacement. If only 35% of the application is being used you are still paying 100% of the maintenance and licensing fees, said Suh. Or if it’s an application that over-engineered and only a portion of its functionality is all you really need, then a third party vendor might be able to help out.

Pitfalls

If there is a huge sunk cost associated with a given in-house solution then contracting for a new solution to provide similar functionality is probably not going to fly with the CFO. Or if you will have keep the old solution running concurrently with the new one (even though its hosted) this should be a red flag that you might want to look around some more.

“When people look at hosting they need to make sure that they’re truly substituting a high fixed cost with a low variable cost,” said Accenture’s Suh.

Or if an application will require a great deal of customization to function well with your current business processes that’s something to think long and hard about. SaaS vendors, in order to scale and offer volume pricing, by necessity can’t offer highly customized applications. That is one of the things that killed the ASP industry in the first place.

“It has to be a very stable business process where a company doesn’t have to radically change what it’s doing or force change on the hosters; anything where the company is ready to accept the hosted solution’s business processes without jumping through a lot of hoops,” said Suh.

On the plus side though, the whole premise upon which the ASP industry was founded still holds true today: you can reduce or free-up staff while maintaining services and unload the problems of break/fix, updating and patching onto a third party in exchange for a monthly fee.

So, if you’re looking for an “out” to free up resources and make your staff more productive (and happy), then finding a few applications to unload is one way to make it happen.

“The whole value proposition here is not that IT departments are too stupid to manage software,” said Posey. “Equal important for the whole SaaS (model) is the whole financial element of it: you pay for the month rather than laying out licensing fees ’til kingdom come. Then you don’t have to deal with the infrastructure.”

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