Application service provider asp

When South Dakotas state government was planning to adopt new HR and payroll software. Colin Keeler, director of financial systems, bluntly asked his internal information technology (IT) staff: Can you match the application service provider (ASP) on cost, service and implementation timetable? IT's equally direct answer: No.

"It was a pretty short discussion," says Keeler. "I dont think [IT] wanted to see something as important as payroll move out of their data center. But they knew there was no way they could compete with the ASP on service or time frame without tremendous costs.

Consequently, after hosting its own legacy software for years, South Dakota's Bureau of Finance and Management in Pierre chose an ASP. joining a small but growing number of public agencies and private enterprises that retain outside hosts to install and maintain their HR and payroll systems.

In the ASP model, which is about 5 years old, the adopter uses the application but avoids the hassle of managing it. The ASP installs and maintains the software on its own hardware, often in a data center far removed from the client site. Users access the application over the Internet.

The customer usually buys a license from the software vendor and pays the ASP a one-time implementation fee and a monthly service tee. There are ASPs for HR information systems (HRIS), payroll systems, recruiting software and other HR applications. There are also ASPs for non-HR applications.

An ASP will give the HR software more care and attention than can the typical overworked corporate IT staff. which administers dozens of enterprise applications, says Amy Mizoras. an analyst at International Data Corp. (IDC), an IT research firm based in Framingham, Mass. IDC forecasts a 15 percent average annual growth rate for the overall ASP market from 2002 to 2006. "The biggest competitor to ASP is the internal IT staff" she says. "To get value, you need someone who does it better than you and cheaper."

Adoption of the ASP model for HRIS and payroll is not widespread, but analysts expect it to increase. Customers understanding and adoption of the ASP model picked up over the past two years, says Amy Levy, a senior analyst at Summit Strategies Inc., a Boston-based IT research firm. HR applications don't necessarily need to be run in-house, Levy says. Adopting an ASP model for HR enables companies to devote limited internal IT resources to mission-critical applications--such as a customer relations management system--and boost their competitive advantage.

While Keeler says he likes the ASP approach, others remain skeptical. For example, Pete Palumbo, senior IT director for Friendly's Ice Cream Corp., a restaurant chain based in Wilbraham, Mass., is not sure that the ASP model is right for his company. His concerns center on costs, the sustainability of ASPs, and particular circumstances within his company. Nonetheless, he hasn't ruled out using an ASP. "Any IT department should look at it periodically," he says. "We keep looking at it."

The decisions that each of these organizations made regarding this HR systems option--after careful consideration--illustrate some of the concerns and benefits that users are discovering about the model.

South Dakota Says Yes

To host its HR and payroll software--from Lawson Software Inc. of St. Paul, Minn.--South Dakota officials chose Agilera Inc. of Inglewood, Colo. South Dakota had developed and maintained a mainframe system for nearly two decades when officials began to look for new HR and payroll software in 1999. They decided to use an ASP even before selecting the software.

Keeler had concluded that his internal IT staff would not have the skills to implement a new system on time or to run it properly. "We would have had to hire database experts and application experts," he says.

Because they had built and maintained the legacy system, IT staff members felt attached to HR and payroll, but they could not in good faith promise to match Agilera's cost and schedule. Keeler included key IT staffers on his implementation team so they could have some ownership of the project.

Agilera, which has about a dozen Lawson HR and payroll clients, installed the system, fixes bugs, owns and maintains the hardware, and manages major Lawson upgrades. South Dakota owns the Lawson license and the data, and bandies interfaces with other state systems. A number of HR users have become adept at working with Lawson, which the state uses to administer payroll for 11,000 workers, manage benefits for 18,000 and offer self-service applications to 6,000.

"The difference is we've got a lot more functionality now and continue to add more, including self-service over the web," Keeler says. "If we had taken it in-house, our implementation period would have been double or triple the amount of time it took us to go live With the ASP, it took a month to get the Lawson application up and running, he says.

Weighing the Possible Downsides

Although Keeler was confident that signing with an ASP would work out, he was still uneasy about some of the risks, including the possibility that whatever vendor he chose might go out of business, he says. "It was a little scary at first. Being government, you are accountable on a broader scale [than other enterprises]. But time has proven it works. It works better than it would work in-house because of the resources that Agilera can bring to bear."

Agilera's data center, in Columbia, S.C., has a key resource that Keeler lacked: staff. "We would have had to hire or grow Lawson experts and Oracle database administrators," he says. Like many government employers, South Dakota has IT recruitment and retention problems. For Keeler, a new hire often is a young person who's just out of school and isn't likely to stay long. "He'll work here two years," Keeler says. "Then he's off to Denver or Minneapolis, where they can pay him a lot more."

Even though the ASP model offers a staffing advantage, Keeler and analysts warn that organizations considering the switch should make contingency plans. "We put a lot of eggs in one basket," Keeler says. "We had contingencies, and we still do. If Agilera were to suddenly go under, we have plans to either find another ASP or bring it in-house."

There are other considerations, too. For example, some ASPs own the software license and rent it to the customer. Keeler would not adopt such a model because it would not have given him the flexibility to bring the software in-house if necessary. "We own the licenses," he says. "If this ASP thing doesn't pan out, we need to be able to own everything to run it ourselves or find another ASP. It costs a little bit more this way, but it is insurance for us."

It's also important for the adopter and the ASP to clarify their expectations and put them in the contract. "Make sure the expectations are in line with the level of control and access that the customer needs or desires," Keeler says. The service level agreement should spell out not only who is responsible for what but also who gets to do what-a lesson that Keeler learned the hard way. A few months into the contract with Agilera, his staff needed to extract and insert data at the Agilera data center to, among other things, integrate the Lawson system with other systems the state runs. Keeler's IT staff runs a data center that is bigger than Agilera's, he says, and "we're used to getting our hands dirty in systems."

But Agilera balked at allowing such access. It took a round of discussions and contract amendments to spellout when and what the state's programmers could and could not do, Keeler says. "Make sure the service level agreement spells out exactly the access you want to the software and data, from the technical side," he says. A spokesperson for Agilera says it's not uncommon to revise signed contracts for one reason or another.

Says IDC's analyst Mizoras: "Understand the service level agreement and how it works. Make sure when they agree about availability they are guaranteering application availability." She adds that networking availability is usually a separate matter. "Most ASPs will not guarantee that last mile. That is the responsibility of your [Internet service provider]. You have to reconcile the two."

Another key concern is the handling of upgrades. Experts say it's important to ask how and when upgrades get whether they're included in the basic agreement or are done for a fee, and what the costs would be. "The idea is to make as predictable as possible the level of service you receive and the price you pay." Mizoras says. "No one wants price surprises."

Friendly's Says Not Yet