Learn asp

Although application service providers represent a new business model, applying the principles and practices of traditional outsourcing will be key to a win-win relationship.

COMPANIES TODAY ARE FACED WITH intense global competition for price, quality, and service responsiveness in a highly volatile business environment. CIOs and other IT managers are expected to deliver quality IT services and systems in an environment of rapid business and technology change, short product delivery cycles, firm schedules, increasing customer expectations, impatient users, and ever-changing business requirements. The need to change rapidly to compete effectively is forcing companies of all sizes to realign through mergers, acquisitions, divestitures, alliances, partnerships, outsourcing, and other relationships. Meanwhile, new companies are being spawned at a rapid rate that do not need to have their own internal support functions.

As a result, IT outsourcing in general, and Application Service Providers (ASPs) in particular, are rapidly emerging as critical to the success of most companies, traditional as well as start-ups. Well funded, but with little time to build an IT infrastructure and staff, many dot-com start-ups are looking to an ASP vendor to fulfill this need. For the next two to three years, the emerging ASP sector will experience a slew of IPOs and spin-ours of ASP subsidiaries from traditional IT services companies.

Primarily, there are three key demand drivers for the ASP market:

* Small to medium enterprises (SME) with dot-com focus

* Large organizations based on continued IT outsourcing trends

* Support from enterprise software companies with heavy implementation costs

One of the advantages of the ASP model is that it is so simple and straightforward to execute. You select a vendor that is an "expert" in a specific functional area, and they quickly install the applications that meet your needs. As simple as it may seem, it is just like any other traditional outsourcing agreement in that service levels, management oversight process, and the other principles and practices also pertain to the ASP model, but in a more scaled down way.

Horizontal vs. Vertical Focus

The first classification of an ASP lies in a one-stop shopping model versus a best-of-breed model. However, another way to segment an ASP is to examine whether it is taking a horizontal or vertical focus. A horizontally focused ASP seeks to offer a full suite of software applications that are common to all the companies. These software applications could include e-commerce, HR, financial, e-mail, etc. In contrast, a vertically focused ASP offers software applications targeted to a specific industry, such as healthcare/life science, financial services, and manufacturing.

It is clear that horizontal ASP vendors are the first wave of the market. ASPs like USinternetworking, Annapolis, Md., and Corio Inc., Redwood City, Calif., are looking to be a single provider to companies for all their functional needs.

The advantages of a horizontal ASP vendor is that companies can go to one vendor for a full suite of products. Additionally, the ASP is choosing applications from well-established and leading software companies. The cons of this approach, however, are that the customer must select their choices from a set menu, and there is likely to be a limited flexibility for companies to select off-the-menu applications.

The Selection Process

Managers who make the decision to evaluate outsourcing need to consider a host of people issues, the foremost of which is communication. Various forms of communications (e.g., newsletters, Web sites, e-mails, small group meetings, and organization-wide meetings) help get the accurate message traveling as widely as, if not as fast as, the rumor mill. Managers should also consider human factors from the perspective of the user community. Users should be provided with points of contact before implementation, and an issue-resolution process should also be instituted. Above all, everyone involved should feel that their concerns were considered during the entire process.

Early in the evaluation you need to identify who will take leadership responsibility, perform the analysis, and make the decisions for your company. This team usually needs a mix of managerial and technical talent and representatives from users, whose services will be directly impacted by outsourcing. An executive sponsor or champion is desirable, and in cases that involve organizational politics, absolutely critical. For larger outsourcing initiatives, top management plays a key a role. For smaller initiatives, middle-level managers can perform the analysis with the support of senior management. The size of the team depends on the scope and size of the project, but smaller teams are generally more effective.

Once the decision is made to outsource, identify persons who will be given responsibility for oversight and management of the outsourcing arrangement and vendor relations after the contract is signed. It is important to get outside assistance from advisors who can help coach and assist the internal team during the evaluation and negotiation processes.

The information that vendors provide is often useful for establishing the types and general prices of services that might be outsourced. Research services such as Gartner Group, Yankee Group, and others are excellent sources of reliable and objective information about which service providers are the strongest. Companies that have previously outsourced can also provide useful comparative information. After narrowing potential vendors, pricing and service agreements can often be reached by negotiating with the two or three most capable vendors and then striking a final deal based on the best offer.

Use Selective Outsourcing

A company can selectively outsource any IT service, such as the use of an ASP for applications, such as payroll, accounts payable, and benefits administration processes; installation and operation of ERP and other packaged software solutions; server and mainframe data center operations; desktop support; data and video communications; and entire business processes such as finance, accounting, legal, and HR.

Total outsourcing is more complex because of the scope of the endeavor and the consequences of failure. Companies that enter into total outsourcing arrangements must spend considerable time, effort, and money analyzing the deal and negotiating a win-win contract. Other potential disadvantages of total outsourcing include major technological and business changes after the contract is signed--it is difficult to predict their frequency and magnitude and set contract provisions that allow for large changes in scope. Failure is a costly consequence of total outsourcing. You will have to repeat the entire process and negotiate a contract with another vendor, or bring the functions back inside the organization with the attendant costs and problems.

Outsourcing relationships vary based on levels of service. Market relationships cost the least to set up and administer, and are relevant for work that is fairly simple and straightforward. Intermediate relationships cost more and are relevant for work that is complex, and which offers substantial potential benefits. Partnerships cost the most and are only relevant when the benefits of a close relationship with a vendor are substantial. Choosing the wrong relationship can result in either excess cost or failure. The typical outsourcing relationship is an "intermediate" relationship that includes the best of a market relationship (e.g., specific service levels) and a strategic relationship (e.g., building trust and a close working relationship).

Negotiating a Sound Contract

The emphasis from the outset should be to negotiate a fair and reasonable contract for both parties. Both your organization and the outsourcing vendor need to agree on everything. Such an agreement should not take the form of an open-ended assurance of goodwill, but rather it should delineate the who, what, when, and where of conflict resolution. An outsourcing contract may last for a long time, and both the organization and the vendor must understand how the relationship will be managed throughout the term of the contract.

Some of the important contract considerations are:

* Terms of the agreement

* Minimum services levels

* Ownership and confidentiality of data

* Warranty

* Exhibits

* Incentives

* Disclaimers

* Bankruptcy

* Acts of God

* Performance measures

* Anticipating change

The first area to concentrate on when negotiating the ASP contract is the value and timing of the implementation milestones. Industry standards typically are:

* 15% at contract signature

* 15% with the delivery of the software

* 15% with the delivery of the infrastructure

* 15% with the delivery of the customer-specific environment

* 10% with completion of training