Once touted as the holy grail of the software industry, the delivery of software via an application service provider (ASP) model has, up until now, failed to fully deliver on its promise. Since the mid to late 1990s, industry experts and pundits have debated the pros and cons of on-demand outsourced IT services, concluding again and again that its time has come. In some ways, its time really has come, but it has taken 10 years for the vision to become somewhat of a reality. In the midst of all this hype, the dot-com age came and went, and the ASP delivery model, seemingly tied to it, floundered as economic uncertainty and confidence levels waned.
During the dot-com age, ASP was closely linked to outsourced Internet sites and most other software that was related to the Web. This caused a massive build-out of data centers throughout the world to handle the anticipated growth of these outsourced solutions. When the bubble burst in 2000, a large consolidation occurred in the data center segment of the market. In reality, this consolidation has actually helped the ASP model become more of a reality in the last few years. As the number of data center providers has decreased, the stability, security and reliability of the remaining large providers has enabled more organizations to develop a trust level that has driven growth in outsourced solutions.
The other contributing factor to the relatively slow adoption of ASP solutions has revolved around the security aspect. All of the accounting fraud that occurred during the post Internet boom led to the development of the Sarbanes-Oxley (SOX) Act of 2002. This act singlehandedly caused a massive reluctance to even consider outsourced solutions as they were deemed insecure unless the provider conformed to SOX standards. Over the last few years, as companies have come to grips with the new reality of SAS 70 compliance and the costs associated with adhering to those standards, outsourced solutions provided by SAS 70-compliant providers have been seeing increased adoption rates.
With financial institutions and corporations alike under pressure to ensure that IT operations align closely to overall business objectives, and in many cases accelerate the organization toward them, the search for models and practices that facilitate this is well and truly underway. Almost without exception, the need to reduce the costs of doing business while improving customer retention and offering new products and services is universal. In increasingly competitive and aggressive markets - such as financial services - doing more with less is almost a mantra.
Total cost of ownership (TCO) has become a hot topic over the last few years. IT, for most companies, is a pure expense. It is not their core competency and the need to rein in costs that has led to the realization that the ASP model can provide the savings needed to justify any risks inherent in these types of solutions. The cost and efficiency benefits of adopting an ASP model are widely known - purchasing and deploying enterprise software, and acquiring, training and retaining dedicated IT personnel are far from cheap undertakings. In some cases, ASP can deliver a 30 to 40 percent reduction in capital expenditure and reduced IT and support costs - an attractive proposition indeed. Couple that with faster implementation times, more frequent upgrade cycles and, in some cases, quicker incident resolution, and the business case begins to stack up.
Managing operational risk is a board-level concern, and where risk is a factor, it is simply good governance to think carefully before considering the outsourcing route. Yet improved reliability on the part of ASP and other on-demand IT vendors has improved to such a degree that in many cases it rivals the availability offered by in-house management - with uptimes just shy of 100 percent. The most forward-thinking of the providers have made advanced security, fault tolerance and disaster recovery key priorities, all of which should go a long way toward allaying some of the residual fears concerning business continuity and operational risk.
As mentioned earlier, meeting regulatory challenges and achieving compliance is a common thread that runs through many of todays IT operations. The regulatory landscape is complex, diverse and ever changing - Basel II, SOX, MiFID and Faster Payments are just a few of the policies and guidelines that enterprises and particularly financial institutions have to operate within. Navigating the compliance landscape is a burden that most organizations need to contend with, but from which few are able to unlock business value. Outsourcing can help to meet regulatory requirements, as the necessary controls, reporting and auditing capabilities are often built in. Organizations tackling compliance should, wherever possible, also view it as a best practice initiative from which greater business benefits can be derived.
So does this mean that ASP will finally deliver on the long-anticipated vision of a world where the majority of software - even mission-critical applications - will be delivered via an on-demand, outsourced model? Perhaps its not time to declare victory just yet.
When considering likely adoption of the ASP model in particular during 2008, the safe bet is to assume that the trajectory will continue much as it has done over the past 12 to 24 months. The likelihood is that small to midsize organizations will continue to account for most of the converts to this method. However, to consign ASP completely to the realm of the small to midsized enterpise would be a mistake. As providers continue to enhance the services they offer in accordance with key business goals, and as lingering concerns over security and reliability are dispelled, more of the larger enterprises - fuelled by a desire to reduce the costs of doing business and deliver measurable return on investment - will take the first tentative steps towards ASP. Once this happens, steady and solid migration becomes a real possibility.
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