Application service providers: market and adoption decisions

• Authors: Yurong Yao;Edward Watson;Beverly K. Kahn
• Venue: Communications of the ACM
• Year: 2010

Introduction IT outsourcing has been a viable business strategy since the late 1950s when companies began to invest significant resources in outside computing services. As IT managers increasingly used time sharing, contract programming, and facilities management, the next few decades saw accompanying increases in efficiency in software applications and services, not to mention decreased operations costs. In 1989, when Kodak outsourced its entire IT department to IBM and EDS, the business world had to scramble to get over its initial shock. Seemingly overnight, "software" and "service" had become strange bedfellows. The rules of the game had radically changed. Since the mid-1990s, the explosion in Internet connectivity, increased bandwidth, and the ubiquitous nature of computing have made the delivery of software applications from remote data centers both technologically feasible and economically attractive. A relatively new form of IS outsourcing, Application Services Provision (ASP), provides applications to multiple entities from its data center across a wide area network. Similar to the telephone services model, clients pay a monthly fee to access online applications from an ASP. Advances in encryption and firewall technology remove a client's security concerns for using remotely hosted services. Active research on ASP outsourcing (also called NetSourcing) has attracted academic scholars and business practitioners alike, but few have investigated the specifics of the market and the decision process to adopt the ASP model. ASPs today are quite different from what they were five years ago, in large part because this dynamic industry has experienced significant merger and acquisition activity. Forty percent of ASPs active in 2001 were no longer in business in 2004. Traditional software companies also have jumped on the ASP bandwagon, developing new technologies to deliver on-demand services. The scope of hosted applications for ASPs has also shifted significantly as certain applications were scrapped for lack of profitability, for example, overall enterprise system hosting with no specific industrial solutions. However, a Forrester report predicted that as eCommerce continued to grow 30% - 40% in 2005, the demand for licensed software products would decrease while demand for hosted services increases. This prediction seems to be reality, as ASP hosting solutions are increasingly viable and attractive business models. Thus, to update our knowledge of the rapidly changing ASP market and to help practitioners make better-informed ASP adoption decisions, this article addresses two central questions: What is the structure of the current market? And what factors should clients consider in their ASP adoption decisions?