The Death of Software?
September 21, 1999
by Paul Keegan
The software industry is about to face a huge transformation. The cause: the rise of application service providers (ASPs), organizations that believe that software should be rented, not sold, and that the most valuable service is just making sure the damn programs run. Still, the industry is young and its business models unproven. Large software makers are trying to adapt. Some are very likely to fail. But in the enterprise software business, the new business model could prove a godsend.
Sunburst Hospitality Corp. owns and operates 88 hotels around the country, including Comfort Inns and EconoLodges. It's in the business of making sure pillows are fluffed and bath towels are clean, and just the idea of managing a complex computer system was enough to give its management nightmares. So when this growing, $204 million company was spun off from Choice Hotels in 1997, it approached the task of setting up an infrastructure to process its financial information with a caution verging on dread.
Sunburst had little choice, of course. Like every other modern operation, the Silver Spring, Md., company simply couldn't function without packaged software applications. And every year, those applications seemed to get bigger, costlier and more maddeningly difficult to install and run. So Sunburst hired consultants, who explained that the hardware and software alone would cost about $1.3 million and require the company to hire a small IT staff that would probably run another $300,000. (That assumed they could even find qualified workers, with high demand chasing too few skilled IT professionals.) When all was said and done, getting Sunburst employees up and running on PeopleSoft Financials software applications would take at least six months, but most likely several more.
Even then, there was no guarantee the new system would work properly. In fact, Sunburst executives recalled all too well what had happened a year earlier when Choice itself was spun off and had to set up its own computer infrastructure. "It was a disaster," recalls Chuck Warczak, Sunburst's vice president of finance. "There were lots of cost overruns because the consultant's time was much longer than anticipated. And once implementation was done, even after 15 or 16 months, functionality was terrible. There were performance problems, technical problems. There was a lack of understanding of how to create an infrastructure, so there was a long learning curve. We didn't want to go through that again."
Back in 1996, Choice really had no choice. Companies were expected to simply endure this agonizing process. But by the summer of 1998, after studying the issue for nine months, Sunburst heard about a company called USinternetworking Inc. (USi) of Annapolis, Md. USi claimed to be part of a new breed of company known as application service providers, or ASPs, which were revolutionizing corporate information technology by transforming software from a packaged product to an online service.
Sunburst management was skeptical at first. But since USi's offices were only 35 miles away, they had regular meetings at which Sunburst learned how the whole thing would work: USi would buy the license for enterprise resource planning (ERP) software from PeopleSoft Inc. and Siebel Systems Inc., install the applications on servers and charge Sunburst a monthly fee to dial into the service over the Internet using a standard Web browser. The obvious advantage to Warczak is that he wouldn't have to buy all that hardware and software, hire an IT staff or endure a wrenching implementation period. All Sunburst had to do was sign a five-year contract, and USi promised to have the company up and running on PeopleSoft in just three months.
It sounded too good to be true. And--who knows?--since most ASPs are just getting off the ground this year, it may still be. After all, companies like Sunburst are being asked to entrust their most vital corporate information and daily data processing functions to firms in an industry so new it doesn't even have a certification process or accepted performance standards. The first long system crash or contractual squabble--in short, anything less reliable than a telephone dial tone--could still give the industry a credibility problem from which it could have great difficulty recovering.
But so far, Sunburst is happy. After a three-month conversion period in the first quarter of this year, the company went live in April and has reported no major difficulties. Sunburst says it has saved about 20 percent over what it was paying its former parent company, Choice, to run its PeopleSoft applications. More importantly, says Warczak, "It allows us to focus on what we do. We're in the hotel business, not the data processing business."
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Companies are being asked to entrust vital corporate information to firms in an industry so new it doesn't have a certification process."
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The ASP trend is being widely hailed as a paradigm shift in the making. Companies in various technology industry sectors--from software vendors such as Oracle Corp., high-speed network and data-center firms such as Qwest Communications International Inc. and "pure play" startups like USi--are rushing to grab a piece of what analysts say will soon be an exploding market.
The ASP industry is still infinitesimal--only about $150 million in 1999, according to International Data Corp. of Framingham, Mass. But IDC estimates those numbers will reach $2 billion in 2003. Forrester Research of Cambridge, Mass., is even more optimistic, projecting $6 billion by 2001. Industry analysts estimate there are about 100 ASPs today, double the number that existed a year ago, and new ones are being announced every week.
"This is a fundamental shift in the way software companies are doing business," says Farrell Griswold, director of outsourcing for PeopleSoft. "It really starts to change ERP players from software companies to service companies. It's a completely different business model."
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