Affordable Software: The Rise of Application Hosting and Application Service Providers

By Vieceli, Jeffery; Blom, Barry et al. | Government Finance Review, June 2000 | Go to article overview
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Affordable Software: The Rise of Application Hosting and Application Service Providers


Vieceli, Jeffery, Blom, Barry, Heck, Patrick, Government Finance Review


Organizations spend roughly $17 billion on the implementation of new packaged software applications each year, and 80 percent of those costs come after the purchase of the software.

The price of implementation, in addition to other factors like shortages of the IT workers needed for implementation, often prohibits many small and medium-sized governments from utilizing enterprise technologies altogether. Large governments that can afford the applications often find themselves focusing on the technology to such lengths that their core business products and functions are neglected. In short, the costs of these applications are often prohibitive and can have adverse impacts on a government's efficiency.

As a result, more and more entities have turned to Application Hosting and Application Service Providers (ASP) as an alternative to purchasing enterprise applications. With application hosting, applications are run and maintained in a central processing facility, and the customer owns the license.

Application Hosting

Application hosting providers come in three types:

1) infrastructure independent software vendors (ISVs) that develop infrastructure software that supports on-line delivery;

2) net-based ISVs that develop software for Internet applications and deliver them on-line; and,

3) traditional ISVs that develop software for sale rather than on-line delivery.

With application hosting, because the client contracts directly with the service provider, applications still can be customized. There can be numerous contracts since implementation, infrastructure, and service and support each can be negotiated among various suppliers. The entity is simply charged a flat price per project.

Application Service Providers

An alternative to application hosting is to contract with an Application Service Provider (ASP)--a company that owns the offsite computer on which the user's software is housed. The ASP provides the infrastructure, but does not run the software. Unlike application hosting, a customer contracts for software, infrastructure, implementation, and service with the ASP. These components make up a standardized package that the ASP offers to all clients. As a result, there is only one contract for the customer to negotiate and deployment is streamlined. There are five types of ASPs:

1) business ASPs that provide applications for the small and medium business markets;

2) enterprise ASPs that offer high-end applications for large companies;

3) local/regional ASPs that provide complete computing services for local small businesses;

4) specialist ASPs that serve a specific activity; and,

5) vertical market ASPs that provide solutions tailored to a specific industry.

In the ASP model, typically, customers commit to a specific contract length, but pay a monthly fee that varies based on the number of users. Hence, the user still pays for the entire software package, but the payments are spread over three to five years.

The ASP market has been developing at a very rapid rate. The Gartner Group, a private market research firm, estimates the current ASP market at $2.

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Affordable Software: The Rise of Application Hosting and Application Service Providers
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