ASP customers hail return on investment

Investment firm Frank Russell knew an application service provider could quickly deploy the company's human resources application, thus freeing its own IT team to focus on other projects. What Russell didn't know was that using an ASP would provide a 200% return on investment in just the first year, says Gene Johanson, senior manager of special projects.

"To tell you the truth, if we had ended up with a wash in the costs, that would have been just fine," says Johanson, who uses PeopleSoft's eCenter. "Getting this benefit on top of being able to get the project up quickly is icing on the cake."

Russell is one of dozens of companies that are reaping big benefits by using an ASP, a fact that may come as a surprise to network managers who are skeptical because of the long list of failures and financial problems these service providers have endured.

A study of 54 ASP customers in North America and Europe conducted by IDC last year found that on average those customers posted a 400% return on investment (ROI) during a five-year period. IDC measured ROI by looking at the cost of the application, hardware and maintenance, as well as identifying the business processes affected by the ASP implementation and gauging impact.

Why is the market getting a bad rap while customers gain efficiencies and cut costs? Amy Mizoras, an IDC analyst who co-authored the report, says that much of it has to do with the lofty expectations that surrounded the ASP market when it emerged. With ASP adoption happening much more slowly than expected, some service providers weren't able to build the customer base they needed to support big upfront investments and ended up closing their doors. As a result some deemed the ASP market a failure.

"What we found through our study is that's really not the case," Mizoras says. "It's almost like these customers are the silent participants in the ASP market. I don't think ASPs do a good enough job of getting the message out that they've got happy customers."

Not all is rosy with ASPs, however.

"Going down this path is still risky," says Terrie Brown, IT manager at lighting manufacturer Lumileds in San Jose. "I think the ASPs who are going to survive are still up for grabs."

At the same time, Brown says that the benefits of ASPs - quick time to market, low upfront costs, and oftentimes better application performance - outweigh the risks. What enterprise customers need to do, she says, is thoroughly research an ASP before signing up and make sure contracts give the customer an out if trouble strikes.

Brown initially used J.D. Edwards' JDe.sourcing application hosting service, but transitioned to J.D. Edwards' partner ASP Agilera when the software maker closed its direct ASP service. Agilera hosts J.D. Edwards' manufacturing, financials and distribution applications for Lumileds, a joint venture of Agilent Technologies and Philips Lighting.

"The benefits [of using an ASP] definitely outweigh the cost and time it would take to do it all myself," she says.

Because she wasn't replacing any in-house systems, Brown says it's hard to quantify the ROI she's getting. But as far as cost benefits go, she says it's a "no brainer" because with Agilera she gets access to application expertise she otherwise couldn't afford.

Ulrich Seif, CIO at National Semiconductor, which uses Qwest to host its SAP financials and human resources packages, also has some words of caution for his peers: understand exactly what it is you're handing off to an ASP or you could find additional expenses, rather than savings.

"What we made very clear is that we only outsource components of our operations that we understand very well because only then can we judge the costs [and the savings]," he says. "If you want to outsource a headache, you will fail because you're just trying to hand off a problem."

Seif says it took just six weeks to recoup the expense involved with moving to an ASP.

Another consideration for some potential ASP customers is lack of customization. For example, Berlitz GlobalNet, a global translation company, sacrificed some sophistication in its salesforce automation application by using Salesforce.com's hosted service.

"You're not able to use technology that you've developed as a competitive advantage because anyone could go and start using [the ASP]," says Kevin Sher, sales and marketing director for North America for Berlitz GlobalNet.

But competitive advantage was not important when it came to Berlitz GlobalNet's customer relationship management needs, he says. What was important was getting the application up quickly: It took three days to get online with Salesforce.com, he says. In addition, Sher says his firm saved at least $300,000 in the first year.

Others, such as Siemens, are finding ASPs can make business operations run more smoothly. Siemens Business Systems is using Portera's hosted professional services automation software to manage its Australian operations.

"There certainly have been a number of benefits, such as having centralized access to information," says Dominic O'Laughlin, Siemens Business Services Program office manager. "We've seen a lot more efficiencies coming through."

Tom Brockhaus, director of customer retention at Charter Communications, says he's already seeing value since he began using hosted sales process automation software from Salesnet in October.

"It didn't take much time to determine the cost benefit," he says. "How can you compare a monthly subscription fee to adding servers and appointing internal IT staff to support whatever application you're using?"

Brockhaus wouldn't be specific about cost savings, but Salesnet's monthly fees range between $49 and $95 per month.

Figuring ROI on ASP implementations, though, isn't as clear-cut as simply looking at technology costs, Mizoras says.

"There are a lot of other benefits. In fact, two-thirds of the benefits are actually related to business productivity and business process enhancement," she says, explaining that rapid deployment and performance improvements will boost ROI.

For example, Sterngold, a manufacturer and provider of dental materials, decided to use ASP Surebridge to host its e-commerce application, rather than handle the project in-house. As a result, Sterngold got its e-commerce site up faster than it would have on its own.

"They got all our information together, got it displayed properly, laid out Web sites, did the art work, did the network architecture, did the database architecture, got the systems in place - all in four months," says Gordon Craig, a Sterngold vice president. "It would have taken us two years to do something like that."

Craig says he expected to start seeing a return on the ASP investment in about two years. "But after about six to eight months of being up and running we were at a point where the site was paying for itself," he says. "We've hit our ROI [target]."

As for Russell's Johanson, he says he's avoiding more than $400,000 in costs annually by using PeopleSoft's eCenter. In addition, Johanson says that by moving from an old DOS-based system that was prone to crash to the hosted PeopleSoft application, his firm has seen an increase in productivity. In addition, the new application was up and running in three months. All this with very little strain on internal IT, which could focus on more important projects.

"The HR director said to me the other day, 'Boy, I'm glad we outsourced this,' " Johanson says. "That was probably the best payoff."