The Case for Small Business to Use an Application Service Provider and Hosted Applications

You may think all the hype and spin about hosted applications and Application Service Providers (ASP) is a bunch of bull - but it's not. Mory Bahar, president and CEO of Apps4biz.com, makes the case for hosted applications in her guest Smallbiztechnology.com article. Apps4biz.com (http://www.apps4biz.com) delivers Internet-based industry-specific business applications to smaller companies (less than $50M in revenue).

Premise

Although seemingly counterintuitive, small businesses can greatly reduce their risks by outsourcing business applications to ASPs and accessing them via the Internet.

Prediction

Small businesses will rapidly employ this application subscription approach because of tremendous low risk/high return benefits and the increasing availability of quality solutions. 
If you ranked the reasons smaller business don’t upgrade/improve their business applications, you’d likely place the "risk" factor at or near the top. After all, if a large corporation takes a risk, it often has deep cash reserves and available investors/stockholders to bail it out. But small business, those under $50 million and often family-owned, can’t afford major missteps often associated with traditional software projects.
So when confronted with a new application approach, the kinds of questions running through any small business owner’s brain might include: How confident am I that it will work? What additional infrastructure costs are required? How about up-front investment costs? Can I use my current staff or do I need to hire more techies? How long will this take to implement and will I need to hire expensive consultants?
Interestingly, with the advent of the ASP model, in which businesses outsource their applications and subscribe to them via the Internet, business risks are actually reduced. This accounts, in part, for the projected growth of the overall hosted application market. Estimated at $150M in 1999, it is predicted to grow to $2B by 2003 according to International Data Group, an industry analyst firm. Small businesses are expected to comprise a significant share of that growth.
But how can something that seems so counterintuitive (adoption of new technology = lower risks) be so true? The answer is readily apparent when you look at common risk factors and see how the ASP model addresses them:
Affordability encompasses acquisition, implementation and on-going costs, all of which have been staggering for the companies (Fortune 500 and midsize organizations) that were first to embrace enterprise resource planning (ERP) systems.

Advantage

With the ASP computing model, smaller businesses can now acquire the use of these powerful business applications without any significant up-front investment in hardware or software because the applications, in effect, are being subscribed to instead of purchased. Furthermore, the ASP provider runs the application offsite on its own hardware and is responsible for maintaining the hardware and software infrastructure. The only hardware required by the small business is a PC or Internet appliance capable of running an Internet browser like Microsoft Explorer or Netscape. There is no need for ramping-up information systems (IS) staffing since the ASP effectively serves this function. And, while traditional software implementations (particularly ERP) often take months or more, properly designed ASP applications can often be put in place in a week or less.
In effect, we are beginning to see the adoption of the utility company model, wherein individual companies recognize that independently creating dependable resources with virtually infinite capacity is unrealistic and cost ineffective. More simply put: Why drill a well when you can just turn on the tap? And, why try to acquire, implement and maintain complex information technology when you can simply plug into the Internet?

Risk

Failure comes at a higher cost to small businesses than large operations. An ASP approach means that after a short implementation and minimal up-front costs, a business can judge how effectively the software is working. Thus, if for any reason an application is not a good fit, the business can quickly cut its losses and look for another solution. Moreover, some innovative ASP suppliers are providing companies with the opportunity to try these applications out for a period of time prior to committing to subscribing, which virtually eliminates any financial risks.

Established smaller businesses have the most to gain in the new Internet economy. Ironically, these companies have not demonstrated a rush to the Web. Most experts agree that those small businesses that are either not on line or planning to be on line are headed for obsolescence. The ASP model provides a rock solid reason for utilizing the Internet and facilitates the ability of a firm to conduct business-to-business transactions, such as procurement, online in an extremely cost-effective manner. The Internet also offers less obvious benefits, such as enabling salespeople to enter transactions or look up customer histories while at customer sites. Leveraging the Web in this manner enables smaller firms to compete head-to-head with even the giants.

Focus

One of the least recognized risks is what happens when business owners become focused on upgrading IS operations and takes their eyes off the business itself. All too often, major application upgrades can negatively impact operations for months or longer because of this. The ASP approach lets business owners concentrate on planning for the future, making money and serving customers instead of worrying about technology issues.