Interactive Week
A new breed of outsourcing companies that host and manage mission-critical applications over the Internet is grabbing the attention of investors and major software developers.
A flurry of announcements have been issued in recent weeks from major enterprise resource planning vendors that are looking either to launch business units aimed at the market or to forge partnerships with the so-called application service provider (ASP) start-ups.
Despite skepticism from some analysts who wonder whether companies will be willing to trust the Internet with their mission-critical applications. ASPs have begun to sign their first big-name clients.
Corio (www.Corio.com), a Kleiner Perkins Caulfield & Byers-backed venture, sealed deals this month with Internet portal Excite and Internet Protocol (IP) telephony company Clarent, to provide PepopleSoft applications over the Web. USWeb/CKS (uswebcks.com) is expected to announce this week that it will provide a wide range of application hosting services for National Airlines, a discount airline being launched in Las Vegas.
"Everybody is seeing this as a great space to be in," said Bob Wise, chief operating officer of USWeb's electronic services division. "It's a people and time issue for most companies. Fast-growing firms don't have the internal resources to install and manage these types of applications."
Usinternetworking (www.usinternetworking.com) has been the most aggressive start-up in the field, raising close to $100 million in two rounds of venture financing - a remarkable figure given that the company barely achieved $4 million in revenue in 1998. IT has been busy building a network of global data centers and has hired roughly 400 technology professionals to meet its growth forecasts.
Forrester Research said the market could soar to as much as $21 billion in just more than two years, but other analysts were not as certain.
"The big question for this market is whether there is a real need," said Meredith McCarty, a senior analyst with the Internet services program at International Data Corp. "Right now, most of the activity has been on the vendor side. They really need to get out into the market and educate companies, and ensure them that their data will be safe."
IDC (www.idcresearch.com) expects to have its own ASP market forecasts ready in about one month.
Richard Heaps, chief financial officer at Redwood City, Calif.-based Clarent (www.clarent.com), is one of the early converts to the cause. Heaps said the IP telephony company is growing at such a rapid pace that its internal applications and systems can't keep up with the load.
"Our internal systems are basically at their breaking point," he said. "If we come anywhere close to meeting out internal growth projections, we might need to do four or five system conversions over the next few years."
Heaps wouldn't' reveal how much Clarent is paying Corio to host its People Soft applications, but he said that, based on an analysis of whether to maintain and operate the software in-house or outsource, he estimated going with an ASP will result in a 20 percent to 30 percent savings.
"There are some risks, of course," he said. "We are dealing with a start-up in an entirely new business. But, I'm confident we have the back-up plans in place in case something goes wrong."
**Reprinted from Interactive Week, February 22, 1999