Is e-commerce of IT application services (ASP) alive and well?

Given the great importance of outsourcing to the Information Technology (M profession, this paper is devoted to E-Commerce of IT application services between Application Service Providers (ASPs) and customer organizations. Instead of dealing with the more general "Is E-Commerce Dead? " question, we address the question of whether "E-Commerce for IT application services is (and will be) alive and well?" Reviewing the history of the ASP industry, shedding light on the factors inhibiting and driving ASPs, and discussing prospective customer profiles and business models leads to the conclusion that, much like E-- Commerce, ASPs are alive but not very well yet.
INTRODUCTION
Against growing doubts about the "new-economy", on one hand, and the continuing development of new programs focusing on E-Commerce in colleges and universities, on the other, this special issue of JITTA addresses the question "Is E-Commerce Dead?" E-Commerce is a general term referring to Over-the-Internet commerce of products and services between two sides such as B2B, B2C, or C2C. Our paper considers a subset of E-Commerce -- B2B E-Commerce of IT application services -- which is manifested when an Application Service Provider (ASP) hosts IT applications and makes them available for rent to customer organizations over the Internet.
Given the great role outsourcing has played in the IT arena, especially the increasing role of ASPs in recent years, as well as the optimism displayed by industry experts regarding the viability of the ASP market during 1998 till mid 2000, it is worthwhile to focus the question on whether "E-Commerce for IT application services is (and will be) alive and well?"
In addressing this question, we have found the academic literature dealing with ASPs still scarce, and therefore relied mainly on our own ASP research (Heart, Pliskin, Shechtman and Reichel, 2001; Heart and Pliskin, 2001) and on industry articles posted on the Internet.
The next three sections are devoted to the ASP industry, with the first one presenting the industry's past and present and the two following sections presenting factors inhibiting and driving ASPs. To gain more insight into future prospects for ASPs, the fifth section of the paper considers potential ASP customers focusing on whether customer organization size small, medium, or large, makes a difference with respect to customer readiness to embrace the ASP concept. The sixth Section considers the vertical and the horizontal ASP business models and the circumstances under which either one, or another model, might be a winner. Finally, the concluding section compares the more general E-Commerce arena to the somewhat "younger" ASP arena, suggesting that much like E-Commerce, ASPs are alive but not very well yet.
THE ASP INDUSTRY: PAST AND PRESENT STATE
The ASP model, pioneered in 1998, is the most recent manifestation of IT outsourcing. Customer organizations of ASPs refrain from investing in server hardware and software upfront, opting instead for a rental contract with an ASP. Users in customer organization of ASPs gain access over the Internet to applications and databases residing on the ASP's servers. Many industry experts have predicted that within a few years, users will not want to install applications locally. Instead, they will access the applications they need, on demand, from online providers who will charge them by the second for the precise value of the specific features and resources they choose to use (ASPnews, 2000).
Since by doing business with ASPs, organizations hope to have IT applications up and running more effectively and to overcome scarcity and high cost of skilled IT personnel, it was widely expected that the ASP concept would be most appealing to smaller companies. Since small or medium-size enterprises (SMEs) confront limited people and budget resources, as well as constant competitive threats, IT acquisition, implementation, and maintenance present a heavy burden on their budget and operational resources. It has been hoped that ASPs might relieve these burdens, letting SMEs access advanced technologies gradually at affordable prices.
Two main business models exist in the ASP industry, horizontal and vertical ASPs. Horizontal ASPs, similar to horizontal e-- markets, cater to a wide variety of organizations. Leading representatives of this business model are Corio, USInternetworking, IBM, and Oracle, recently joined by Microsoft with its Dot Net enterprise. Vertical ASPs cater to one industry, such as hospitality, automotive, chemistry, or energy, offering applications tailored to the specific needs of the industry. Examples of this business model are Silverbyte, for hospitality and Porters, for professional services (See the reference list for web site URLs). Another type of a vertical ASP is a vendor specializing in one type of application, such as GeoNet Services specializing in electronic messaging.
A few hundreds vendors are currently labeling their businesses as ASPs. Among the most prominent are Breakaway Solutions, Corio, USinternetworking (USi), EDS, and Oracle. At Oracle the belief is that