The application-hosting market is poised to explode, and some analysts estimate it will reach the $20 billion mark in 2001. By last count, there are already 86 providers of application-hosting services in the United States using either existing packaged applications such as SAP R/3 and PeopleSoft, or offering their own custom-developed software.

Most of the hot application service providers are startups such as Corio, iXL, USinternetworking, and USWeb. But many big players are lusting after this potentially lucrative market, including the folks at Cisco Systems and Oracle.

According to the marketing literature, ASPs are going after the small and midsize market, but if you look at the client roster of many of these companies, they're being brought in to divisions of large companies too. The reason? Cost and time to market.

When To Outsource

An ASP makes sense for large companies that have too many top-priority applications to manage them all efficiently using an internal IT staff. Often, it's not the IT department that brings in an ASP. Business-unit heads may hire one after failing to get the type of support they want from their internal IT shops. Or, they may need to implement a new accounting package in a shorter period of time than their internal IT department and/or consultants can deliver. A typical consultant engagement for SAP R/3 is three years. USinternetworking typically gets customers up and running on R/3 in three to six months, according to VP Michelle Perry.

Why the big disparity between the ASP and more traditional enterprise resource planning consultant? USinternetworking found that 80% of a packaged application's functionality is used by all companies. The customization of the application then is reduced to the last 20% of the project implementation.

ASPs also help reduce the risk of implementation failure through standardization and centralized management of system resources. They're experts at SAP R/3 or J.D. Edwards. That's all they do so they can easily roll out an upgrade for multiple customers. A business IT department has limited expertise and resources to implement upgrades and ongoing system maintenance. And, as most studies show, the biggest cost associated with an application is not the initial purchase price but the ongoing life-cycle maintenance

Many companies realize ERP software doesn't necessarily give them a competitive advantage. Because these packages are so structured, it's difficult for the customer to customize them and integrate them into Web and legacy applications. For companies that don't view an ERP package as a competitive tool, it makes sense to outsource it to an ASP. Decades ago, companies decided to outsource their payroll systems to third party service providers because payroll isn't an area where a company can add any unique value. The same thinking may soon color the decisions of large companies when it comes to human resources and financial applications.

Nike, for example, decided to outsource all of its IT resources except custom application development. Those applications that will be developed internally are competitive, customer-facing systems.

Who Are the Players?

Here's a look at some notable companies in the ASP market today:

USinternetworking Inc. is one of the most prominent ASPs, following its successful initial public offering in April. The company was founded in January 1998 and already has a market capitalization of $1 billion. Its target market is midsize companies with annual revenue in the $50 million-to-$1 billion range. The typical customer is the division of a large multinational company, such as Hershey Corp. and Samsung Corp. The company implements and manages ERP applications for customers from its four data centers around the globe.

X-Collaboration Software Corp. focuses on providing group collaboration services to small and midsize companies that don't want the cost and effort of maintaining their own applications. X-Collaboration CEO Kevin Lo envisions his company as a portal service for business-to-business collaboration. Small companies rely a great deal on other companies for legal, financial, manufacturing, shipping services. These companies typically don't have the financial resources to support the complex business processes and software packages required for this type of collaboration, supply chain, workflow, etc. So for a monthly fee, they can have access to X-Collaboration's application-hosting services--a fee, many company official say, is less than the annual licensing fee of a single E-mail or group collaboration application. The company's goal is to help customers adapt to market conditions quickly. It does this by helping to take costs out of standard business activities.

Resource Partner Inc. is an application outsourcer that will implement PeopleSoft applications on its facilities and provide small and midsize companies with T1, virtual private network, or Web access to its services. Resource Partner handles the implementation, ongoing application management, and process outsourcing. The company's goal is to drive costs out of the financial and HR systems, says VP Sam Amore. Resource Partner started as a shared services division of Borden Corp., but was spun off a few years ago. The target customers are companies with less than $250 million in revenue.