Applications Hosting

The Next Step for CLECs

Goli Ameri

Competitive local exchange carriers (CLECs) have known for a while that to survive in the competitive telecom market, they must provide value-added services and become the one-stop shop for business clients. Services may include local dial tone, long distance and international calling, as well as a comprehensive menu of data products such as Internet access, web server hosting and web page design.

The most precarious position for a CLEC is to remain a provider of mere bandwidth. Some CLECs have even threaded further in the converged world of telecom and the Internet and provided full-blown e-commerce applications.

Complex websites are required to handle transactions and run applications such as Java applets, streaming audio and video, and e-mail, all of which have to be integrated with in-house systems. In effect, the prevalence of sophisticated e-commerce applications has created a paradigm shift that has blurred the line between application software and services.

As a result, the next trend in the world of the Internet is for service providers to take a step beyond offering net-centric applications to provide standard enterprise applications such as accounting, enterprise research planning (ERP) and sales-force automation. To maintain and strengthen their foothold in enterprises, successful CLECs will be required to lead this trend.

For many CLECs, providing applications-hosting services is a logical choice. This new industry targets exactly the type of customers that CLECs are after. Due to limited Internet telephony (IT) resources, small and medium-sized companies are compelled to outsource their IT applications. Forrester Research Inc., Cambridge, Mass., projects that applications outsourcing is on the rise and that medium-sized businesses are at least 50 percent more likely than large companies to follow this trend. CLECs can benefit greatly from the applications hosting business because they can: leverage their existing customer base and physical infrastructure, including such sensitive requirements as large bandwidth, virtual private networks (VPNs) and bulletproof facilities; increase customer retention by collaborating with them in implementing and maintaining their mission critical applications; and increase service differentiation and thus generate new revenue streams with higher profits.

According to International Data Corp. (IDC) of Framingham, Mass., "ASPs (applications service providers) are service firms [typically pure ASPs, ISPs (Internet service providers), telcos, computer vendors, integrators and/or resellers] that provide a contractual service offering to deploy, host, manage and lease what is typically packaged application software from a centrally managed facility." Customers gain access to these applications through the Internet. According to IDC, the ASP arena is expected to generate more than $2 billion in revenue by 2003, and some analysts even expect the market to go up to $8 billion in the same time frame.

Some of the key players in the applications outsourcing market are large ISPs like Verio Inc., Englewood, Colo., that already provide website hosting, and e-commerce services. Others include new applications hosting companies such as Usinternetworking Inc., Annapolis, Md.; NaviSite Inc., Andover, Mass.; Corio Inc., Redwood City, Calif.; and Exodus Communications Inc., Santa Clara, Calif.; or such traditional powerhouses as IBM Global Services, Somers, N.Y.; Frontier Global, Sunnyvale, Calif.; EDS, Plano, Texas; Oracle Online, Redwood Shores, Calif.; and ServiceNet, Herndon, Va., (a joint venture of Accenture LLP, Chicago, and GTE Internetworking, Irving, Texas).

The notion of outsourced applications is at least 25 years old. The mass marketing of application software over the Internet, however, is a new idea with solid drivers including: pressures in the corporate environment to reduce mounting IT overhead including staffing, equipment and secure VPNs; certain in-demand applications such as sales-force automation, collaboration or customer support can be designed and easily accessed via the Internet; the availability of new and prevalent broadband services; proliferation of e-commerce; and the push by more established independent software vendors (ISVs) to regain market share.

The large corporate market has been saturated with installations of such mission-critical applications as ERP, slowing revenue growth at such established software vendors as The Baan Company, Barneveld, The Netherlands; PeopleSoft, Pleasanton, Calif.; SAP AG, Walldorf, Germany; and even Oracle. AMR Research Inc., Boston, forecasts that the ERP industry will grow only 30 percent in 1999 down from 37 percent in 1998, and it expects the sliding trend to continue.

These ISVs are redesigning their products so they can be accessed and used via the Internet, and partnering with ASPs such as Corio, USinternetworking and EDS to distribute their software into the small and medium-sized business market.

Most important, Microsoft Corp., Redmond, Wash., is taking a hard, serious look at applications hosting. Not only is the company reviewing the possibility of renting its own applications over the Internet, but its investment in Qwest Communications International Inc., Denver, places the software giant's seal of approval on the ASP industry. The Qwest-Microsoft partnership was a first step toward converged service provisioning in the telecom industry. The two companies have agreed to collaborate in applications hosting and distribution and managed VPN services as well as web hosting and e-commerce.

Qwest has thus become the industry's first facilities-based ASP with a strong foothold in corporate environments for selling managed end-to-end services. Qwest will be delivering applications from SAP, Siebel Systems, San Mateo, Calif., and Oracle to business customers.

Intermedia's Digex, Beltsville, Md., is one of the CLECs taking the lead in hosting applications, announcing a partnership with Pandesic LLC, a Synnyvale, Calif.-based joint venture of Intel Corp., Santa Clara, Calif., and SAP. Digex will be responsible for order-entry coordination, data processing, order fulfillment and shipping, and inventory management.

GST Telecommunications, Vancouver, Wash., is another CLEC, which has dabbled with applications hosting by distributing the HotOffice service from its website, providing collaboration tools for small to medium-sized businesses. IXC Communications, Austin, Texas, may eventually enter the fray (especially after its acquisition by Cincinnati Bell). The company's previous investment in Applied Theory may be a boost to its ASP plans.

Intel's $200 million investment in Williams Communications, Tulsa, Okla., is the semiconductor giant's first step into applications and web hosting. Williams will provide the network connectivity for Intel's new Internet Data Services facilities. Intel plans to sell its data services in a wholesale fashion to ISPs and CLECs.

The regional Bell operating companies (RBOCs) are jumping on the applications hosting bandwagon as well, expecting tremendous demand for outsourcing services. Bell Atlantic, New York, has announced a program that will allow its customers to run their groupware on the Bell company's network using hosted Lotus Domino server technology.

Hardware vendors also have entered the fray with applications hosting initiatives to help software vendors integrate their applications with their routers. This is good news for CLECs since many of them already have entrenched relationships with these server vendors. Cisco Systems Inc., San Jose, Calif., Hewlett-Packard Co., Palo Alto, Calif. and Sun Microsystems, Palo Alto, Calif., have established hosted applications divisions, introduced service provider strategies and are brokering deals between software vendors and their own dealers.

CLECs can enter the applications hosting market by partnering with the likes of Qwest, EDS, Exodus Communications Inc., Santa Clara, Calif. or Intel Corp., and offering both co-branded and private-label hosting services. EDS for example, is offering such broad services as e-mail and groupware at the low end and complex e-commerce, supply chain management and enterprise resource planning services at the high end. EDS will run the applications in its own data centers, and will provide services such as billing, customer care and applications support services.

The advantage to this option is reduced up-front costs, especially for CLECs focused on building their telecommunications networks. CLECs' telecom businesses are finally beginning to show revenue and cash flow, and the startup costs of an applications-hosting business could have a negative impact.

Another avenue for CLECs is leveraging their own data centers by collaborating with ISVs. This is a viable option especially because smaller software companies do not have the resources to maintain their servers in house, and are finding the larger ASPs cost prohibitive. Even large software vendors are looking for partners who can provide them with new sales channels. Microsoft invested 5 percent in NaviSite and the ASP is charged with evaluating the hosting potential of Microsoft applications. To take full financial advantage of this option however, CLECs must acquire application-level expertise for the software they host.

The other option is partnering with systems integrators or value-added resellers (VARs) who act primarily as application implementers. The advantage to this option is that CLECs do not
have to acquire the application implementation skills and can allow the systems integrators with skills in implementing ERP applications to do the day-to-day management.

No matter which option CLECs pursue, they should target the biggest bang for their buck. Offered services should not only include the basics such as network management, security, access and hosting but such end-to-end managed services as: up-front consulting; project management; training; customization and integration services; and ongoing technical and help desk support services.

Other than the technicalities of setting up an ASP shop, customer service is the most important component of becoming an ASP. Customers are mainly looking for a high-performance, reliable network that is scalable and secure. This includes such features as site mirroring to boost reliability, load balancing and intelligent routing to streamline performance, and VPNs to increase security.

They also want service level agreements (SLAs) covering availability and performance guarantees. Customers demand corporate-class SLAs in writing, including penalties for nonperformance.

Finally, they want one number to call and one company to deal with. To retain their customers, CLECs have to become the point of contact and eliminate the software vendor.

There is a plethora of software applications out there, and CLECs have to be careful to chose services from a variety of providers, picking the best of breed for each offering. These applications may include: e-commerce; database software; office automation; back office; vertical markets; and ERP applications.

An IDC study showed that payroll, e-commerce, supply chain and collaboration are the applications areas most likely to outsource. The banking industry is most open to outsourcing accounting functions with six out of 10 U.S. banks indicating they would consider the option.

While hosting services are a vital service component for most CLECs, it will take another 12 to 24 months before the market truly catches fire. The ASP market is an emerging market and customers need time to entrust their mission-critical applications to an outside source, and ISVs require time to optimize their applications to run over the Internet.

In a few years, applications hosting will become a large part of a provider's business. However, most Internet service providers that host websites are unwilling to become ASPs because they lack the resources and the business is outside their core competence. CLECs, on the other hand, who are targeting small and medium-sized businesses, do not have the luxury to leave the job to someone else.

Goli Ameri is principal of AmeriSearch Inc., Portland, Ore., a nationwide search and filing service. She can be reached at (503) 968-8437.

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