When application service providers (ASPs), came on the scene several years ago, traditional software vendors scoffed, doubting the upstarts could make a dent in their market share. They didn’t buy the concept of software offered on demand over the Internet on a monthly basis. As it turned out, they

were wrong.

The number of small businesses embracing hosted or ASP software has grown steadily, especially in the last couple of years, with small businesses leading the charge. According to Yankee Group, the applications that SMBs are most often implementing via an ASP these days are marketing, project management, time and billing, accounting/financial, CRM, merchant services, inventory management, messaging and payroll.

But before an SMB decides to select a hosted application, it should have a sense of the benefits and limitations. Yes, there are limitations. But, if the model is used correctly, they might not outweigh the benefits.

The Pros
  1. The vendor is on the hook. The typical hosted software provider holds the responsibility for: managing both the software and hardware components of the application; such network issues as redundancy, data backup and disaster recovery planning; managing the data centre or centres that deliver the application; and upgrading the software automatically for customers on a regular schedule. Simply put, hosted software can save a company time and money in IT support and equipment costs.
  2. Hosted software carries a set price per user per month. Traditional software, even for small businesses, can cost thousands to tens of thousands of dollars when implementation fees, hardware, maintenance, services and support are factored in. And surprise costs do happen.
  3. With newer applications, users don’t have to toggle between three or four different screens, for instance, to complete one task. Interfaces are intuitive and designed to follow a workflow as it is actually performed.
  4. Upgrades are made frequently — and for the customer, effortlessly. Because the software is delivered over the Internet, an ASP has greater flexibility in upgrading the applications and rolling out changes to customers. Traditional software providers, by contrast, might upgrade software once a year, if that, but the customers bear the burden of reconfiguring it. Using the ASP model means customers can do more to shape the application.
The Cons
  1. Some ASPs are built on a single tenant architecture, which usually translates to higher costs for end users, who will then encounter many of the same problems experienced with traditional software. The latest generation of ASPs has been built on multi tenant architectures, which allow the vendor to maximize the efficiencies of scale using a shared infrastructure.
  2. Because this is a relatively new model, some vendors are farther ahead in providing functionality than others. One of the early complaints about ASPs, for instance, was that they were difficult to customize, and customers accepted this as one of the trade-offs. Recently some ASPs have closed this gap.
    For some ASP applications, integration has been tough. A company that deployed a hosted sales force automation application for instance, couldn’t take its data and use it in accounting or inventory databases. Today, more ASPs are providing pre-built integration hooks, allowing a company to integrate an application into a third-party system.
    Others have gone further and built standards-based, Web service architectures that provide even better flexibility. But the integration process is still cumbersome with many ASP applications. In some cases it is at least as difficult as it is with traditional software. It is the one area in which traditional software and ASPs both need to improve.

Steve Frappier is director of Canadian operations for NetSuite Inc., an ASP that specializes in serving SMBs.

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