Today, the new breed of software as a service (SaaS) providers is considered, by some, the best bet for on-demand application hosting. Their predecessors, application service providers (ASPs), offered application services in a hosted data center style, a costly approach that led to service-level and financial failures. However, ASP hosting that survived -- such as Annapolis, Md.-based USinternetworking Inc. (USi) -- have Software as a Service on their menus.

"I understand completely why people are confused about ASP hosting and Software as a Service," says Laurie McCabe, an analyst at AMI-Partners Inc. in New York. "The terms are often used interchangeably. They shouldn't be, but they are."

ASP hosting of yesterday

Back in the 1980s and 1990s, ASPs got the application outsourcing business rolling by hosting third-party, client-server applications. Essentially, ASPs transferred a customer's application sets into mini-data centers housed in a "massive, extravagant data center," says Jeffrey Kaplan, managing director of consulting firm ThinkStrategies Inc. in Wellesley, Mass.

Since so many customer-specific applications were being run by one ASP, the ASP hosting couldn't provide much expertise in each application. Customers still had to have in-house expertise to make sure the applications were behaving correctly, Kaplan says.

The high cost of building and maintaining data centers and running customer-specific applications

crippled many ASP hosting ventures. For instance, a founding member of the ASP Industry Consortium, FutureLink Distribution Corp., couldn't make a profit and pulled out. Other shutdowns caused major concerns among customers, as did bankruptcy filings like that of ASP market leader USinternetworking.

All of these developments, coupled with a strong 1990s economy, caused many CIOs to choose not to relinquish their company's IT assets to an ASP.

ASPs of today

Despite these setbacks, many ASPs have survived. USi, for instance, rebounded after a merger and still leads the U.S. market. Most have either narrowed their focus on one vertical, or have even added Software as a Service-type services to their menus. USi still calls itself an ASP, but it offers Software as a Service, as well as remote management independent software vendor enablement, e-business development and hosting and other services.

Software as a Service takes another track

The typical Software as a Service provider offers applications specifically designed to be hosted and delivered over the Internet to many customers. As a result, the providers can create and offer value-added features, which would be expensive in the ASP hosting model. Each customer gets its own instance of the application, but the provider still achieves economies of scale because of the simpler application scenario.

With Software as a Service, the customer doesn't have to buy the software and then pay for the provider to host it, says George Zarcilla, director of customer service at San Francisco-based Xoom Corp., a RightNow Technologies Inc. Software as a Service customer. "The upfront outlay isn't so great. It's a flat fee," he says. Xoom didn't have to deploy the CRM application from Bozeman, Mont.-based RightNow and doesn't have to maintain it.

Evaluating a Software as a Service provider's application is much simpler than the traditional model of putting a third-party app through its paces in-house, says John Johnson, assistant vice president of licensing at the American Society of Composers, Artists and Publishers (ASCAP). The provider simply gives the prospective customer access to the application via a Web interface.

With Software as a Service, the customers' IT people have access to a number of different features or capabilities within the software set and can tweak them via a Web interface to fit the needs of their company.

"The interface makes it easy for administrators to customize for simple changes," says Ed Barrett, marketing vice president at McLean, Va.-based Care Rehab and Orthopaedic Products Inc., a Salesforce.com Inc. Software as a Service customer. San Francisco-based Salesforce.com assisted in customizing one aspect that was beyond the capabilities of the Web graphical user interface, but that cost Care Rehab much less than doing it in-house would have.

The cost savings in IT labor was cited as a major boon by users Barret, Johnson and Zarcilla. For Xoom, the savings in labor alone is about $35,000 a year.

When using ASP in the past, Zarcilla needed to have in-house application experts. "With SaaS, our IT staff only has to think about having an Internet connection and can focus on Xoom's core competency," he says. "We don't want to get involved in inventing or support CRM apps."

There are dozens of Software as a Service providers in many different application categories. The only gaps right now are in some vertical markets, McCabe says.

Making a choice

Customers who need providers that will host specific, customized applications or off-the-shelf applications in a secure data center, then the ASP may be a good choice. It also suits companies that want to outsource all or most IT processes, including development and Web sites.

The Software as a Service model is a good fit for companies with many geographically dispersed and/or mobile software users or users who collaborate with each other or outsiders, McCabe says. It works well for companies that have no need for in-house application developers or experts. It also provides benefits to companies burdened with heavy regulatory compliance requirements, because Software as a Service centralizes IT management and automatically generates reports. Finally, if the applications of a particular Software as a Service provider work for your company, then SaaS is a good choice.

SaaS has demonstrated a quick deployment time, quickly attained ROI, high reliability and -- compared with ASP hosting -- lower customer cost. Kaplan advises: "Give it serious consideration as an alternative to shrink-wrapped applications or ASPs."

About the author: Maxine Kincora is a technology writer in Berkeley, Calif. She can be reached at mckincora@msn.com.

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