Why app hosting and outsourcing can’t hurt you

November 1999

Why app hosting and outsourcing can’t hurt you

Don’t fear the new generation of outsourcing options
By Dan Kara

Two industry trends that appear to threaten your job may actually be opportunities in disguise. The first trend, outsourcing, is a strategy that has worked for years to cover internal IT departments’ competency gaps and quickly provide them with state-of-the-art technical capabilities at a reduced cost. Most Fortune-class organizations outsource at least some component of their IT and network strategies.

The second trend is the rise of the Internet/Web as a global application platform. The existence and ongoing commercialization of the Internet/Web as a global, open “wire” presents the business community with many opportunities. New applications built with new tools and techniques offer businesses access to untapped markets.

Outsourcing and the Internet/Web are naturally synergistic, and their pairing could not be better timed. The same business benefits and economies of scale that have made generalized outsourcing a success also apply to Web-centric outsourcing, perhaps more so. Not only can outsourcers offer more robust, timely, and complete services than most companies can provide internally, they also provide technological expertise and leadership in the fastest moving of all IT segments: the Internet.

Why outsource Web development?
Outsourcing and the Internet are also closely related to corporate application development. For example, the number of vendors providing outsourced Web development services dwarfs the number of firms providing other types of Web-related outsourcing. It’s easy to see why. Any organization that hopes to remain in business is developing completely new classes of applications that take advantage of the ubiquity and universality that define the Internet/Web.

Next-generation Web development requires a different set of skills from those required for first-generation projects. Often, internal IT departments lack these newer skills. In addition, competitive pressures demand that new Web systems and services be brought online quickly, and of course, cost is always an issue. As a result, most organizations look to outsourcing first for their increasingly complex Web development projects.

And while the ascendance of outsourcing as the first option for Web development efforts is fraught with danger, opportunities abound as well. As a developer with the requisite expertise—particularly in Java, application servers, and XML—you can name your own price. This is because all organizations, including outsourcers, are having trouble finding and retaining individuals with the skill to build complex Web-based systems (primarily Internet transactional applications and e-commerce systems).You can also have the option of working as a corporate developer or as part of an outsourcing army.

The sting of the ASPs
The Internet and related technologies have enabled a new outsourcing paradigm to emerge: software can now be rented or leased (rather than purchased) from Web application hosting vendors. The applications themselves are centrally managed by the hosting vendor and can be accessed from anywhere using either the Internet or a combination of virtual private networks (VPNs) and leased lines. Thus the age-old “build or buy” dichotomy evolves into “build, buy, or rent.”

The class of companies that “host” the applications have been dubbed application service providers (ASPs). ASPs are responsible for the smooth deployment and operation of the leased software, including maintenance, software upgrades, customer support, and occasionally training.

Web hosting of back-office applications (ERP and others) is receiving the bulk of press, analyst, and user interest at this time. The terms “application hosting” and “application outsourcing” are used widely to describe this practice. Many vendors and users equate “application outsourcing” with the Web hosting of back-office systems and vertical market applications.

The professed advantages of this approach make it extremely compelling for virtually all classes of organizations. These advantages include cost savings, global reach, predictable usage fees, and rapid deployment, as well as the elimination of upgrades and maintenance. Naturally, many people expect the nascent Web application hosting market to explode over the next few years. In a recent report, International Data Corporation predicted that worldwide spending on Web application hosting services will reach approximately $150 million this year and will grow to $2 billion by 2003, a four-year compound growth rate of 91 percent.

Much of the growth of the Web application hosting market is expected to come from small to mid-sized firms (less than $250 million) that do not want to invest in an expensive internal IT architecture. Web application hosting reduces up-front capital expenditures on servers and software, as well as decreasing IT staffing overhead. Basically, Web application hosting allows smaller companies to “play like the big boys” for a fraction of the cost it would take to do it themselves.

Like generalized outsourcing of Web development, the growing ASP market could spell trouble for corporate developers at smaller companies. Enterprise application packages used to be too pricey to threaten developers at smaller firms: it was cheaper to build a custom back-office system than purchase an expensive enterprise package. The application hosting approach changes all that.

Enterprise packaged applications have succeeded because they meet a crucial business need that custom development cannot: they can speed delivery of business systems. In some instances, the overall cost of the packaged solution is lower than if the same software was developed in-house. These benefits apply whether the applications are hosted internally or externally via an ASP.

If packaged solutions offer a lower-cost alternative to systems development and can be brought online quickly, why develop applications at all? Simply put, cost and time to implement are not the only variables in the build-or-buy equation. Issues related to suitability, malleability, and creating a sustained competitive advantage for the organization also come into play.

Today, most enterprise application packages focus on automating internal business processes such as human resource management and billing. Applications that automate internal processes contribute to the bottom line by saving money. Applications that automate external processes are those that interact with customers (or manage customer interaction), whether those customers are inside or outside the company. Automation of these external processes can actually generate more revenue. So while internal process automation carries bottom-line benefits, external process automation provides a sustained competitive advantage to the organization.

Unlike internal enterprise applications, external applications are company- and industry-specific. They must be custom engineered from the ground up. Even if a packaged application roughly meets the business requirements for external processes, other problems can arise.

First, even in those circumstances where organizations might be in the same business, or hope to accomplish similar goals with software, their respective business processes will typically differ (often dramatically). As a result, organizations may end up tailoring business processes to meet the needs of the software rather than vice versa.

Even when an enterprise application package successfully automates external business processes and exactly meets business requirements, problems still exist. Foremost among these is that every competitor has access to similar advantages using the same or similar packages. Therefore, businesses hoping to maintain or enhance their competitiveness must consider custom software development.

Customization: Still the best bet
Indeed, customized software development, despite its additional costs, is often the best way to ensure organizational differentiation. Moreover, it is often during systems development efforts that new technologies and techniques are exploited.

Corporate developers have little to fear from the latest generation of Web-based outsourcing options. Those who cultivate their Internet-related skills and expertise will grow professionally as the Web grows. The ASP phenomenon cannot change the fact that custom development can achieve far more competitive differentiation than application packages.

In truth, the ASP approach should benefit developers. For VARs, the benefits of application hosting are obvious: a greater number of clients to sell product to. But more importantly, developers of all stripes will soon have hosted applications and services that will benefit them directly. After all, advanced software development and testing tools are software, and as such they can be hosted and then rented on an as-needed basis.

Dan Kara is the CTO of the Intermedia Group, a research and analyst firm based in Westborough, MA. He is the co-editor of Kara/Rymer Enterprise Java Perspectives, a newsletter focused on the role of the Java platform within the enterprise. He can be reached at dkara@intmedgrp.com.