Application Hosting Still Popular Despite Sector Shakeout

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The application hosting world has seen its share of ups and downs. Just last month, two major players — Intel, and LoudCloud, the startup founded by Netscape Communications co-founder Marc Andreessen — exited the Web hosting business.

But while the turmoil has left customers cautious, it hasn’t kept them from hosting their applications outside company walls. The application hosting business nearly doubled from 2000 to 2001, to $1.8 billion dollars, and is expected to grow at more than 50% a year for the next four years, according to Jessica Goepfert, an analyst with IDC.

For Woburn, Mass-based Charrette Corporation, a 750 employee retailer of architectural and graphic design supplies, the key factor in deciding to outsource its SAP applications was the cost of hiring qualified staff.

Charrette turned to outsourcing early this year, after building a Web site which allowed customers to place orders online. “Our ecommerce operation is live 24X7,” says Kevin Walsh, the company’s CIO, “which means we need to support our users 24 hours a day. That meant hiring more support people, but a good SAP BASIS administrator in our area can command anywhere from $85,000 to $125,000 a year.”

Instead of hiring more staff, Charrette turned over its SAP applications, which included financials and inventory and warehouse management, to Siemens Business Services. Charrette’s applications are now hosted at the Siemens data center in Toronto, Canada, which has 180 employees and specializes in SAP applications.

Although Charrette’s applications have moved north and across the border, they still run on the same Hewlett-Packard 9000 system that they ran on in Massachusetts. As part of the deal, Siemens bought Charrette’s computer hardware from the company.

That helped make the deal attractive to company management, says Walsh, even though the firm estimates it is paying about five percent more to outsource its applications.

That premium may be misleading, according to IDC’s Goepfert. “If you’re just looking at cost alone, you’re missing half the picture,” she says. There are a lot of other benefits of outsourcing.”

Walsh agrees. “There are a lot of offsetting economic factors,” he says, “when you look at the intangibles, and not just the hard dollars.”

For one thing, Walsh has found that turning the applications over to Siemens has freed up his staff to focus on making other improvements to the system. “We now have the opportunity to do more value added things for the company, rather than worrying about the day to day operation,” he says.

Goepfert also cites benefits like improved security. “Outsourcing can provide greater security than the company would be able to do internally themselves,” she says, “because the hosting company typically has more expertise in that area than any one individual company.”

Application Vendors Becoming More Flexible

With the large potential in the hosting market, the large ERP vendors have begun not only selling software, but offering to run it for their customers as well. In the last few years, SAP, Oracle and Peoplesoft have all begun providing hosting services for their products, and, in some cases, pushing hard to gain a share of the market. According to some Oracle users, every Oracle sales pitch the company’s 11i E-Business application suite now includes a proposal to host the applications through Oracle.

Until recently, however, users who chose to host their applications with a software provider were limited to running only applications from that company. That was a problem, says Goepfert. “A lot of customers don’t want only one vendor,” she says. “They may well want to combine Oracle financials with Peoplesoft’s HR.”

The vendors seem to be aware of that, and are cutting deals with third party providers to take over the physical hosting of their applications. Peoplesoft, for example, which first launched its eCenter hosting service in 2000, announced in January of this year that it was turning over its hosting operations to Hewlett-Packard. SAP signed similar deals with both HP and EDS last year.

These partnerships will allow customers to host applications from multiple vendors, says Sanjay Katyal, director of Peoplesoft’s eCenter service. And while the Peoplesoft’s applications will be hosted at HP’s data centers, customers will still sign their contracts with Peoplesoft.

“We’re still on the hook to guarantee the level of service,” says Katyal.