Agencies eye ASPs warily

| GCN STAFFFor most agencies, outsourcing applications represents sailing on uncharted seas.The Interior Department isn't one of those agencies.Interior has two offices that are outsourcing administrative applications to application service providers.The Minerals Management Service is outsourcing a system that manages billions of dollars in revenues from mineral leases. And Interior Freedom of Information Act officials are offloading a document management and tracking system ().The service's responsibility is to collect royalties, said Michael Del-Colle, head of the agency's Procurement and Support Services Division in Herndon, Va. 'By going to an ASP we can focus more on collecting those royalties as opposed to worrying about information technology as if that is our core function. It's not.'A few other agencies are venturing into the ASP market. The Federal Railroad Administration, Federal Aviation Administration and Federal Energy Regulatory Commission all are in various stages of outsourcing applications.But for the most part, the ASP 'rent-an-app' craze that hit the private sector a couple of years ago subsided before it could penetrate government.ASPs were the latest thing: Outsource, say, a human resources application to an ASP and your IT headaches are over. And you could cut staffing, training and technology costs.Then came the Great Shakeout, littering the marketplace with ASP corpses.Market analysts at Gartner Inc. of Stamford, Conn., predict that 60 percent of ASPs will go out of business in the next year.Although Gartner expects ASP revenues to increase over the next four years, it has reduced its projection for the global ASP 2005 market from $25 billion to $18 billion.'It's a normal track that a new IT service in the market follows,' said Christopher Ambrose, Gartner's research director for external service providers. 'It hits a peak of expectations and goes into the trough of disillusionment, which is where we see the ASP market still sitting.'Even the pure-play ASPs, those offering full application outsourcing services, aren't making money.That includes USinternetworking Inc. of Annapolis, Md., which hosts the Minerals Management Service's system as well as those of the other agencies mentioned. USi, the leading ASP in terms of annual revenue, reported revenue of $109.5 million last year, a 208 percent increase over 1999. But the company has yet to turn a profit and this year it cut its work force by 11 percent to reduce overhead.Karen VenDouern, manager of public-sector business development for USi, said the company has strong backing'including a major investment from Microsoft Corp.'and expects to break even in the third quarter of this year.As for the industry upheaval, 'where you have a lot of niche-oriented guys jumping on the bandwagon when they see a new technology, there's always a shakeout eventually,' VenDouern said.Officials at the ASP Industry Consortium of Wakefield, Mass., also view the shakeout as a natural part of the evolution of a new industry.'It happened in telecommunications, it happens in every industry,' said George Caravias, the consortium's secretary-treasurer and executive vice president of Interpath Inc. of Research Triangle Park, N.C. 'I don't think that's necessarily the bad thing that everyone makes it out to be.'The ASPs that are surviving the turmoil are beginning to look to the government and its estimated $40 billion in annual IT spending as a potentially vast market.They know that government agencies, faced with IT work force losses and budget constraints, are under increasing pressure from the Bush administration to outsource technology functions and concentrate on their missions.'I see the federal marketplace [for ASPs] opening up more,' VenDouern said. 'We're seeing a lot more requests for proposals and requests for information being written in specific language tailored to ASPs, saying they will accept alternative outsourcing solutions.'But feds who know something about ASPs view them with a wary eye. The financial stability of ASPs is a chief concern.'The ASP market has been following what's been happening to the dot-coms,' said Arthur Pyster, deputy assistant administrator for information services and deputy chief information officer at FAA. 'It's under a lot of pressure. I wouldn't be uncomfortable with testing the water with some non-mission-critical, smaller-scale applications to see how well that plays out. But I would be very nervous about trying to outsource major segments of my infrastructure to them.'Pyster noted that FAA's own ASP project'a cost-accounting management system'is a good example of the type of application that an agency can use to try outsourcing.'It's non-mission-critical,' he said. 'It's relatively small. We'd hate for it to have problems, but if it did, it would be relatively straightforward to recover from those. There aren't safety implications. It's an important application, but it's certainly not core to our business.'VenDouern said that ASPs aren't interested in hosting core government applications.'There is no way we would want to touch the system for air traffic controllers,' she said. 'That would be a huge liability and not one that we would have expertise in.'More suited to outsourcing, she said, are applications such as enterprise resource planning, including financial management, human resources and messaging systems.For Del-Colle, the instability of the ASP market is not a big worry. It's just a question of doing your homework.'This is really a contracting issue more than it is an application issue,' he said. 'You have to be sure that you're dealing with a viable and established firm as opposed to one that is parading promises.'In addition to ASP viability, the security of network data when it's hosted on an ASP's servers is a major concern for feds.But the ASP industry has a response: We know security better than you think.'Most ASPs understand security far better than many of their customers,' the ASP consortium's Caravias said. 'The skills, the systems and support infrastructure necessary to provide a high level of security are there, certainly among most experienced ASPs. At Interpath, we have banking and insurance customers who are paranoid about security. They come to us precisely because we can provide higher levels of security than they can themselves.'Despite being slow to catch on, application outsourcing is nonetheless viewed as the wave of the future for software delivery.'Overall, there is going to be a natural paradigm shift from software as product to software as service,' said Gartner's Ambrose.Carl Kelly, senior vice president for online services for Oracle Service Industries of Reston, Va., told a FOSE audience in Washington in March that about 29 percent of Oracle's current business is application hosting.'Oracle is heading away from the CD-ROM,' he said. 'Our goal is 80 percent of software delivered through the Internet model.'At the same session, Harris Miller, president of the Information Technology Association of America of Arlington, Va., said, 'The ASP marketplace is very much the future. It's really [where] the private sector is headed.'Whether the federal government heads in that direction to any significant degree remains to be seen.'I think it's going to be a while before it's a mature market,' Pyster said.