Large enterprises are traditionally the trailblazers for new technology. But things have been turned around by application-hosting technology and services being marketed by a new breed of application service providers (ASPs).

Smaller companies, thanks to economies of scale, look like becoming the early adopters of remote hosting.

An ASP strategy can go wrong very easily if not tightly managed, said Mark Armstrong, managing director of ASP System Care, speaking at a conference in Paris organised by database vendor Progress Software.

System Care hosts applications for Si3, a small supply chain management company and the only UK customer at the conference. Real-life ASP users are still a rarity, and those that exist tend to be early adopters of technology. Through partnerships with IBM and Progress, System Care supplies Si3's entire IT set-up, including supply chain management applications, network support and hardware.

The arrangement has given Si3 the chance to focus on its core business, but users must work closely with their ASP, warns Si3's managing director Sean Fennon.

"The relationship part of it has to be right, which is why a lot of ASPs won't survive," he says. "When we signed the contract with System Care, we said that they had to become our IT department."

Progress wants to rival Oracle in renting database and ASP enabling tools to service providers. It has signed up 2000 software suppliers, including System Care, to its Aspen ASP programme to ensure that vendor applications are ready to be used in a hosted environment. Now all it needs are the users.

Analyst Robin Bloor says that large organisations' applications are too tightly integrated to be hosted by a third party. ASPs will have to depend on the small to medium-sized business market for the moment, says Bloor. He highlights his own research, commissioned by Progress and IBM, showing that small and medium-sized organisations could save up to 30 per cent in running costs by renting all their IT needs through a third-party ASP.

Risky business
Not every business is suitable for application hosting. The risks associated with accessing applications over an internet connection are too great for certain industries. "Manufacturing is the last thing you would ASP," says Bloor. "The idea that the production line stops and you can't get your hands on the IT person responsible is absurd."

"Financial accounting is going to be the major ASP application, because if it goes down the accountant might complain but the company will not stop," Bloor reckons. "Anything that can't stand an hour of outage is not going to get ASP-ed."

Bloor predicts that the ASP market will take off in stages based around service level agreements between the customer and the service provider. This is not hype-led, but is a result of business demand.

"It is about cost of ownership issues such as hardware, software licences, upgrades, network and back-up costs," he says. "You can't get the skills for some of these things, and many businesses don't have the time."

Short shelf life
Gartner's Rita Terdiman predicted at the analyst's spring symposium that 60 per cent of current ASPs will not survive beyond 2001. This is because of poorly thought-out business models, their choice of partners, their ability to execute services and an eventual consolidation in the market as more established companies finally enter the space. Gartner said late last year that host ASP services are still too expensive and unsophisticated for smaller users.

Sage, a supplier of accountancy software to the small to medium-sized market, fits Bloor's image of the ASP. Yet the company still talks only of moving into the ASP space "in the near future".

The opportunities are clear, but the extent of demand seems limited. With early adopters expected to come from the financially constrained small to medium-sized sector, any boom in the ASP market may be slower in coming than its proponents would hope.