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Companies reach to Web for software

Businesses can lease software over the Internet. But they must weigh benefits with risks when deciding to tie critical computer functions to a company across the Web.

E-mail isn't just for gossip and routine messages at Amerinet's operations center. It's at the heart of the company's business.

The check-processing company's clients send e-mail messages asking Amerinet to verify their customers' checking account numbers. Amerinet sends back e-mails predicting whether checks will bounce.

So Amerinet executives were leery about turning over the crucial e-mail system to an outside company. But they made the leap after serious research. Now, Amerinet's e-mail runs off computers inside a Virginia data center. And Amerinet employees access their messages via a Web site.

The result: Amerinet's information technology department no longer fusses with fixing the e-mail system when it crashes or upgrades it when it needs improvement. "They can spend their time on something that adds value to our business," said Scott Duncan, who heads up Amerinet's Clearwater center, "something that brings in revenue or reduces costs."

Across the country, companies are weighing the potential efficiencies _ and the real risks _ of entrusting crucial computer functions to vendors whose software is accessed over the Web rather than installed on PCs.

An entire industry of such application service providers has sprouted to lease everything from simple applications that allow a salesman to schedule appointments to complex programs that permit a manufacturing company to manage its production line.

Instead of charging customers a large upfront fee for a software package, ASPs charge on a monthly or per-usage basis.

The ASPs range from tiny shops with a few employees to large corporations employing thousands. Even Microsoft, the world's largest software company, plans to make programs such as Word and Excel available on the Web to companies and individuals, who would be billed each time they sign on rather than buying software in shrink-wrapped packages.

But the rush of businesses to sign up for online software hasn't met the most exuberant estimates of Internet entrepreneurs and analysts.

The Gartner Group, a Stamford, Conn., technology consulting firm, estimated last year that worldwide ASP sales would grow from $889-million in 1998 to $23-billion by 2003. But this year, the company said its growth estimates should be reduced by 30 percent because ASPs were encountering more resistance from potential customers than expected.

Companies considering online software fret about the reliability of their Web connections, about the uncertainty of passing confidential documents back and forth over the Internet and storing them on someone else's computers, and about whether an ASP's promises of fast and attentive service will hold up over time.

"There's a lot of fear and confusion about ASPs," said Marc Blumenthal, the founder of Progressive Business Solutions, who sold his Tampa systems integration company to ePartners of Dallas in April. But the biggest concern for businesses that outsource to ASPs is what happens if one of these companies goes bankrupt.

The idea of an outside company managing computer systems is not entirely new. In the 1970s, when huge mainframe computers dominated the business world, owners of the massive machines would rent them out for a few hours at a time to companies that needed to crunch numbers. But when the PC invaded the workplace in the 1980s, companies found they had all the computing power they needed right on their desktops.

Over the past decade, the cycle from mainframe to desktop has come around again. First, companies began to link their PCs to powerful central servers so users within an organization could share information. Those servers generally were located on site and managed by internal employees. More recently, companies have connected their in-house computer systems to the Internet, allowing employees to communicate with the outside world. The servers providing the Internet connections are controlled by outside companies known as internet service providers, or ISPs.

"ASPs take Web outsourcing to the next level," said Paul Wray, the co-founder of Qualitative Marketing Software, who sold his Clearwater software company in December to Sagent Technology, a Mountain View, Calif., e-business software provider. "What's driving the trend is that companies are finding it more and more difficult to find people to operate their own information technology systems."

Wray, who manages his former company as a division of Sagent, said the division has spent more than $1-million in the past year to make sure its software can be delivered over the Internet. So far, Wray says only 5 percent of his customers have asked to access software over the Internet, but he expects 40 percent to migrate to the ASP model within two years.

Many software manufacturers and fledgling ASPs expect a similar surge in demand. As a result, the Gartner Group estimates that about 500 ASPs have emerged over the past two years.

South Florida has become a particular hotbed of activity, with several dozen ASPs setting up shop in the Fort Lauderdale-Boca Raton area. Many of these companies were drawn there by Citrix Systems, Florida's largest software company, which has championed the development of the ASP industry. For example, TeleComputing, the company that handles Amerinet's e-mail, relocated its headquarters from Norway to be near the Fort Lauderdale software giant.

Lacking a champion such as Citrix, the ASP industry in the Tampa Bay area has not developed as quickly. Tradex Technologies was the best example of a local ASP, but it moved its headquarters to Atlanta before selling out in December to Ariba of Mountain View, Calif. Tradex makes software that allows businesses to establish online marketplaces. Tradex stores the software needed to run the marketplaces on its own servers, and market participants pay Tradex membership and transaction fees to access the system.

Other ASPs are just beginning to emerge in the bay area. Many of them are offshoots of Web design and development firms.

Four of the companies are located in St. Petersburg: Emagisoft is preparing to mass market a suite of Web-based applications meant to help businesses set up and manage e-commerce Web sites; DataGlyphics has created a separate company called to help private schools and colleges set up Web sites to keep in touch with alumni; NetWise has developed software for companies that want to allow clients to access data from the company's proprietary networks; and Horizon provides software that allows companies to design and distribute their own marketing newsletters.

Of these software companies, only Emagisoft has committed itself to becoming an ASP. The others view the development of online applications as a sideline.

It also is difficult to find companies in the bay area that already use ASPs heavily in their business. An exception is Pride Enterprises, a St. Petersburg organization that uses prison labor to produce dozens of products and services. Pride is working with Cylex Systems of Boca Raton on a contract with the Florida Department of Motor Vehicles.

The DMV processes about 20,000 transactions a day, which generate about 100,000 documents, said Ron Layel, Pride's director of digital information systems. Pride has its prison workers scan the documents into computers, then sends the documents over the Internet to Cylex, which stores them on its servers. They're available online to DMV employees whenever needed.

"The Department of Motor Vehicles had the option of doing all this in-house," Layel says. "But by outsourcing, they have avoided the upfront capital cost involved in buying servers and the ongoing hassle of staffing an information technology department."

For traditional software producers and the companies that help them install their applications for business customers, the crucial calculation is how much to bet on the ASP market and how soon.

"If you're a software company and you don't install your own system to deploy software over the Internet, you'll be out of business in two or three years," said Gordon Tunstall of Tunstall Consulting, a Tampa company that provides businesses with financial advice.

But Marc Fratello, the chief executive of PowerCerv of Tampa, is moving cautiously. His company, which provides software to manage data that might be scattered across various divisions within an enterprise, has been struggling financially. So he's looking to partner with an ASP that can put his company's offerings online.

By contrast, Infinium of Hyannis, Mass., one of PowerCerv's principal competitors, has taken a more aggressive approach. It spent $5.5-million during the nine months ended June 30 to build and support its new ASP data center, according to documents filed with the Securities and Exchange Commission. But the company landed only six customers and generated only $21,000 in revenues during the same period. The company predicts demand for its ASP services will pick up rapidly and revenues will surpass $225,000 a month before the end of the third quarter.

ASPs of all shapes and sizes are encountering the natural resistance to new technology and a reluctance by companies to turn over systems they consider core to their business.

E-commerce systems are selling best, said Randy Wadle, the president of St. Petersburg's NetWise Technology. That's because companies are used to using outside vendors for functions related to the Internet. Software that helps companies streamline their accounting and human resources operations also is selling fairly well because a company can survive if the servers running those systems go down.

But getting companies comfortable with the idea of outsourcing software that manages their manufacturing and distribution is much more of a challenge.

"How a company purchases raw materials, organizes production and delivers final products is often what gives it a competitive advantage," Wadle said. "A company may not want to change those processes, so they conform to restrictions imposed by an ASP." Wadle said ASP software is less flexible than software installed and customized for just one company.

Blumenthal of ePartners said the companies that have migrated most naturally to ASPs have been dot-coms and Fortune 2,000 corporations. Dot-coms like ASPs because they save them from having to invest a lot of money in equipment and staff Fortune 2,000 companies like ASPs because they are used to having their servers managed off site.

"Most small-to-midsize companies are accustomed to being able to see and touch those machines with the blinking lights that are stored in a closet down the hall," Blumenthal said. "They don't like the idea that those machines might be housed clear across the country."

Most of all, no company likes the idea that an ASP it depends on could go bankrupt.

The Gartner Group says that fear should not be underestimated. There are already too many ASPs, it says, predicting that 60 percent are going to fail within the next four years.

"Today's dot-com collapses will pale in comparison to the effect the pending ASP meltdown will have on organizations that use these ASPs," Audrey Apfel, a Gartner research director, said in August. "When dot-coms collapse, they implode and have little impact on their customers and other industries. The ASP consolidation will have a domino effect, affecting business systems . . . for companies that have outsourced those functions to ASPs. Then those failures can quickly spread damage along supply chains."

That's why even companies that use ASPs are taking it slowly, scrutinizing potential vendors at every step.

Duncan of Amerinet, the Clearwater operation that farmed out its e-mail, said his company is proceeding slowly in its reliance on an ASP.

"We're going to wait and see how they do with e-mail," he said, "before we give them anything else."