By Sheri Jacobs

Nobody knows better than the small-business owner that focusing on core competencies leaves little time to spend on day-to-day business operations. Most business owners hate to give up the control traditionally associated with outsourcing key functions. On the other hand, installing state-of-the-art technology can be both costly and time-consuming. Enter the newest option for small and mid-sized businesses: the application service provider (ASP).

In simple terms, an ASP is any organization or third party that provides software applications over the Internet, typically rented for a fee. ASPs and the services they provide are leveling the competitive playing field for many businesses. ASPs host and manage the application from their site or a remote location. That means no software or hardware to purchase and install, no costly upgrades or add-ons, and no need to hire or train IT professionals. ASPs allow small businesses to use or test the latest technology immediately, with little financial risk or binding commitment. Once limited to software created for large companies by developers such as PeopleSoft, Microsoft, and IBM, the ASP market, spurred by the Internet, has spawned a second generation of service-oriented ASPs that offer small businesses access to packages that they previously could not afford.

Know What to Ask

Outsourcing is not right for every company or every application. Companies typically outsource those applications that entail a high level of availability or technical expertise. Virtually any software application can be delivered through an ASP. The most common are e-mail, calendaring, payroll, time and billing, communications, customer relationship management, and word processing.

Payroll outsourcing, for example, contains highly confidential and sensitive data. The application needs to be programmed to automatically calculate government tax deductions and divide money into appropriate accounts; just one mistake entails significant risk of government fines, not to mention disgruntled employees. For an application that is as mission-critical as payroll, businesses want to select an ASP that has reliable network performance and dependable security. Conversely, keeping that data stored on a secure server at a secure facility might be safer than keeping it in-house, where disgruntled employees and unauthorized staff could access it.

Doing payroll in-house also reduces the time available for more important activities, such as core competencies. The average small business spends 50 hours a year—or one week—on payroll-related activities. Doing payroll in-house also requires businesses to keep up to date with changing federal and state tax and filing rules. According to the IRS, 40% of small-business owners have been fined by the IRS for inaccurate or late payroll filing, with an average fine of $845.

Know What You’re Paying For

One thing that makes ASPs extremely attractive to small businesses is their affordable cost structure. Businesses no longer have to own or operate the hardware and software on which their business functions run. Applications are “rented” from the ASP for a monthly fixed rate ranging anywhere from $9.95 to $10,000, based on the package and functions. The monthly fee allows access to the latest technology as it changes. It is crucial to establish a “Statement of Services” that identifies everything the ASP will provide.

A Competitive Advantage

Finding the right ASP can be confusing, but online research can direct the CPA to a specialist in the service that is to be outsourced. For more information on ASPs, see WebHarbor.com (www.webharbor.com) and ASP News (www.searchasp.com), two ASP industry portals that deliver information, news, ASP links, directories, and solutions for small and large businesses.

Editors:
Paul D. Warner, PhD, CPA
Hofsta University

L. Murphy Smith, DBA, CPA
Texas A&M University