ASPs WHIMPER, but big bang on the way

Application service providers might still be thicker on the ground than are the customers willing and ready to take up their services. Seemingly breeding like cockroaches, ASPs (application service providers) might still be battling to make a buck and struggling to define working business models for themselves. Even so as the year 2000 creeps past its midpoint it would be a foolhardy man or woman who's still prepared to dismiss the ASP model as a business answer looking for a question. Sue Bushell reportsIt might appear to be producing more of a whimper than a bang at the moment, but that's probably illusory: analysts agree the ASP model will explode over the next few years - it's just taking time to achieve critical mass.

If you doubt just how far the ground has shifted in favour of the ASP model over the last six months you should know it's no longer just small to medium enterprises that are casting a favourable eye over the model.

The reason: the ASP model is looking increasingly compelling as a way to reduce total cost of ownership (TCO) and - with e-commerce forecast to generate 30 per cent of ASP revenue over the next five years - as a speed-to-market enabler for e-business. It also holds out promise of being able to help end users alleviate the chronic IT skills shortage.

IDC expects spending on ASP services for enterprise applications alone to soar to $2 billion worldwide by 2003, with the entire ASP market opportunity to reach $4.5 billion, just as long as early deployments succeed and vendors can continue to evolve effective strategies.

Meanwhile Gartner projects the Asia-Pacific ASP market alone will rise to about $US2.5 billion within four years, growing from a very small base but growing very rapidly.

"We are still behind the US by a fairly long way in terms of actual uptake, but there are beginning to be some customers now and there are a number of ASPs in business," says Gartner analyst Rolf Jester. "Lots more are talking about it."

Jester is in the throes of producing Australia's first definitive research into the Australian ASP marketplace, covering both customers and vendors. He expects results to be available within three months.

But an IDC study conducted earlier this year in the US showed that only around 5 per cent of IT professionals had detailed knowledge of how to apply the ASP approach to their businesses. While Australian users are also still struggling to understand the ASP model, there is growing evidence that many are seeing the model as increasingly attractive as their understanding grows.

When asked by Pricewaterhouse-Coopers over the last two months, Australian enterprise resource planning (ERP) and customer resource management (CRM) customers and even existing ERP and CRM users said they were "absolutely" likely to take up an ASP-type offering providing the TCO equation stacks up.

And that, PricewaterhouseCoopers' (PwC) ASP leader David Bostock says, it clearly does. Based on PwC's modelling, organisations can expect a 10 to 30 per cent reduction in TCO over five years with an ASP, depending on the size and complexity of the organisation.

And it's not just potential ERP and CRM customers we're talking here, Bostock stresses. Sure, organisations looking to get a leg up onto the ERP or CRM bandwagon are seriously considering the ASP model right now. But existing customers also see the new model as playing a major role just a tad further down the track.

"Those who are currently mature ERP and CRM customers see the opportunity at a point in time when they need perhaps to significantly upgrade to and at the same time move towards an ASP model," Bostock says.

"Even though they may have already bought licences, all the other elements of the ASP still have attraction in terms of spreading the cost over a number of years, getting the sort of economies of scale that they can get from being supported from a central hub and so on."

As Bostock points out, most organisations shopping for ERP and CRM solutions are not only mature but also possess significant internal capability. These guys can, and frequently do, put these types of solutions together themselves. Yet they're saying that as long as they can be sure there are genuine TCO savings to be had, they'll go for the ASP offering every time. That's a dramatic change in attitude over a relatively short space of time.

Even those customers not yet ready to consider a full ASP solution were at least considering the merits of an application hosting environment, where effectively the hardware, infrastructure, communications and application support are all outsourced, Bostock says.

Taking the lead

Butler Group believes that the true market leaders in the new economy will be those organisations that produce faster and cheaper, have strong customer relationships, and can go to market quickly with completely new products. It says ASP solutions can partly meet these requirements.

But the model won't be for everyone. Navision Software Australasia managing director Garth Laird says the ASP model has proven to be many things to many people but in no way suits all the variations of information requirements that Australian organisations need.

"In the case of desktop applications, ASP can be easily justified as the template for the creation and production of word-processing or spreadsheet documents is essentially identical from one company to the next. However, for complex business systems where the process of deployment and use varies from company to company, ASP offers little.

"In fact, ASP promotes an inflexible use of information systems making it difficult for a company to create a strategic advantage for itself in the market," he said.

Eager beavers

Views like that don't seem to be deterring the staggering number of software vendors scrambling for their share of the ASP market, with another IT vendor, telco, or service provider announcing its plans to develop an ASP offering every week.

Heavyweights like Oracle and Microsoft are busy retooling high-end databases and classic apps like Microsoft Word for delivery over the Internet, and every other major software vendor now has some sort of ASP channel available to them.

Citrix Systems Asia Pacific, Alta Internet Business Centres, Solution 6, Mincom, Nortel Networks, Shasta IP Services, Cable & Wireless Optus, Hewlett-Packard, Progress Software, Interbiz, NetIQ and Baan have all entered the game and start-ups like Alta Internet Business Centres are competing with revamped bureau services for space.

"There's almost no software vendor, almost no telco, almost no service provider that isn't thinking about doing something in this area," Jester says.

But those vendors will have to be careful to tailor their offerings to the market.

When PwC teamed with Telstra to provide enterprise resource planning and customer relationship management application services recently then ERP leader Chris Bennett said the marketplace was demanding ERP and CRM solutions that were specifically tailored to individual organisation's requirements.

"It would be a fallacy to think that an organisation will take a generic ASP service offering with very little tailoring. What we're offering is [the ability to customise] requirements in a configured system," Bennett says.

Barriers

There are many likely reasons for the relatively slow uptake of the ASP model here, ranging from the cultural to the financial.

For one, as Gartner's Jester points out, the ASP model requires a large upfront investment from the ASP on infrastructure and software, yet capital is often particularly difficult to raise in a relatively small market like Australia.

"It's also a business model that is new; potential users have a valid number of questions that they're asking the ASPs and the users are still coming to terms with the whole thing. And also, of course, the ASPs are still setting themselves up and still getting themselves into gear', Jester says.

"And nobody has really made the big breakthrough yet that says this is the way to go. But we're getting there, we're just getting there fairly slowly."

Great Plains e-business and ASP product manager Richard Duffy agrees customer uncertainty remains the main reason for Australia's relatively slow uptake.

Worldwide, Great Plains has more than 500 customers running in an ASP or hosted environment. In Australia it currently has seven.

Duffy says small-business customers in particular are still struggling to understand the difference in cost between hosting applications internally and having them delivered through an ASP solution.

"And for many of those customers, because TCO isn't a thing identified with SMEs, they can't see the logic behind it", Duffy says.

But ASP customers will also have to act with extreme caution. With so many new entrants into a complex, unproved market, Gartner predicts the shakeout among ASP players will be swift and brutal, with more than 60 per cent likely to vanish before the end of 2001, due to poor service or market consolidation.

Horses for courses

Eworld Technologies' CFO Catherine Reynolds has been a champion of outsourcing for years. Now she looks upon the ASP model as the answer to a prayer. Eworld has solutions offerings in mobile products and services and in e-commerce and Internet enterprise. Reynolds says its aim is to work with emerging technologies by becoming an integral contributor to the new world of wireless telecomms and data communications.

Reynolds, who has outsourcing implementations in companies like Lend Lease and MLC Life under her belt, says the ASP model suits an e-business like Eworld down to the ground. That's why ASP Alta Internet Business Centres has hosted Eworld's IT infrastructure since the company's inception four months ago.

Reynolds says when as a dotcom startup Eworld gave her the chance to develop her fulfilment strategy for the business' entire delivery mechanism from scratch, she had no hesitation in turning to an ASP.

"I'm looking at an outsourced model entirely," Reynolds says. "I want to have my servers outsourced, which they are already. I want the management of my IT infrastructure to be outsourced so that my team can focus on the delivery of the business. So I went for the ASP model because I'm looking at an outsourced fulfilment process."

And experiences like Eword's will undoubtedly help push the ASP model along. It's clear the gradual growth in customer acceptance is being driven by the new ability of ASPs to cite real customer experience while offering practical assurance on issues like security, protection of data and reliability.

But Great Plains' Duffy also acknowledges many ASP offerings remain immature, particularly in managing and pricing service level agreements (SLAs), and concedes the lack continues to hold up more widespread acceptance of the ASP model.

Determined to help potential users overcome this uncertainty, members of the 460-strong ASP Industry Consortium are pushing for establishment of a globally recognised contract negotiation and dispute avoidance and settlement mechanism.

Proponents believe moves to standardise contract language and to create a method for resolving disputes about delivery of ASP services will benefit both end users and ASPs operating across international borders.

"By its very nature, the ASP industry will cross international borders and extend beyond the framework of national laws that exist today," said Citrix Systems Asia Pacific enterprise solutions manager iBusiness, Phil Osborne. "By offering a neutral venue for resolving contractual differences, the proposed initiative will remove a stumbling block to international expansion of the ASP market."

But if the ASP model is going to make serious inroads into at least some bigger organisations, there remain many other issues to be resolved.

The ASP model will have to prove it is scalable and sufficiently feature-rich to manage complexity.

Service level agreements will have to cover the whole range of operations, and system management will have to be end-to-end.

ASP will have to be able to offer watertight guarantees on security, resolve uncertainties over the ownership of data and end the current confusion over licensing issues and pricing models.

And organisations contracting with ASPs will have to be assured of an escape route if the ASP fails to provide a satisfactory level of performance, or the situation of the company changes and it therefore wishes to cancel the agreement.

But while these remain barriers to adoption, make no mistake.

Many of the ASPs competing for business are fully cognisant of their weaknesses and most will develop solutions in time which will make their offerings utterly compelling to at least some companies of all shapes and sizes.

What is an ASP?

-Staff writers

With technology vendors of every conceivable shape and size suddenly morphing into ASPs, there is considerable confusion around the term. Clare Gillan, an analyst at IDC, said ASPs have a few key defining features.

"An ASP delivers an application," says Gillan. "The ASP supports a one-to-many model that entails relationships with management, application, network, and implementation partners - and an ASP offering is centrally managed."

Defining exactly what an ASP is and what services they provide tantalised the Cahners In-Stat Group into asking 100 ASPs to describe the model. Analyst Kneko Burney, who authored the survey, said most respondents said they wanted "to do everything" from providing high-speed Internet access to hosting and manageing applications for businesses. A true application service provider should be able to deliver the hardware, application software, network infrastructure and take full responsibility for a monthly fee," Burney said. Amy Wohl, president of Wohl Associates, a computer industry analyst,said the ASP phenomenon is all about redefining boundaries.

"We call [ASP] the reinvention of IS architectures," Wohl said. "Instead of being built inside the company, they will be built outside and accessed from the inside."

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