Could an ASP be the answer to your IT headaches?

Application Service Providers (ASPs) challenge the current IT “ecosystem,” and how we use the software that we use to run business. The question has to be asked, however, can they ultimately save your business potential IT headaches?

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By  Robin Duff Published  July 25, 2001

I|~||~||~|Not so long ago, the question of whether to outsource IT operations was almost a yes or no decision. You either turned them over to a third party service provider or you did it all yourself. Now, thanks largely to the Internet and the growth of Web based systems, companies can hire specialised service providers to handle specific aspects of IT: application development, data storage, security and Website performance, as well as employee benefits or customer data management. Businesses can even hire service providers to monitor and manage other service providers.

In fact, sensing a business opportunity, large software companies such as Microsoft, Oracle and PeopleSoft are seeking to sell their applications as services. Entities such as IBM Global Services are revamping their product lines to respond to the new competitive landscape with smaller, more-focused services. As evidence that the outsourcing market has changed dramatically over the last few years, think of three little letters: ASP. In the United States, in an example of that market’s incredible potential, there are already 500 applications service providers, many less than a year or two old, competing for outsourcing contracts.

What is also evident is that many of these niche service providers won’t make it. Few are profitable, and Gartner estimates that 60% of ASPs will go out of business or be acquired by the end of the year.
“The ASP market has slowed down tremendously,” said Stratos Sarissamlis vice president international, service management strategies, Meta Group. “We expect a good 60% of players to fold into their organisations through mergers or acquisitions.”

The Middle East’s experience of the ASP revolution has already seen evidence of this, with major players here, such as Comtrust and ASPGulf identifying that a long period of hype, accompanied by high costs services were being offered at, served to effectively shrink an already fledgling market.

“Certain ASP startups perhaps shouldn’t have been started in the first place, as many of them had weak business plans and revenue models,” said Duncan Watson, CEO of ASPGulf. “Look at what happened in the car industry: over 400 manufacturers when the industry first started. Additionally, this business is not just about a lower cost solution to what a business may currently get, but providing a better service that could be replicated in house.”

||**||II|~||~||~|Comtrust’s marketing manager, Farooq Hasan, agrees. “I have not seen the Gartner report, however, the ASP market was very hype-driven a year ago, and too many of them sprung up,” he commented. “The major reasons many failed, and will fail in this region were and will be: lack of business strategy; an unfair estimation of the market’s size; an inappropriate business model; high pricing as well as a lack of proper manpower.”

ASPGulf has an ambitious, end-to-end approach to application service provision, which it splits into four segments; horizontal solutions for the large enterprise market; horizontal solutions targeting industries within the mid market; ASPGulf Business Outsourced Solution, which are solutions indirectly targeted at small businesses through strategic partnerships; and ASPGulf Hosting Solutions, which is an application hosting service that provides clients with a range of IT managed services for hosting business applications in a secure reliable and high availability data centre environment. Sounds good, but the most cynical of observers would point out that most small businesses in the region barely have in-house strategies of their own, and therefore, identifying their exact needs would be a major challenge.

“The reality is that small to medium businesses in this region face a great deal of pain in purchasing and utilising best of breed solutions,” countered Watson. “ASPs can solve this by providing access to otherwise unaffordable software. Most SMBs outsource their website. They have always outsourced their power, water and telecommunications requirements. Getting their IT power from an ASP, which I would refer to as an IT utility company, is a natural progression. The key is that ASPs are not just offering a replacement of what can be done in-house, but additional services that can only be provided, cost-effectively, as a service.”

Comtrust’s Hasan seems to agree that ASPs should be offering applications that are otherwise too expensive for smaller businesses.

“It is relevant for an ASP to offer business applications to SMBs very cheaply, although with limited functionality to start of with. A growth path for use of the application should be also be offered, with different flavours for different types of company.”

Although Comtrust is not necessarily an ASP in the strictest sense of the term, it does run an ASP service known as Quickshop, an e-retailing solution which incorporates server certificates, storefront licences a hosting and payment service for SMBs.

“Several merchants are using this today,” said Hasan. “These include Ajmalperfume.com, alkhairia.org.ae, astylestatement.com, spinneysathome.com and Dubai Duty Free.”

Large service providers have also recently responded to the demand for SMB’s managed and application hosting services by spinning off new services divisions or playing up their capability to provide project management for complex outsourcing deals. IBM Global Services has turned its attentions to the ASP market, for instance. The world’s largest services organisation, with a staggering $33.2 billion in revenue last year, partnered with Intel in October to help software providers migrate their applications to the ASP model.

IBM and Intel will help software companies develop Web-hosted applications on the Intel-architecture-based IBM eServer xSeries. IBM will provide software, hardware and consulting for companies looking to move their applications to the Internet. So are companies such as ASPGulf and Comtrust worried the presence of such huge international entities possibly moving into their space here?

“Obviously this is something we have considered, but I believe the big companies will have to work through service providers such as us,” said Watson. “The market, in most cases, requires a multi-ISV solution, and that is where an aggregator of services can play an important role. ISVs don’t necessarily have the skills or position to offer extensive outsourcing services.”

||**||III|~||~||~|This appears to be the next step for ASPs and other service providers in the region: a pooling of resources so that SMB’s IT managers have less of a complex task to deal with when trying to fully outsource projects. While the growing number of service providers promises advantages in pricing, service, and expertise, these promises come with their own set of problems. As more companies hire specialised outsourcers to handle different applications and technology needs, IT managers are faced with a new challenge: managing multiple outsourcers.

“You had better have really good project management skills,” warned Ted Kempf, an analyst with the enterprise solutions practice group at Gartner. “Because it can be a project-management nightmare.” Kempf continues by giving a cautionary note about companies considering using multiple providers. Specifically, he says that there can be integration problems when companies decide to outsource different applications to vendors that don’t have existing relationships with one another. A better strategy, he says, is to use a community of vendors that have established partnerships with each other and can work together to provide the desired environment.

A related concern has to do with how a service provider— or providers— will fit into a company's culture. Albeit a large enterprise example, SMBs here may be interested to examine what Kodak in the United States experienced. Although Kodak monitors its own server performance and hosts and manages its own website, CIO John Chiazza claims that he hasn’t ruled out using new-breed outsourcing companies to do his work for him.

“It’s difficult for companies to do everything for themselves because IT moves too quickly,” said Chiazza. “My mission is to support different business opportunities for my company.” How an outside contractor would fit with internal politics and policies is a significant consideration for Chiazza.
“We’re looking to better integrate internal operations: so you have to be thoughtful when interjecting third parties.” IBM has recently taken over the company’s network operations, as well as providing direct PC sales. Chiazza pointed out that Kodak’s consolidation of service providers wasn’t by design, but just happened to work out that way as the company continued to grow as its IT needs evolved.
“You have to constantly evaluate your need for services as well as technology advances,” he said. “You have to look at what your business is trying to accomplish and the role that IT plays.”

The American market offers an insight into some of the challenges that lie ahead for the Middle East's fledgling ASP market, but clearly, the market has still to evolve significantly before businesses can fully relax about handing over mission critical IT responsibilities. For a start, Meta’s Sarissmalis points out that he expects a good 6% of current ASP players to become part of other organisations through mergers and acquisitions.

“Basically, these guys had a few problems regarding business models that couldn’t be sustained in the long term,” he said. “However, their market cap and their ability to attract capital was very strong until last March, so they thought that they would go on forever, but their business model didn't reflect their ability to sustain it. The second thing was sustaining the operational side: they just didn't know how to run a business.”

||**||IV|~||~||~|In its most empirical sense, the ASP model should invoke the idea of the delivery of software as a service. In exchange for accessing the application, the client renders rental-like payments. An ASP therefore facilitates a remote, centrally managed “rent-an-application” service for the client. The emphasis is placed on the use not the ownership of the application. The client no longer owns the application or the responsibilities associated with initial and ongoing maintenance. The client, through an Internet browser, accesses remote, centralised computer servers hosting the application. Only the results from the application are managed locally by the client.

This seems like a basic enough principle: so why the perception that so many ASP start-ups are getting it wrong, and when will things begin to look more stable?

“The current market is a wait and see,” continued Sarissmalis. “These are the first waves of ASPs and we are aware of many companies that are working to deploy second way ASP offerings and we expect that market to take off in the second half of 2003. ASPs are doing their homework to get better, but at the moment it is seen as a pricing model.”

The ASP industry is therefore at a crossroads, in terms of the ultimate long-term viability of the basic ASP concept. Despite the fact that the International Data Corporation (IDC) is forecasting a compounded annual growth rate for the ASP market in excess of 90%, there is an increasing groundswell of critics pointing to what they perceive to be an overall lack of client momentum. This may be true: outsourcing is still a foreign concept to many businesses.

“Up to three years ago, outsourcing was a disease that you wouldn’t like to catch, an indication of flawed IT management,” said Sarissamlis. “Today, outsourcing is for speed, and the means to drive flexibility, and that can be translated in different terms, in different companies and different business cultures. We basically recommend that the [business] commands the process, takes time to do it, and views the [ASPs] as complementary sources, where they can externalise the production of resources, while still retaining accountability and responsibility over service provision.”||**||

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