Apps on demand

ASPs and hosting partners can generate cost savings by cutting upfront investments and reducing operating costs. Companies in the Middle East are beginning to realise these advantages and are starting to outsource IT functions

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By  Neil Denslow Published  July 2, 2002

I|~||~||~|Last year, Rotana was faced with a problem common to many companies in the Middle East. It had implemented an IT solution to tackle problems caused by out-dated systems, but it found that the IT ‘solution’ was creating almost as many problems as before.

Rotana had implemented Microsoft Exchange to ease internal communication and send out large-scale mail shots to customers. However, the in-house server quickly became overwhelmed by the traffic it received.

“It required a lot more attention than we originally thought, as the [128 K/bit] bandwidth was rather narrow, so we often got clogged,” explains PJ Sebastian, area financial control, Dubai & Northern Emirates, Rotana.

Consequently, the group’s hotels outside of Dubai had difficulties accessing the server, as did its executives when they were on the road. Similar concerns were raised when IT developer, Eastern Networks, implemented a CRM solution.

“Our engineers are always in different countries at customers’ premises, so we wanted to give them access to the CRM package [which would] let them see the customers’ [documentation] and fill in the reports remotely,” explains Hazem Mulhim, group managing director, Eastern Networks.

Both companies decided that the way forward was to employ an application server provider (ASP). ASPs manage a company’s software, either generic applications, such as e-mail, or more specialised solutions, such as CRM packages. Clients access the application over the Internet via a web browser.

The whole outsourcing market, including both ASPs and hosting companies, is growing rapidly. IDC values the market in Western Europe alone at US$16 billion for 2002 and predicts growth rates of 11% a year for the next few years.

Within the region, the leading players look set to be IBM, which has opened a data centre in partnership with Dubai Internet City (DIC) and Etisalat, which has its own hosting centre at DIC. Most other regional PTTs have also announced similar hosting plans.
However, despite the efforts of vendors, the outsourcing model has yet to fully mature in the region. “Largely, the Middle East is still a DIY (do-it-yourself) market and it has been a very sound strategy up until now,” explains Charles Ashman, solutions business development manager, HP, Middle East.

“[But] we are beginning to see two moves across the Middle East; one is the upskilling of the local [providers] to offer managed services and the other move is IT managers saying ‘are there better companies that can run my data centres for me?’” he adds.

Rotana decided to outsource the management of its e-mail system to Comtrust, the secure Internet infrastructure division of Etisalat. The company moved its server to Comtrust’s data centre and leased another one from the ASP. Unlike most companies, which just lease servers from an ASP or keep their own in-house, Rotana took a dual hosting option in order to utilise their previous investments.

“We would rather lease a server from Comtrust than have our own, but basically we already had the infrastructure and we had to use it. It was only a year old and we could hardly throw it away,” explains James Mascarenhas, area information systems manager, Rotana.

||**||II|~||~||~|Eastern Networks, which outsourced its CRM and accounting data to ACCPAC, followed a more standard approach and stores its data on the ASP’s servers. This enabled the company to use the apps it wanted, but without having to pay for hardware.

“We are making the best of the [ACCPAC] offering with the minimum investment,” says Mulhim.

Aside from the cost of buying the infrastructure itself, there is also the software investment to consider. Chirag Patel, director of business development, Vertscape, says the high expense can be avoided by using cheaper sub-licences from ASPs.

“[The cost of] licensing software is ridiculously high... [but] when companies chose the outsourcing model, they don’t need to have the software, they just need a browser,” he explains.

Once the initial investment has been made, there is also the additional expense of running an in-house solution. Paying for leased lines, support and staff is an on-going investment, which Tariq Habib, Comtrust’s senior manager for technology and operations, thinks many companies overlook when they consider installing an application in-house.

“Most people just look at the capital cost,” he says. “The operational cost, which is the major component, remains hidden. It just pops up at the eleventh hour. Sometimes this can be very critical to a business.”

Siamak Kia, business development manager, IBM Global Services, Middle East, Egypt & Pakistan, also highlights the operational cost of an in-house solution, especially in terms of expensive and difficult to find IT staff.

“A lack of technical expertise in-house is a driver for [outsourcing],” he argues.

“With an Internet application you need a database administrator, a systems manager and a network administrator. Multiply that by the three shifts you need for 24x7 covergae and you are talking about a lot of people,” he adds.

ASPs argue that using their services can result in overall cost savings of up to 60%. This includes eliminating hardware as well as the ASPs’ ability to offer flexible pricing based on either application usage or the volume of data stored. So while a company with its own leased lines will always have to pay the full rent, an ASP’s charges will vary according to how much the system is used.

“We only pay for heavy usage when we have it,” notes Sebastian. “Under our old model, whether we used it fully or not, we still had to pay the full price.”

He estimates that this will generate cost savings of around Dhs 200,000 per year compared to similar bandwidth from Etisalat, plus a similar figure in support costs.
Support costs are reduced by outsourcers’ ability to benefit from greater economies of scale. Instead of a number of companies individually paying for their own separate leased lines, hardware, firewalls and IT staff, an outsourcer shares these expenses between all its clients.

“For example, it is very difficult for organisations to patch all security holes as they are discovered. [However,] these can all be consolidated in terms of cost and expertise in a hosted data centre,” says Habib.

||**||III|~||~||~|This pooling of support lets a company limit the growth of its IT team or even reduce it. For this reason, Tony Sparks, CEO of ASPGulf, suggests that companies’ existing IT departments resist outsourcing as they view it as a threat to their role and jobs. However, these same people soon become enthused by the idea once they realise that taking away the need to manage basic things like servers and e-mail, will give them time to investigate projects that add value to the company.

“By removing this menial level it actually allows them to start addressing strategic issues... [Rather than] just looking after the fact that when a user clicks on an icon, something happens,” Sparks says.

For example, now Rotana’s in-house team is spared the chore of managing its e-mail server, it is assessing upgrading the group’s hospitality infrastructure as well as implementing an integrated HR app — projects it was previously too busy to undertake.

ASPs also shorten time to market, as they already have the licence and hardware in place. As a result, clients don’t need to spend months buying and implementing infrastructure. It also means that companies can trial a solution before committing their own resources to an in-house implementation.

“They don’t have to think about anything [expect the application]. If they like it and then want to migrate it onto their own infrastructure, they can do,” Patel says.
Sparks agrees that in-house solutions are slow to implement and adds that they may also prove disappointing when they go live. “Not only are you spending a lot of money, you’re also taking a lot of time to realise that you didn’t quite make the right decision,” he says.

Despite these advantages, Eammon Kennedy, European infrastructure management services, IDC, warns that outsourcing may not be appropriate to all organisations. For instance, companies with ‘heavy’ apps, such as CRMs or ERPs, often customise solutions to meet their own requirements.

“[However,] the ASP model relies on delivering a standardised version to all clients. As a result, there is conflict between the ASP’s requirement for standardisation versus the clients’ need for customisation,” he explains.

Companies with specific IT needs, or very valuable business critical systems, may also decide to keep them in-house to ensure there is ample support. A bank, for instance, may be happy to outsource less critical systems, such as payroll or simple web site hosting, but not the core banking apps as even a small amount of downtime may cost millions.

“In such a case, the bank may prefer to ‘over-engineer’ their systems and have what might be considered excessive staff to ensure that problems do not arise,” Kennedy suggests.

||**||IV|~||~||~|The analyst also raises the issues of security, suggesting that some companies have particularly important data they will always refuse to store offsite — despite the state of the art security protocols most hosting centres have in place.

Mohammad Hejazi, president of eBayaNat, which runs a document management engine through EIM, agrees that companies will always feel more comfortable with their most important data stored in-house.

“There are certain documents that are very sensitive for an organisation, so we don’t really recommend that they use our system for extremely sensitive documents,” he says.
Sebastian takes a similar line and has no plans to outsource Rotana’s financial data as yet.

However, arguably 95% of documents, for example, application procedures, maintenance procedures and information about the company, have no sensitivity and can be read by anybody. These can therefore “be trusted in the ASP environment. The 5% left over can be kept within the organisation,” says Hejazi.

Another way round data sensitivity is to outsource the application, but to keep the data on site. Sparks says this still benefits the client as support for the app is outsourced and this is more difficult than managing the data.

This sort of divide is rarely seen outside of the Middle East, but Sparks says it has proven popular locally as a way of overcoming the greater sensitivity there is about data storage within the region

“Most of the big groups here — bar the multinationals — are based on traditional family-based trading groups. There’s an obvious sensitivity about hosting and inter-group competition, which we’ve got to be very sensitive to,” he explains.

Eastern Networks’s Mulhim says the company did have concerns about security, but these were allayed by the fact that Computer Associates was working with ACCPAC in managing the application.

Rotana also audited security protocols and got references from existing clients before it committed to outsourcing

Both companies were satisfied by the security arrangements they found and say that they will consider outsourcing further applications in the future. Sebastian also recommends that other companies investigate it too.

“In the short term, you may find it a little more expensive, but over a stretch of time it is much more cost effective. You pay less and get a much more efficient service,” he says.||**||

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