ASPs – a model of business virtue?

For the sake of simplicity – and this article – an ASP is a company that is able to provide access to standard applications delivered to a customer over the Internet and accessed via a web browser. In essence, they represent the more glamorous end of the outsourcing sector.

Pan-European Internet service provider, KPNQwest, provides an ASP service itself, as well as being the infrastructure provider for other ASPs. "The main application we offer on the ASP model is ‘Managed Exchange’," says David Tuohy, vice president marketing hosting & applications at KPNQwest.

Tuohy describes this as a hosted version of the Microsoft application, which the user buys on a ‘pay-as-you-use’ basis. "A company that wants to outsource its e-mail and scheduler requirements doesn't have to have an IT organisation to manage its Outlook infrastructure," he adds. "We've seen the strongest demand so far in the financial sector."

In partnership with Atos Origin, an e-business services provider, and OpenText, a provider of collaborative intranet, extranet and e-business applications, KPNQwest also recently launched the LiveLink collaborative Internet working environment from OpenText.

Dave Boulanger, research director enterprise management strategies at US research company AMR Research, says that many companies turn to an ASP, rather than spend money upgrading their existing software. "ASPs can probably do it better, faster and cheaper than the companies can," he says.

Boulanger describes how one of AMR Research's clients, a technology company, decided to use an ASP to run its administrative backbone (financial, human resources, payroll, and general ledger systems), because that allowed the company to focus on more strategic initiatives.

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Problems

Jim Simpson, chief executive of SevenMountains Software, a company that provides ASP infrastructure, admits that there are technical problems in providing access to applications over the Internet. He cites security as one of the issues.
"That can be resolved for the bigger companies in a virtual private network (VPN), but you do need to have the network infrastructure to be able to run in that way," he says. Most larger companies have had the infrastructure in place for some time, and can afford to purchase additional bandwidth, unlike small to medium-sized enterprises (SMEs).

"It was generally believed that the SME marketplace was going to be massive," says Simpson. He believes it still has potential, although many smaller ASPs found the SME market tough to crack, because smaller companies often lack the infrastructure to be able to use an ASP.

According to Martin Dipper, vice president of Infonet Services Corporation, most of the large multinational firms have looked at, or are looking at, a VPN with value-added services on top. "The SMEs look for connectivity, and maybe can't afford to look for value-added services," he adds.

In April 2001, Infonet set up an ASP arm based in the Netherlands. "We differ from other ASPs in that we build extranets," says Dipper. "Over those extranets we allow our multinational customers to distribute the existing applications which reside on their site."

Infonet ASP launched with over 60 clients, one of which is Devote NV, a Dutch eConsulting firm, which specialises in e-business and IT architecture, consultancy and implementation. Devote's clients include international companies such as ABN AMRO and ING banks, Ahold, KPN and Elsevier, which Devote is delivering managed Microsoft Application Hosting services.

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Cost savings?

For their putative advantages, however, the real question is ‘are ASPs delivering cost savings to their customers’? According to Boulanger, ASPs probably provide ongoing savings of 10-20 per cent above what a firm would have to spend to provide the application internally.

"Because they've done the same implementation for companies of your size, probably up to 150 times, ASPs can do the implementation quicker, and therefore cheaper," he says. In addition, they usually come to the table with a series of implementation aids, templates, and pre-configured solutions.

Another benefit ASPs bring is from a cash perspective. "Rather than having a company pay money to the systems integrator and software vendor, a lot of time the ASP will take the combined implementation licence, integration and user training, and turn that into a 36-60 month capital lease," says Boulanger.

"We use an ASP ourselves," says Simpson of SevenMountains. "It costs us something like 55 dollars per seat, per month, and it's a good system. It wasn't a huge amount of management effort to install it and get it running. We definitely saved money in terms of the infrastructure we had to put in."

Yet, Martin Dipper also strikes a cautionary tone. "Traditional ASPs often host one application as an island without the backend connectivity into the customer's other applications. They may be providing cost savings for one application, but you've still got the cost of integrating that back into other applications on your site," he says.

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QoS

Colin McEwen, principal consultant at pan-European network operator Interoute, highlights the importance to ASPs of quality of service. "If firms are going to outsource what could be business-critical applications, they should be asking themselves really hard questions about their resilience strategy," he says.

"Both the ASP and the carrier need to agree what those resilience strategies are," says McEwen. "We can offer an alternative path that's automatically switched in: the so-called 'protected circuit'. If you buy an unprotected circuit, it's cheaper, because it may not be there all the time."

Another problem for the ASP is the constant struggle to obtain enough bandwidth. "IP networks are born to burst, so they love it when an application is trying to grab more bandwidth," says Todd Krautkremer, vice president worldwide marketing at performance specialist Packeteer.

"We've seen ASPs that have really struggled with simply trying to deliver print traffic over Citrix at the same time interactive traffic is being delivered," says Krautkremer. "Whenever their customers print something, all other things stop until the print job's done, and that's a huge problem."

ASPs that use Packeteer's performance management tools include European ASP Attenda, which provides managed hosting services to more than 80 organisations, including Microsoft, Debenhams, John Charcol and Reed. Packeteer tools are also used by global ASP Futurelink, which recently provided 385 branches of Jewson, the UK builders' merchant, with access to the Microsoft Office 2000 suite, email and backend stock control systems.

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Life’s a struggle

For ASPs, life has not been easy, and many are falling by the wayside. "Most of the ASPs are relatively small companies," says Simpson of SevenMountains. "Getting all of your applications and services from an ASP was something that didn't really take hold very well."

Moreover, Boulanger of AMR says that the ASP market is experiencing a shake-out. Given the current state of the US economy, he predicts that only 400-500 of the existing 1,100-1,200 ASPs will still be around by 2002.

"When you talk to them about profitability, a lot of those ASPs either didn't have a delivery model or a business model," he declares. "Some of them never intended to become profitable within the first three to five years. Earlier this year there were more press releases than customers."

SevenMountains’ Simpson says the successful ASPs tend to be application-specific. "We are ASP users ourselves," he says. "We buy our customer relationship management system on a rental basis and receive it over the Internet: a product called UpShot. It's very good, and the company has done very well."

Packeteer's Krautkremer points out that many ASPs have not properly considered how to go to market. "They've spent most of their energies setting up data centres, applications, and websites, but spent very little time on how they're going to go to market, reach customers and sell their products," he declares.

Krautkremer also says that some ASPs have taken a less than holistic view of what their role is: "They're trying to say that all they offer is applications and hosting, and how the application gets delivered is a network connectivity problem, that the customer needs to solve."

Customers don't want to be systems integrators, according to Krautkremer. "They want to rent an application, because they don't have the resources or the competency to build it themselves," he says. "They expect that application to have all the availability and performance necessary to do the work."

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ASP to AM?

So what is the likely future for ASPs? "The large outsource players like EDS and SAP are starting ASP services," says Simpson. "That's an interesting model, where large serious players that customers would be willing to trust, are starting to provide a service and to tie up with some big content providers."

"In the last six months, we've noticed, especially in the corporate and large business segments, a huge demand for what I'd call 'applications management (AM)'," says Tuohy of KPNQwest. "These are companies who want to have all the benefits of the ASP model, but they still want it on a one-on-one basis."

Applications management is more like dedicated hosting with the application, where you give each customer its own unique solution and infrastructure. "Even though the application might be the same for every customer, the database configuration, storage, and firewalls are all different," explains Tuohy. "That's where we're seeing a really strong demand."

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