Feeling the squeeze from ASPs

Everyone in IT will have heard the arguments about application service providers (ASPs) by now. We have all been told that the ASP market will be worth so many billions of dollars, depending on which analyst you believe, by the year 2003.

You'll also be familiar with the prediction by Scott McNealy, chief executive at Sun Microsystems, about where all the smart chief executives will be heading for their IT in five years' time. McNealy's previous predictions have been right so far.

The business case for renting applications is advancing so quickly, and with such confidence, that finance directors up and down the country are starting to believe it.

The huge marketing machine behind the ASP industry will, by this time next year, make it the conventional wisdom that buying IT is pointless - it will be much more effective to rent it from an ASP.

Less clear is where this leaves the average reseller. After all, what is a reseller if it isn't a service provider? And where does that leave resellers when every vendor, from Microsoft to BT, wants to become a service provider?

Most resellers have the resources to install a system and integrate it, but they are not structured to offer long-term support. That's what IT departments are for. If, in future, the industry gets its applications and networks from service providers, where does that leave older members of the channel? Will the reseller be reduced to acting as an agent for ASPs? How many resellers will have the resources to offer these services?

Some people are in no doubt about the future role of resellers. "I wouldn't give my product to the channel to sell," said Nigel Kilpatrick, managing director at IMC, a company which has evolved away from distribution and into service provision. "Resellers would screw it up big time. There's an opening for smart resellers who can lead the market instead of being led by the nose by their supplier. The good resellers who can become application integrators will do well out of the ASP market. The problem is, I don't know any like that in the UK."

Kilpatrick previously worked at networking giant Cabletron, alongside its founders Bob Levene and Craig Benson, neither of whom were great fans of the channel. But he insists his attitude is typical among suppliers, and that a successful ASP market would be the opportunity most manufacturers have been waiting for because they cannot wait to cut the traditional resellers out of the equation.

"This will be the final stake in the heart of the channel," said Kilpatrick. "The whole supply-and-demand model will be changed, leaving the resellers out of the picture. If every manufacturer was honest, they'd tell you they can't stand the channel. They make all the right noises when they need resellers, but they know the channel is only good for sales of tin."

Levelling the playing field
It's a harsh assessment, but the mixed messages coming from manufacturers seem to add weight to Kilpatrick's views. A few months ago, Sandip Gupta, director of business development at Californian manufacturer Ensim, briefed journalists about the benefits to resellers of the company's Server Xchange, which is designed to make application services affordable for small businesses. When the US company launches its product in the UK, he promises it will level the playing field for small resellers.

By taking a standard Intel, Sparc or NT server, and splitting it into smaller partitions each with its own resources of CPU, memory, available bandwidth and disk space, a reseller can create a number of mini 'virtual servers' within one big server.

This, says Gupta, will mean that smaller resellers that couldn't afford to buy masses of servers and dedicate each one to running the IT for individual small to medium sized enterprises (SMEs), will be able to compete in the ASP market. Small businesses would be the ideal customers for application services, and the ideal providers of those services would be smaller, localised resellers.

By the time Ensim was setting up a channel for these products in the UK, the message seemed to have changed. Mark Henderson, managing director for Europe, freshly recruited from Cable & Wireless and charged with establishing a sales channel for Ensim in the UK, explained the market opportunity.

"All the big companies are building data centres and they want to rent out space to small companies that can't afford to pay for an entire server. But the people I'll be talking to are the big players - the top data centre companies and the quality ISPs [internet service providers] and ASPs," he said.

In reality, then, resellers are a low priority, but perhaps they will get a shot at the market once all the big hitters have bedded themselves into the SME arena.

"It's the age-old distinction," complained one reseller. "Manufacturers have these programmes for the top money earners that they call the VIP resellers. The flip side is that it makes the likes of us the non-VIPs."

But Henderson insisted that resellers will be able to cash in on the ASP market, in the short term at least. It's an enormous act of faith for a company to site its data and applications - indeed its entire business processes - with a third party, he argued. Since resellers already have a relationship with the customers, they are the ones most likely to inspire the right degree of confidence. Besides which, there will always be a need for agents.

The channel will be of great importance, said Nick Lowe, ASP relationship manager at Sun. "Resellers have the relationships; they know how customers work and they are the ones that will get called out when something goes wrong. They shouldn't feel threatened by the ASP market. Most of the big vendors have been racking their brains about how to sell to resellers, and this is the ideal model," he said.

A question of survival
But using resellers to sell services is not simple. "The problem with some resellers is that they'll sell a service, but do nothing to justify their existence," complained Duncan Crook, managing director at distributor Equinox. Although the company sells managed services, which are ostensibly a networking offering, Crook insisted that the issues are the same, whatever services are being sold.

"There are plenty of resellers that just go out there, deliver the goods and don't seem to want to get involved in configuring the system, which is where they might be able to justify their margin," he said. "A lot of them will have to look to their laurels if they want to survive in this new market."

If the behaviour of some manufacturers is anything to go by, they don't see much of a future for the channel. Oracle and Microsoft, for example, seem to think they should become ASPs themselves; a potentially costly mistake, said Katy Ring, an analyst at Ovum. "They need the channel. I don't think they're in a position to offer this themselves," she said.

One of the biggest problems with the fledgling ASP market is that there seems to be no consistency in the way it is sold. One of the original selling points for an ASP used to be its cost. This has been revised in the US, according to David Caruso, a Boston-based analyst at AMR Research. He said there are no savings to be made by using ASPs, and in some cases the skills premium is even more expensive than if you hired your own IT employees.

Caruso conceded that an ASP is likely to provide better expertise. Even so, there's something about the way application services are being sold that might provoke a backlash, and this could benefit resellers.

"Companies selling application services will make a profit only if they can construct something that can be sold over and over again, without too much tinkering," he said. "The problem is, that's exactly what the IT manager of a big company will want to avoid. What we're seeing in the US is that IT managers are getting lumbered with the integration work because ASPs don't want to do that; it's a major cost."

This is perhaps where resellers come in. But they may be better off pointing out the contradictions in the way application services are being marketed. So much conflicting advice is bandied about that it's understandable if few users have been tempted by these new outsourcing vendors.

But who are these new ASP customers, anyway? According to Ring, application services are ideal for departments within big organisations that want to outsource particular standalone applications.

Bob Apollo, vice president at ecommerce software provider eGain, agreed. He said that only the big corporates can afford the bandwidth that is necessary to site applications on one side of the wide area network (Wan) and your users on the other. "It's only the companies that can afford good internet access that can really make use of an ASP," he said.

One of the criticisms of IT managers in big organisations is that they can never roll out applications as fast as people demand. This makes an ASP deal particularly attractive to an IT manager faced with a project that has a tight deadline.

On the other hand, it is only postponing the problem of integration. "Two years down the line, they'll have to integrate that with the rest of the IT infrastructure," said Ring. Perhaps this will be an opportunity for resellers and integrators to offer their services, provided they are still in business.

According to Esoft Global, which claims to be the world's largest ASP, the sector is tailor-made for the small business. The Centre for High Performance Development (CHPD), for example, is a specialist consultancy which has grown rapidly in the last couple of years. With 50 employees spread around the world, the quickest way of getting Microsoft Office applications, customer relationship management (CRM) and accounting systems up and running was to outsource them to Esoft.

Maggie Deere, new business development director at CHPD, said: "I've worked in corporations that have taken four years to fail to get a CRM system going, but this lot got it up and running in a month."

Breaking into virgin territory
But CHPD is a special case, and the rest of the SME market will remain in limbo until some of the conditions needed for a healthy ASP industry are met. Much hinges on the price of bandwidth.

As a report by Durlacher Research pointed out, small companies will think about using ASPs only when bandwidth becomes a commodity. We're still a long way from that situation, and it is arguable that little will change until BT's monopoly of the local loop is challenged - all of which makes BT's membership of the ASP consortium a little puzzling.

Another hurdle that has to be surmounted is users' lack of confidence in what for them is virgin territory. As Chris Barling, managing director of ecommerce supplier Actinic, pointed out, users have enough trouble with the idea of working off a server, let alone a remote device.

"On a local area network, they have 10Mbps bandwidth at least, and still people like their applications and data to be stored locally. Imagine the leap of faith that's required if you're going to ask them to work across some ropy Wan," he said.

Resellers that find themselves competing for business against ASPs can make even more capital out of the murky issue of service level agreements and the legal wranglings that any outsourcing leads to.

"The issue of contracts is going to be a legal minefield," warned Peter Slavid, business strategy manager at ICL. "There are many issues to resolve before users will be satisfied that they've taken away the risk. What happens when you come to the end of a contract? Do you get all your data back, or the last version of each document? Do you get the historical data? And what format do you get it in? What happens during the transition period when you're moving your web commerce site to a new host and the orders are still coming in? There are no standard processes in place."

The role of the reseller, in the short term, is to be an agent in the emerging ASP market. If ASPs take off in a big way, then resellers which do not provide those services will become surplus to requirements. But the economies of scale needed to become an ASP will rule out most resellers. The main defence against the ASP competition is that, like the outsourcing and bureau services that preceded it, the ASP market will be a fad that doesn't become a mainstream activity.

Conclusions:

• As the ASP message spreads out to the level of finance director, conventional wisdom suggests that buying IT is pointless.
• Good resellers can become systems integrators and succeed in the ASP market. But observers believe that not enough ASPs make the grade.
• One notion gaining ground is that vendors find traditional resellers intolerable, and are all looking to ASPs to get rid of their conventional channel.
• The SME sector is tailor-made for the ASP model and observers believe this could be the saving of many resellers.
• The role of the reseller may be as an agent in the emerging ASP market if it is not just a fad.