Application service provision (ASP) was billed as the panacea for all computing ills when it arrived on the scene a couple of years ago. But after the hype has faded there is scant evidence to suggest that the model is going to revolutionise the way small to medium sized enterprises buy IT.
It was a great proposition. By providing software on a rental basis, ASP would be the answer to skills shortages and enable companies to respond fast to the fluctuations of an e-economy, according to its proponents. Large corporations could roll out applications quickly and get product to market ahead of the competition. Small fry startups, for their part, could gain access to heavy duty IT applications that they would not otherwise be able to support.
The model presumed that the internet, and other carrier networks, would provide access that was secure and cheap enough to make a compelling case for companies to farm out the hassle of hosting and managing software to a third party. Similarly, by operating on a one-to-many basis, ASP suppliers would be able to operate economies of scale and pass on these cost savings to customers. At the very least, users would be afforded predictable budgeting. But it was hoped they could turn scale applications up and down and pay for them on a metered basis, like a true utility.
The utopia of companies paying for applications on a per usage basis has not materialised anywhere. However, in the US the proposition of handing over the hosting and management of core applications has found favour, although pricing models are frequently based on a traditional licence model. According to analysts IDC, US companies accounted for 90 per cent of the $150m spent on hosted and managed enterprise applications last year.
Europe has been a lot slower to embrace ASP, but after a number of false starts in this market, suppliers are revising their claims about how and where ASP can add the most value to businesses. Users are overcoming their caution about entrusting core applications to third parties and are now talking the language of service level agreements with their suppliers. Both these factors are key according to a new forecast from IDC which predicts that the ASP market in Europe will grow from $15m in 1999 to $850m by 2004.
Putting the 'S' in ASP
Gary Pugh, data server marketing manager at Oracle, believes that the 'S' in ASP has been largely to blame for slow take-up so far. "Although the letter stands for service, most suppliers are delivering software," he said. This may be because ASP has its roots in the early co-locations services where suppliers managed basic hardware resources and network connections remotely. It was a logical next step to add software to that configuration.
But as Pugh pointed out, the key to ASP is not to outsource software hosting, or even to adopt a more relevant pricing model, but to deliver benefit back to the business. "The vast majority of [an] IT budget - up to 80 per cent - is consumed by infrastructure and doesn't deliver any benefit back to the business. A lot of time is spent maintaining code or adding patches to back-office code," he said. "Things like payroll and financial applications are not the crown jewels of a company's business."
By using ASP for these services, a company can focus on the 20 per cent software and services that give crucial competitive advantage. Pugh said that Oracle has done precisely this in a recent re-engineering exercise designed to migrate the corporation to an ebusiness model. The software house previously used 97 servers and 120 databases across the world to host its email system. Oracle made a multi-million dollar saving by rationalising these onto one database and one server that hosts the function globally.
Tim Pickard, vice president of the ASP Industry Association, agrees that the proposition should entail much more than a software application on tap. "Classical infrastructures involve far more than legacy systems - it's about process and chemistry too," he said. However, he believes that companies will want to manage infrastructure in-house in the long-term and use ASP to add new functionality to the business.
Pickard envisages the scenario of a high street bank itself offering financial ASP to small business customers in order to differentiate between brands. A sensible strategy would be for the bank to bring the software and process back in-house, once market objectives had been achieved, he said.
A rash of recent launches supports the thesis that ASP is good for financial applications, but also that it is best suited to infrastructure. Among those suppliers who have a launched a financial ASP are QSP and Anite Group who are both marketing their wares to dotcoms. QSP identified a serious lack of financial management capability within this group, evidenced by the demise of Boo.com and the findings of its own research.
An attraction for dotcoms interested in ASP for financial systems is the ability for services and software bought in this model to grow with the business. Some 86 per cent of the sample surveyed by QSP believed this to be a priority. And the difficulty of managing growth in these kinds of companies applies to all functions. Few dotcoms would be able to support and maintain financial software on a global 24 x 7 basis, for example.
Modifying the model
However, another finding in the QSP research exposed one of the major flaws of ASP for which no supplier has yet found an adequate rebuttal. A 57 per cent majority of dotcoms interviewed said they would have to customise any package to map their processes accurately. In general, the higher the turnover of the company, the greater the extent of modification deemed necessary.
QSP points out that it provides a lot of the core applications in templates which enable a degree of modification by individual user companies. And it claims that its value proposition is to provide services around the core templates which include some integration and training, for example.
Nonetheless, no industry benchmark has yet been developed to quantify the amount of integration and customisation that would be required to optimise an ASP over a three-year life cycle, for example. This is the breakthrough that researchers Gartner Group made when it calculated the real cost of ownership of the PC desktop and found that capital outlay was way exceeded by future support and enhancement costs.
Malachy Smith, group chief executive at QSP, conceded that ASP will be dictated by market expectations. "The model is there to drive down costs and create a lower point of entry for adopters," he said. However, Smith knows that users will not be prepared to pay for steep customisation costs, and will probably want the traditional benchmark to apply - 20 per cent investment to provide 80 per cent functionality.
The biggest benefit of ASP may yet prove to be the ability to outsource complete functions such as IT or finance systems, so long as the processes within the software can bear to be completely standard. This is what the Centre for High Performance Development did. The 70-strong company, which specialises in training senior management, uses ASP from Esoft Global for all its business applications. Having made the radical decision to do away with an IT department, the company has freed up its capital for core investments.
As Pickard confirmed: "Budgeting, and making the best use of capital, are key advantages of the rental model".
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