Born again

More broadband services, lower bandwidth costs and further development of web-based computing are breathing new life into the application service provider market.

More broadband services, lower bandwidth costs and further development of web-based computing are breathing new life into the application service provider market.

Although big players such as the Telecom/EDS/Microsoft joint venture e-solutions and Unisys have backed away from the concept of standalone application hosting, a number of smaller ASPs continue to gain customers and are beginning to make profits by either providing full IT solutions to small and medium-sized customers or niche solutions to vertical markets.

Microsoft came up with new ASP licensing in 2000 and signed up e-solutions (now folded back into Telecom), Always There, Greenwood Technologies, Nubizz, Datacom, Unisys and iVASP.

Next month Microsoft will run a series of seminars about ASPs aimed at small and medium-sized businesses. Microsoft’s Terry Allen says this year has been a year of building and consolidation of ASPs. Next year the company will focus on promoting, marketing and building the customer base.

Allen sees ASPs are finding more success with business systems applications such as BizTalk, SQL Server and BizTalk rather than desktop products like Word or Excel.

The number of ASP users is growing, albeit rather slowly, says Martin Shelton, managing director of Always There, which specialises in offering point of sale systems to the retail sector and is owned by ANZ subsidiary Eftpos New Zealand. “There’s still caution on the part of many. ‘Wait and see what will happen’ is a common market response.”

Shelton says while Unisys and e-solutions have gone back to vanilla hosting, genuine delivery of software as a service is falling to mid-market players — typically new businesses that can offer a better empathy and customer service, rather than a purely technology-focused approach. “Understanding the market is important, not just for credibility but to fully deliver to customer expectations. ASPs need to understand their customers’ business.”

Back in favour

Shelton believes that while the total cost of ownership equation hasn’t yet swung heavily in favour of the ASP model it is moving that way. “It’s pretty much even-stevens dollar-wise, but if customers recognise all the real costs of running PCs in the field one thing is certain — people costs are increasing and ASP/data centre/network costs will decrease, meaning the TCO cost will progressively swing in ASPs’ favour.

“Sharing complicated and maintenance intensive infrastructure makes good sense. IT today is a specialist business. Does every business need to develop these skills themselves or should they remain focused on their core-business and outsource?”

What most people got wrong about the ASP market was that they thought it was about a single application delivered to the customer, says Jimmy Baroutsos.

Baroutsos heads Auckland-based iVASP, a full service ASP offering ERP, CRM, collaboration software and desktop productivity applications as well as IT infrastructure software and hardware. IVASP, which was started by telecomms contractor GDC Communications two years ago, uses its phone services business as a sales channel.

According to reports from its recent AGM, the division, which hosts software by more than 30 software companies and recently added locally developed content management system Rex, will be profitable this year.

Baroutsos won’t say how many customers iVASP has, though the company’s 2001 annual report says the division was serving nearly 1000 users at more than 30 clients by the end of 2000. Initially iVASP had trouble finding enough skilled IT personnel for the division but staff numbers now stand at 50.

IVASP’s Todd Sutton says the main concern of potential customers is security. To answer this iVASP has gained ISO9001:20000 accreditation for quality management and also takes part in a KPMG security and resilience audit.

Sutton says the five core benefits of using an ASP are reliability of service, predictability of costs, scalability, portability and breadth of services — once you’ve got the platform you can easily add other services on top.

The ASP model also gets around the worry of keeping software licences up to date. Baroutsos points out that if you don’t want to sign up to Microsoft’s Software Assurance licensing scheme — in which you have to pay for the right to upgrade — renting your software is an alternative because you pay for the Microsoft licence on a month by month basis. You can suspend services and recommence at any time.

Why does the Microsoft ASP licence allow that?

“They would rather deal with 10 customers who have a solid platform than have a bunch of customers who need constant support because their hardware is out of date,” says Baroutsos.

Microsoft’s Allen says if you take the price of ASP licensing and compare it to full product licensing and amortise that over a four-year period, you’ll find the pricing is similar.

“It’s an alternative and valid way of licensing and it will depend on the organisation.”

When ASPs attack

Obviously the ASP model isn’t always appropriate. “Systems integration is always an option and some times I tell them that’s the right thing to do,” says Baroutsos.

“If you have low IT requirements — no interest in upgrading, your current servers are doing the job and you don’t need much support — then systems integration is better. We’re not cheap. You get what you pay for. We run just about $1 million worth of infrastructure just for storage.”

AppServ’s Graham Clark says the customer needs to be at a certain stage in their IT usage for ASPs to be appropriate. That stage is usually a requirement for an upgrade, maybe due to a business merger or acquisition.

“If some has invested heavily in their central server infrastructure in the last 12 months then it’s very unlikely that an ASP proposition would be rational,” says Clark.

AppServ, the ASP spin-off of systems integrator Computerland, is two-and-a-half years old and has five employees but can call upon Computerland’s 600 staff.

“We have never been one to say it was going to be a revolution. However, there are some logical business reasons for using an ASP like resource shortage, shortage of skill sets and gaining economies of scale. Things that a customer wouldn’t necessarily be able to invest in themselves such as power generator backup, air conditioning and fault tolerance. Those are no-brainers that make the market logical.”

When AppServ takes on a customer it tends to take on other components of their IT. Customers use a multitude of links to access the service, traditionally DDS and frame relay but increasingly broadband services. “ADSL for VPN connections is a good remote access solution for a small office or someone connecting from home but not anything like the carrier-grade services that some of the fibre-based networks can provide,” says Clark.

“Cost has gone down because communications is always a significant part of a service such as this and the quality and quantity of bandwidth available has risen. Historically communications could be up to 30% of the overall solution but now it can be below 10% of the overall solution cost.”

AppServ is able to use the Computerland sales channel but also approaches customer prospects directly.

Sharing the market

Unlike Baroutsos who sees systems integrators as competition, Clark doesn’t see it that way. “It’s the in-house model that we compete with. We’re offering another service option to Computerland customers. It will suit some, it will not suit others. It’s more important to look at where a customer is in their IT lifecycle. Does their application set suit the ASP model? Does it fit the culture of their business? “

Like Baroutsos and Clark, Keith Watson, managing director of Auckland-based Nubizz, says people want a fully functional solution, not just an application.

Nubizz’ services range from traditional outsourcing where it manages servers at the customer’s premises or customer-owned servers at its data centre (located at Datacom) to hosting applications shared by many customers on a single platform. About 60% of two-year-old company’s revenue comes from shared platform customers and 40% from dedicated servers.

Nubizz shares 26 staff with its sister company, consultancy Asparona, and became profitable in the last three months, says Watson.

“It’s a fairly capital-intensive business model so there’s always going to be a time to profitability.

“There have been two phases to the ASP market,” says Watson. “When people started talking about the ASP model it was strictly defined as everyone sharing an application, but if you look at ERP applications they’re hardly ever shared. There is a dedicated instance of that application for each customer. What might be shared is the management.

“We’re seeing large numbers of companies considering managed services. Generally they’re updating their applications or looking at new applications. We believe we can save customers 30% to 50% of their IT operating costs by managing their IT services. The logic is we are pooling our infrastructure and specialist knowledge in ERP, HR and helpdesk.”

However, Watson says the advent of web services might see a renaissance of the shared platform model and Nubizz is starting to offer Microsoft .Net-developed applications such as a locally developed payment gateway called Banqonit. “They were developed to be shared on the web from the ground up.”

Layer upon layer

Greenwood Technology was already hosting customised solutions for clients when it decided set up an ASP business two years ago. The ASP division now accounts for around 30% of its revenue. Greenwood Technology marketing manager Greg Mikkelsen is reluctant to give a specific number of customers but says it’s between 30 and 50.

Mikkelsen says an adjustment phase after the dot-com crash saw the ASP market stagnate somewhat, but activity is on the rise as the impact of internet-architected applications kicks in.

Greenwood ASP has increased its customer count over the past year and is forecasting a doubling of revenue over the next twelve months.

“We never took the risk of adding whole suits of products that were unproven. We’ve only added products and services on the back of a firm commitment from a customer,” says Mikkelsen.

ASP revenue accounts for 20% to 30% of the business of HDSL (hosting and data centre services), the joint venture between Hitachi Data Systems and local businessmen Wayne Norrie and Roger Cockayne. Norrie says he sees the ASP label disappearing as it doesn’t reflect the business benefits.

He sees three layers to the ASP market, the first being the customer layer where customer relationships and business understanding are key. The second is the applications and systems integration layer where an application is tuned and rolled out for a particular market sector — horizontal or vertical — and bundled as a complete solution with application support, implementation assistance and helpdesk facilities.

The third is the infrastructure layer on which everything runs: network connectivity and security, MIPs on tap, storage on tap, backup, disaster recovery and management of all the above.

The first two layers are often provided by the same company, but can be separate. HDSL specialises in the third layer, and goes to market through partnerships for the first two layers.

“We provide low-cost, high-value IT infrastructure services through efficient and secure sharing of the IT infrastructure. Dramatic savings are made primarily through many companies sharing and technical skills and expensive infrastructure around the back office.”

Norrie says the third layer can support sharing, as it is quickly becoming a commodity and doesn’t provide competitive advantage. “Being up and running is no longer a competitive advantage — it’s a pre-requisite to being in the game. The first two layers need to be closely coupled, as they do provide competitive advantage. This leads to players who operate on an industry vertical and get close to the business being more successful in the long run — unless it is a commodity application such as payroll.”

A feasible option

Norrie says low cost of pipes and the predominance of IP are technologies that are allowing this to happen now as opposed to two years ago.

“The fibre provided by United Networks, Citylink, Tangent and lower costs from major telcos have reached a point where this architecture is now feasible. And all items can now be integrated with a minimum of systems integration cost, which wasn’t possible in the past.

TelstraClear spokesman Ralph Little says the ASP industry is still in the embryonic stage and is highly fragmented which is consistent with early-stage industries. “The market will go through a consolidation phase before we start to see true growth.”

However, he believes ASP is a sound business model and once there is a shift in New Zealand’s philosophy from owning to renting, growth will be huge.

TelstraClear’s ASP strategy is to deliver collaboration applications, which provide added value to its network. Its services include intranet and extranet solutions, and mail and messaging based on Microsoft Exchange 2000 and Outlook. The telco’s target market is small and medium-sized companies and the number of users is in “four figures”, says Little.

Leveraging its outsourcing business and data centre, Christchurch-based software company Jade set up JadeDirect, as an ASP division two years ago. Its aim was to provide the thin-client architecture and hosting platform for ASPs specialising in niche markets. However, it is no longer separately branded and has become part of the systems management division.

“For smaller ASP endeavours it is entrepreneurs that create the opportunities,” Jade spokesman Greg Williams says, “They are the ones that identify and build a community of users and then develop an application to fit. We provide the technical support and a hosting facility.”

Williams says when the interest in ASPs began Jade had quite a few inquiries about hosting all sorts of SME-focused applications but that has fallen off. “Now that the technology has moved through the hype phase we think it will gradually grow as entrepreneurs find suitable niches and build sustainable business models around them.”

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