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Hundreds of dot-com failures were expected to drag down the application service provider model. Brian J Dooley finds out how ASPs are faring in New Zealand and how they are battling for local survival.

Hundreds of dot-com failures were expected to drag down the ASP (application service provider) model. But even as the number of ASP providers declines in the US, they report greater demand for their services. Brian J Dooley finds out how ASPs are faring in New Zealand and how they are battling for local survival.

The ASP business, enthusiastically embraced just last year, appears to have hit the doldrums. Internationally, early ASPs begun to consolidate, and there has been a significant market shakeout. Business models are changing as theory meets practice. In New Zealand, with fewer and smaller ASPs, the trend has been a slower take-up than initially expected, and relatively flat growth for many of the participants.

But there are encouraging signs, including the fact that some of the vendors appear to have a model in place that works, and new elements in the global business picture may play to ASP strengths. A number of factors are making ASPs more attractive. First, their value proposition has always been reduction in the total cost of ownership of IT processes, from desktop to back office. These economies are not always obvious, and have taken some time to sink in. But rising hardware and software costs, combined with economic downturn, have led many businesses to examine costs more closely. This favours the ASP approach.

Other recent developments include recent Microsoft licensing program changes, which make the concept of “software as service” more palatable, and the continued rollout of DSL fast internet technology by Telecom and Clear, providing low-cost broadband service throughout the country. The continuing shortage of IT skills has also made ASPs more attractive.

Why do it?

Companies can outsource much of their IT operation to the ASP, thus reducing personnel requirements, and putting the operation into the hands of experts. The downside to using an ASP has generally revolved around cost and security requirements. Cost for running applications appears high on an individual basis, but ASP operators are quick to point out that the cost of the software licence alone is not really comparable, since the ASP provides installation, maintenance and a secure operating environment. The security issue is more complex, because the networks themselves aim to be extremely secure, and today generally involve dedicated lines. However, as with any outsourcing arrangement, some companies are wary of sharing a service with competitors.

Many potential ASP customers are also taking a “wait and see” approach, and are only jolted into considering an ASP approach when major changes such as hardware upgrades, corporate acquisition or other business factors cause them to take a hard look at IT expenditures.

Why they aren’t service bureaus

ASPs operate like last generation’s service bureaus in providing applications to users online, from a central source. There are important differences, however. The bureaus provided dedicated line access to one or two critical applications to users operating a simple terminal. ASPs provide dedicated or shared line access to everything from simple desktop tools to mission-critical applications, within a secure environment, and with all maintenance services generally provided. Access is generally by PC; part of the cost saving lies in greatly reduced equipment requirements, with older and less powerful systems quite acceptable.

The New Zealand ASP market underwent a brief period of expansion over the past two years, with early arrivals esolutions, Unisys, AppServ and iVASP being joined by a wide range of niche players such as exo-net, and Jade Direct. Expectations were initially quite high, but for many, progress has been slower than expected. In part, this is certainly due to the dot-com “bomb” and resultant wariness of new technologies, added to a global economic downturn. However, there are also indications that many initial business models were not quite ready for the market as it developed.

The shape of things

Although few ASPs here have closed their doors, there has been plenty of reshuffling in organisation and expectations. “The market was originally overhyped, but this has been followed by a period in which the business model is better understood,” says AppServ director Graham Clark. “We take a pragmatic approach. We are finding that we have less of a need to educate potential customers these days. Last year created a lot of unrealistic expectations.”

AppServ, part of the Ceritas Group (previously Computerland) which has been in the business for two years, provides the MS Windows desktop, MS Office, email access and other applications. The company views itself as application-agnostic, in that it is willing to work with customers to host their line of business applications. It uses Citrix MetaFrame for most of its application delivery, and generally provides its services through dedicated leased lines rather than over the public network.

“The ASP market has grown, though it has not met initial expectations,” says Clark. “Some of the major players have even backed off from this area. We have approached the market in a methodical way, however, and have experienced some success.” He says AppServ has no doubt that applications will develop to become a utility-based service. However, the market still needs a compelling reason to develop. “In general, this is really the initial consolidation phase of development. In the beginning, the definition of ASPs shifted all over the place. Now, two to three in New Zealand have emerged with solid and reliable service models.”

Driving forces

Among the issues driving the market forward today are vendors such as Microsoft changing their licensing model for new versions of Windows, which is effectively “seeding” the market; and the advent of DSL service. DSL has potential to drastically lower the network costs barrier. Direct DSL can provide a replacement for leased lines and may help to bring ASP services down to smaller businesses. Another driving factor for this market is the shortage of IT personnel. Even large firms are having difficulty finding and retaining IT staff these days, and an outsourced ASP solution provides a way to eliminate the need for dedicated operators. Clark, predictably, sees the market continuing to mature and grow. “We expect substantial development over the next several years. The trend is fuelled by emergence of back end and ERP applications, which are adapting to ASP delivery.”

One of the strongest players in the local ASP area is iVASP, a wholly owned subsidiary of GDC Communications. IVASP has generally taken a low-key approach over the 20 months it has been in operation, while claiming a steadily increasing market share.

“Last year, the market was all hype,” says divisional manager Jimmy Baroutsos. “Many got the fundamentals wrong. It is extremely important to have the necessary competence, as well as to have confidence and commitment to the customer base. However, reports that this market is in trouble are greatly exaggerated,” he says. “This is now past the early adopter stage.

Medium-sized businesses are looking increasingly at ASPs, and ASP solutions are being asked about more and are turning up on quotation requests.

IVASP focuses on the small to medium-sized business areas, and despite not having done much marketing, the organisation is probably the largest ASP in the country, by revenue, says Baroutsos. It provides a variety of applications, ranging from Sage accounting packages, CRM, sales, ERP, payroll and desktop services, to Microsoft Office. Its ambitious aim is to gain 90% of the desktop business from 90% of its defined small business market. It claims growth has been excellent, and the company has just expanded its sales staff from two to 12.

Because ASPs are designed to save money, Baroutsos believes that the current economic downturn may actually add to growth. They are designed to lower total cost of ownership, and at the same time offer freedom from technology churn.

“An important factor in this market is that many companies switch to ASPs because of some culminating event,” says Baroutsos. This may be a hardware upgrade, corporate downsizing, outsourcing or installation of new applications. These events cause businesses to re-evaluate costs and take a careful look at the technology environment. The move to an ASP is not a mainstream move, but companies often select it when they investigate it further. At the moment, the market needs a lot more customers and demonstration of true business benefit before it will really take off.

Niche players

In addition to the major multi-service players, there are a number of companies offering ASP services to niche markets, or providing a few mission critical applications using this model. Software developers are also creating product versions that are specially adapted to operating through the ASP model. Financial software firm

exo-net’s package that can run over LANs, WANs or through ASPs, says chief executive David McKee-Wright.

“ASP capability is definitely within our plans, but it only constitutes about ten percent of our current market.”

He says exo-net is now going after franchises, where hundreds of different financial databases can be combined into a single, centralised source. This is similar to an ASP hosted solution, but would be internal to the franchise. McKee-Wright says one thing that has harmed the market is that a lot of ASPs have been trying to sell software that they don’t know anything about.

“Where and how an application is hosted should be completely transparent, like a utility. After all, you don’t call the power company every time you want to boil a jug. The infrastructure should be nearly invisible.” Exo-net believes the ASP market will really only take off in a few years when current PC networks expire, and coherent service level agreements are available from ASPs. End users also need to perceive that there is real value.

“The ASP market, as we are involved in it, has been very flat. Most sales of our software are made with the intention of moving to a hosted environment, but they are not deploying. Too much needs to be lined up; we provide the software, but they need to arrange resellers, an ASP, and so forth. ASPs do provide capability to provide service across wide geographical distances using a chain of technologies to put a service together,” he says.

The future

While the ASP market is certainly poised for growth, elements of the business model still need to come together to drag it into the mainstream.

Some of these factors were pointed out at an IDC AppSourcing Forum held on April 17-18, in the US. During this conference, 30 major enterprise ASP customers were asked to define the impediments in selecting an ASP, and discuss how ASPs could make the buying process easier. The number one impediment was finding an ASP with the right application portfolio, and with expertise in their industry. Fully 79% also said that the buying process could be made easier if ASPs allowed for more customisation.

Although the forum drew upon the much larger US and international ASP market, these findings do point to a need for flexibility and developing an understanding of the customer. Significantly, these factors have also been an important part of the most successful New Zealand ASP operations. The industry as a whole is clearly moving beyond the initial “one size fits all” type of offering toward careful consideration of individual customer requirements. The ASP solution will probably never replace software ownership. The desire to own software and systems simply runs too deep, and ownership can be convenient. For medium-sized to large companies, however, cost savings and peace of mind in knowing that IT is under control will be powerful factors encouraging this model.

Brian J Dooley is a North Canterbury-based IT writer.

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