Business Solutions for Rent: ASPs

Business Solutions for Rent: Application Service Providers
Presented by James Subach, Ph.D
Managing Member/Co-Founder, Bridge Alliance, LLC
Contact James at dr.jim.subach@worldnet.att.net

June 19, 2001

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Summary

You can read the complete transcript of the workshop.

Application Service Providers (ASP) represent a new set of opportunities and threats to today’s service providers. ASPs are a "Back to the Future" offering that mirrors conventional outsourcing but with the underpinning of the Internet and other, powerful communications systems and services.

In this presentation, Dr. Subach focused on ASP use primarily by small to medium businesses (SMBs). The costs, availability, trends, and pitfalls were discussed. Participants discussed the emerging trend of wrapping ASP software offerings with offerings from professional service firms in diverse areas such as Human Resources and Accounting and reviewed how these firms are extending their reach further into their clients by delivering enhanced services.

Points covered in the workshop include:

  • Why Use it?/Why Not to Use It?
  • How Big is that Market?
  • How Does It Work?
  • What Applications are Available?
  • Leveraging ASPs as a service Offering To Clients
  • What are the New Issues Involved with ASP use?
  • Where is that Industry Going?


June 19 Session Sponsored by Elite Information Systems


Workshop transcript

Session Moderator: Welcome everyone, and thank you for joining us today! I'm pleased to introduce Dr. James Subach, who will give a presentation on Business Solutions for Rent: Application Service Providers.

James A. Subach, or Dr. Jim as he is often called, has over 30 years of experience in system analysis, planning, design, development, and the business use of technology. For the last few years he has focused his attention on the business use of the Application Service Provider (ASP) model and the future of this new technology delivery model. He has published articles on its practical use and is a speaker on that topic. He uses a pragmatic "No Technobabble" presentation style that is well received by audiences.

Jim is a founding member of the Bridge Alliance, LLC, President of JAS & Associates, Inc., and was the CIO of a software startup company. He has created products for use by software companies entering the ASP market.

Welcome Dr. Jim!

James A. Subach: Good afternoon. Thank you for taking time from your day to join in this discussion on Application Service Providers (ASP).

During the last 20 years I have worked with business information systems in many different industries and capacities. For the past 4 years I have been studying and subsequently writing about the ASP model. It is an area of applied technology that creates new opportunities for consumers and providers. It comes at a time when businesses need more options in the Information Technology areas. Timely access to critical business information has become an increasingly essential component of today's business operations. There is constant pressure to deliver high quality information in ways that are better, faster, cheaper, and more effective.

Into this arena walks the ASP, an old idea in a new form. It provides solutions to the above problems, but how does it work, how does it fit, and how do you use it?

The ASP model is fundamentally a good idea but the related jargon and marketing hype make it difficult to understand it and separate fact from fiction. Today we will take this model apart to help you evaluate its use for you. We'll also look at the differences that exist based on issues such as business size. Finally, we'll look at where ASPs are going in the future, and what those changes mean to you.

Please give me feedback on the issues and concerns you have about this model. AND, as you already know, your questions and comments are welcome and valued.

The Basics

The ASP model is a way to make someone else responsible for the operation and upkeep of your business applications. There are several business drivers for this. A short list includes the following:

  1. Reduce the costs associated with upkeep and maintenance by outsourcing.
  2. Make Information Technology (IT) costs more predictable by setting fixed costs.
  3. Move non-essential technology to an outside location to allow the business to focus on other, more critical issues.
  4. Provide access to new technology and related expertise in a more cost-effective manner.
  5. Provide a means of keeping current with relevant technology.

There are others but these are some of the ones cited most often.

Physically, the ASP model has three parts.

1. Your office. This includes the basic computer equipment you have and any internal networks.

2. The ASP. This is where the servers and application software are located.

3. The connection between your office and the hosting center. This connection can be a dial-up line, high-speed data line, wireless, or a combination of these and other methods. There is a common assumption that the connection uses the Internet but this is not always the case.

Troy@Pipeline: Our company has developed an application initially designed for an ASP delivery mode, but have discovered that the companies we've targeted are not thrilled by the idea of sensitive information living outside their firewalls. Is this a common obstacle faced by the ASP community?

James A. Subach: Yes, Troy. Successful applications in the ASP market at this time are usually non-mission critical and have few security concerns. But this is slowly changing.

What many people miss is that the ASP itself may have three parts.

1. The hosting facility. This has the servers, high-speed connections, and technical support for those resources.

2. The business application. This may or may not have been created by the ASP. Oftentimes a software company that we shall refer to as an Independent Software Vendor, or ISV has developed this.

3. The application support personnel, or "Help desk." These may come from the ASP or the ISV.

Any questions so far?

There are some cases where the hosting centers provide the support for the infrastructure components primarily and provide technical support for the application but no end-user support. A new term has been coined for this type of operation, Application Infrastructure Provider (AIP). In this case the ISV (Independent Software Vendor) assumes a greater and more interactive role for the customer.

Because of the various pieces that may exist at the ASP, you may be asked to have different contracts for each of the pieces. TIP: A single contract that covers all the ASP pieces is preferable. It is almost always to your advantage to have a Single Point of Contact (SPOC) if something goes awry. But how do you pay for all of this?

Paying for the Service

The ASP model is fundamentally a rental or subscription model. At the risk of oversimplifying there are three different types of payment plans.

1. Flat Rate. In this case you will pay a flat rate, usually monthly, for the ASP services. This type of arrangement is more common with large companies.

2. Per Seat. In this case there is a fixed charge per user account per month. There may also be an initial set up charge for the application and a separate setup charge for each new user. The per seat model is the most common one in current use.

3. Per Transaction. In this case a charge is levied for each transaction. Some examples of transactions would be: the entry of a purchase order, payment of an invoice, posting of a journal entry, or processing of a credit card transaction. The cost per transaction may or may not depend on the type of transaction.

It may be possible to get a hybrid of the above. In most cases it is best to have a single type. It makes the billings much simpler and the charges more predictable. Now a question for you. What types of pricing plans make sense for your businesses?? Please think about it. It affects the type of contracts you may use with the services.

The Pricing Issue

Many businesses are surprised when they learn that ASP prices are not as low as expected. Initially they fail to consider that the ASP has assumed responsibility for computer systems, networks, system administrators, cabling, backup, redundancy, and not just the business application and related training.

They may not realize that the ASP has included maintenance, user support, and upgrades in the cost of the contract. (But don't assume this. Make certain that these are in the contract!) Also, the ASP will usually base their price on the amortized standard sale price of the application over period of time, typically 3 to 5 years.

To determine if the ASP solution is priced reasonably, you have to do some work. Determine what your acquisition costs would be to bring the application in house. Add the loaded costs of all equipment and personnel. Factor in maintenance agreements, disaster recovery plans, continuing training for support personnel, any changes needed to your physical plant, and a myriad of other details.

Determine the amortization of the original software price over the period in question. After you've done all that you can compare apples to apples. As a rough rule of thumb, your cost to use an ASP, including the costs of your connections to the hosting center, should be approximately 90% of the actual cost to bring the application in house over the period of the contract.

For small companies the issues are usually fairly obvious. For larger firms they can get very complex especially if the firm already has an expensive infrastructure in place.

Why Use ASPs

ASPs are great choices in a number of areas.

If you have a limited IT staff, then outsourcing can be a way to avoid creating or expanding an IT department. There is a caveat here. The issues involved in using an ASP are technical, right down to the contracts. (See SLAs further in this document.) If you do not have the expertise in this area, engage a trusted advisor who can guide you through this process.

General-purpose applications are excellent candidates. Email and messaging are the most common applications that are run in a ASP mode. Between 60% to 65% of ASP outsourcing involves one or both of these. Typically the costs of outsourcing are less than the cost of managing these services internally.

Non-critical applications are another candidate. Human Resources applications are one such example. Certain call center applications are another.

ASPs can be less expensive than hosting an application internally. For certain commodity services such as email and messaging these savings can be significant. In some of the more competitive areas there may be creative pricing that is attractive. For example, HR packages may be priced based on the number of employees rather than the number of seats. The pricing may be compelling.

ASPs may provide a bundled set of services that would be difficult or expensive for a business to acquire and coordinate itself. For example, one ASP has a business maintenance offering. In this application, the ASP provides ways to receive work orders, assign crews, and coordinate work.

This ASP has rolled a wireless component into the package that provides for dispatch and tracking services for maintenance employees. This coordinated approach provides a one-stop-shop for maintenance operations. It also frees the building managers from having to create and implement the wireless portions of the system themselves. This is a good example of the economies of scale that and ASP can bring to a business solution.

As another example, consider the case where some employees work outside the office for significant periods of time. An ASP application can provide access from any location with the proper type of connection. Similarly, if your employees work odd hours or are located in multiple time zones then the 24 X 7 availability of your application through an ASP can be a big benefit.

In some cases the business driver is the speed with which an ASP can get an application up and running. An ASP is usually already set up to load and run the application. The business usually needs only a high-speed link to the ASP hosting center. In some cases, an application can be up and running in few days.

Contrast the above with the case where a business chooses to host the application internally. In these circumstances the business may need to specify, purchase, install, and configure new equipment and software. Add in new information support personnel and/or training to support the application. This process may take weeks or months in the case of a significant application. If the need is critical then the time saved by using an ASP can be the deciding factor.

The following example is one I like for service firms.

If you are contemplating new operating locations then an ASP deployment may help. Your new offices can connect to your ASP-based application with the simple addition of a connection. In some cases this can be done using the Internet. In this case, consider the use of a Virtual Private Network (VPN) as a way of controlling access and security to your application. Larger companies may have the resources to do establish new locations easily without an ASP, but smaller companies may be able to lever the ASP model to enter new market regions more quickly and at a lower cost.

Similarly, you can use an ASP deployment to speed up sales force automation projects. Larger companies may not need or want an ASP model for this, but smaller companies can lever an ASP deployment combined with Internet access to speed up sales force automation and improve sales and customer service.

By the way, is the alphabet soup of ASP, ISV, VPN, etc beginning to get confusing to anyone??

Session Moderator: Definitely!

James A. Subach: Should I review?

Session Moderator: Please.

James A. Subach: ASP means the Application Service Provider. This is the company that hosts the business application that a customer would use. The business application may or may not have been created by the ASP.

The software is developed by a software company frequently called an Independent Software Vendor or ISV. This is the company the developed the business application.

In the ASP supply chain, the ISV supplies the software to the ASP who hosts it.

Clear so far?

Session Moderator: Ok.

James A. Subach: Finally, the ASP provides access to the customer through some type of communication connection such as the Internet of a private connection.

Session Moderator: And what is the VPN?

James A. Subach: If your connection is over the Internet than you may want security. You do this by using a Virtual Private Network (VPN). A VPN encrypts your information so that no one else can read it.

Clear?

Session Moderator: Yes. How does an ASP operate when the Internet is not involved?

James A. Subach: You simply lease a line from the phone company, or simply dial into the ASP directly through a modem pool (a collection of modems). A lease line is more common because it provides a connection that is always available.

James A. Subach: Any further questions?

Session Moderator: Is information transmitted over the phone this way subject to any interception?

James A. Subach: It is unlikely that information over a phone line, whether dial up or leased, will be intercepted.

Any other questions?

There are creative uses of ASPs. For example, in a part of one city, an ASP provided a service that helps coordinate the emergency room operations of several hospitals. Approaches like these can monitor current workloads at emergency centers and direct patients to the centers best able to help them in the shortest time.

There can be another creative twist if you are a provider of professional services to a number of clients. In this case you might offer an ASP-based service to your clients. You could arrange to have access to the collective data of your clients on an as-needed basis. You could review the data and provide updates, advice, and other related services based on the indicators in your customer data. By the way, I am getting more and more interest in this area as a way for service firms to expand into new areas.

To use a simple example, you might have an ASP-based accounting system. On a nightly basis you could have the data scanned automatically and, based on client profiles, report unusual conditions. You could then evaluate these reports and suggest remedial actions to specific clients.

Use your imagination to devise other ways to add value to your client services when you have access to their data. Of course there are legal and ethical issues here, but these can addressed effectively.

As another example, small businesses may want to take advantage of competitively priced ASP products on the Internet. Accounting is one such function and NetLedger is an example of a related ASP offering. For a fee in the range of $10 per month per seat, a company can have a basic accounting package. Also, these packages may allow your CPA, with your permission, to review your books as needed and provide assistance and other support based on your data.

Again, a firm could look to these products as a way of expanding beyond commodity-type services

The ASP offerings that provide such services are adequate but not as fully featured as the conventional packages that you install directly on your computer. Still, this area deserves a look to see if it fills your needs in a useful way.

Questions?

OK. Here are the reasons to avoid ASPs, and there are a few.

Why Not to Use ASPs

If your people need a lot of specialized support, then the outsourced support of an ASP might not be adequate. In particular, if constant on-site assistance is needed then an ASP solution would likely be a poor fit.

If you need customization of your application then an ASP deployment might not be adequate. You should expect that customized reports should be available as long as fundamental changes in the business logic are not required. If your business requires changes that affect fundamental logic then the software might not work for you. There are some ISVs/ASPs that are developing applications that are customizable to some degree. The number and sophistication of those applications should increase over the next few years.

The point is that customization is difficult in subscription-based ASP use. We will not see mass customization here for some time.

If you are a small to medium enterprise (SME) then you might find that the training options for your people and the results are not satisfactory. This is not a direct fault of the ASP model. Rather, it is because the ASP model allows and may even encourage companies to have employees operating outside the company from locations such as homes, temporary offices, coffee shops (via wireless), and so forth.

In this “anywhere, anyone, anytime” environment, company policies and procedures may not be implemented properly. Under these and similar circumstances conventional web-based training that are based on traditional training models can break down and lead to ineffective implementation of the application. On the other hand, if your business provides training and implementation services, then this may be an opportunity for you to provide those services without the need to in-house technologists.

Not ready for Prime Time.

If your application is mission-critical then you may want to wait for the ASP model and the providers themselves to stabilize. There are few things that are more disruptive than to have your ERP system down for several days while you scramble to find a new ASP center to host it.

And there is another risk. Some ASPs are providing software, hosting, and support out of small offices that do not include robust data centers. These are so-called Micro-ASPs. If your application is being delivered this way, then make certain that you understand the risks and are willing to accept them. A short list of risks includes unscheduled downtime, scheduled downtime for backups, and possible data loss due to non-redundant hosting locations. Proceed cautiously if your ASP fits the Micro-ASP outline.

Most ASPs will fail or merge. At the beginning of 2001 there were approximately 800 significant ASPs. By the end of 2001 that number my drop by half. Over the next 4 to 5 years the number may drop to less than 50. However, this is not as grim as it appears on the surface. In many cases we will actually be seeing a consolidation of the hosting centers. These centers will provide hosting facilities for a large number of applications.

Session Moderator: Data loss - doesn't everyone make backups these days?

James A. Subach: I wish they did. In small businesses backup is often delegated to the least qualified individual. With an ASP you have a professionally managed backup process. That should provide comfort to many businesses.

In the SME markets, application support will be pushed back to the ISVs and/or their call centers instead of the hosting centers. During this transition period customers will have some service interruptions while applications are moved to new hosting centers. Two items will become critical to customers. First, the ISV must be financially healthy and committed to the ASP model. Second, there should be multiple AIPs (Application Infrastructure Providers) who can host your application in the event that your current hosting center drops support for your application.

Any questions about why not to use ASPs?

Then let's continue.

Leveraging the ASP Model with Your Business Services

At the upper end of the spectrum, large software firms such as SAP and PeopleSoft may deliver their products as an ASP service. Large business service organizations such as the national and international accounting firms may provide the training and implementation services. The same opportunities exist in the small and middle business tiers.

In these tiers there are hundreds of business software packages that are available as ASP offerings. Depending on the ISV, these may be offered locally, regionally, nationally, or internationally. Some packages are in the horizontal business areas such as accounting, payables, and so forth. Some are very specific such as warehouse management, freight forwarding, and interstate transportation and delivery.

There are ways to leverage this if you wish. Many ISVs, particularly those that operate regionally, are open to business agreements with service companies that may recommend, train, or implement their software packages. This allows business service firms to choose applications that match the internal skills of the firm and deliver the related training and implementation services.

I sit on the Advisory Board for a number of small companies that are delivering ASP applications. They are usually very open to these type of agreements. One significant advantage is that the service firm does not need the technical expertise to deliver, install, and support the application. The firm can concentrate on the business services components and leave the technical issues to the ASP and ISV.

It is worth point out that the services firms do not need to be accounting firms. For example, a Human Resources (HR) firm may partner with an HR software provider. In this arrangement, the HR firm would provide traditional and new, enhanced services. The HR ISV provides the software and technical support. These arrangements lever the strengths of both parties.

There are business opportunities here. Any questions?

Then let's continue.

Other Issues

Who owns the data? You may be surprised that the ASP may own your data. Their contract may allow them to resell your data, usually in a sanitized mode, to other parties. Read the contract carefully. A key phrase you might encounter is “data exhaust.” Some ASPs expect to receive 10% of their income from the sale of data exhaust.

What if you want to leave the ASP? Always check your contract to make certain that you can get your data dumped from the ASP's database in a form that can be loaded into another application. Require that the ASP provide full technical specifications that clearly describe the meaning of the data in each data field. Make certain the contract specifies how and when the data can be dumped, the medium on which it will be dumped, and the method by which you will receive the data. Identify the support that the ASP will provide after you receive the data to resolve any problems or questions that may arise.

What if you want to bring the application in-house? Make certain that the contract provides a way of doing that at a reasonable price and that the ASP has a plan for you to do that. Make certain that there is a process for the cutover so that you are certain that the data you have is current and up to date. Determine what credits the ASP may provide you and/or any penalties you might incur. Determine if you need a contract with the ISV in cases where the ISV is not the ASP.

ASPs also provide Service Level Agreements, SLAs. These describe the availability of the service, penalties for non-availability, speed of access, and other technical components of the ASP model. Many companies ask their IT staff to review these agreements. In many cases this is a mistake. Most IT departments are data specialists, but an SLA has its roots in telecommunications, an area that is not normally understood by IT professionals.

If your staff does not have experience in telecommunications, then bring in an outside expert to help you through the SLA and your first ASP negotiation. It can help you understand the issues more completely and protect you better in the event of problems with the ASP or any component of the ASP that is covered by the contract.

And now the future: What's In Store for ASPs?

By 2005 we expect that the ASP contracts written that year will be worth around $25B and that revenues for that year will be in the $7B to $8B range. By the same time we expect that there will have been significant failures of ASPs and considerable consolidation in that market.

But there is a downside. We expect that the number of ASPs will drop from current levels in the 600 to 800 range down to 50 or less. Some predictions have the number as low as 25. These results are not contradictory if we remember that the ASP will likely split into AIP and ISV components for the SME market. Under those conditions the hosting component becomes a commodity and we would expect consolidation.

We should also expect a change in the appearance of ASP applications. Today, most ISVs will create an “ASP version” of their application by converting into web pages that appear in a Web browser. Web pages can be an awkward way to enter and process transactions.

A better, emerging solution is the delivery of applications that do not require a browser. These applications will look and operate in the same way as conventional applications today. They will be highly interactive and responsive. Sophisticated reporting tools will be used to produce high quality reports, in contrast to the simple print function in a browser. The emphasis should be on moving data rather than displaying pages. Some pieces of this model are already beginning to appear. We can expect more.

Services and other technologies will begin to be bundled with ASP applications. For example, an HR application might have a HR service company to provide additional services that employees may need. In this case, the ASP becomes the one-stop-shop for a complete service.

In other cases we might see complex wireless services blended into a sales force automation package. This could include email delivered to PDAs (Personal Digital Assistant) or cell phones, wireless interactive terminals for field use, and other value-added services.

Individual companies might find it too expensive to support multiple wireless devices, but an ASP, because of the economies of scale, may supply multiple wireless solutions to deal with different customers, and different wireless products that customer may already have.

As companies adopt ASP solutions, they will become less technology focused and more business-centric. Technology itself may be on its way to becoming a commodity, though it will be a long journey to get to that point. We can expect software customization to decline and, with it, the number of businesses that offer those services. Again, it will take time for this to become significant.

We can expect that software companies will offer ASP and non-ASP versions of their software to improve their chances for long-term in their success.

Technologies will be more available. These include voice recognition, handwriting recognition, high quality interactive video, and others. While today's ISVs have to deploy a technology one customer at a time, in the ASP model, a new technology can be deployed to hundreds or even thousands of customers at once through a single location. This reduces time-to-market and the substantial costs associated with the support of these technologies.

In cases where companies need to deploy sales professionals or service professionals, companies will find it quicker and easier to set up temporary or permanent satellite offices. Companies such as manufacturers and distributors who deal in hard goods will be more restricted in this use.

Conclusion

Some have touted the ASP model as a revolution when it is actually more like an evolution. The fundamental model is over 30 years old. The principal advantages are some savings, speed to implement, and a reduction of internal technology overhead. Disadvantages are an unstable market, few easily available high quality applications, and unresolved security issues. ASPs may not represent a brave new world. They may be more like a fresh new day.

In the future, if you have other questions please contact me at (602) 674-0029 or email me at dr.jim.subach@worldnet.att.net.

We have covered a lot of material in a short time. I hope the pace was a good one for you. If there are any questions or comments, now is a great time for them.

Session Moderator: I really want to thank you, Jim, for an excellent presentation! There is a lot of valuable information here that I'm sure our readers will appreciate.

I would also like to take a minute to thank Elite Information Systems, Inc. for sponsoring this workshop. You can find out more about Elite Information Systems by clicking on the banner in the middle of this page.

James A. Subach: Thank you all for your attention. I'll linger a few minutes for those who might have items to discuss. Have a wonderful and productive day.


Biography

James A. Subach, Ph.D. has over 30 years of experience in system analysis, planning, design, development, and the business use of technology. For the last few years he has focused his attention on the business use of the Application Service Provider (ASP) model and the future of this new technology delivery model. He has published articles on its practical use and is a speaker on that topic. He uses a pragmatic "No Technobabble" presentation style that is well received by audiences.

Dr. Subach has been on the faculty at various institutions and was a Visiting Scientist with NASA. He is a founding member of the Bridge Alliance, LLC, President of JAS & Associates, Inc., and was the CIO of a software startup company. His business clients come from industries as diverse as manufacturing, land development, banking, medicine, and others, including custom and commercial software development firms. He has created products for use by software companies entering the ASP market.

E-mail: dr.jim.subach@worldnet.att.net
Web site: www.bridgealliance.com

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