Which ASPs are going to be successful in the future? This question
is almost impossible to answer. The wide-ranging predictions for
the size of the ASP industry indicates the potential for success,
but the ongoing consolidation seen in the marketplace has cast
doubts on the viability of many of the players. In this Concept
Paper, Butler Group considers the various factors that go into
determining the potential of ASPs and what ASPs can to do improve
their chances of survival.
The future success of the ASP industry has been a hotly debated
subject in the IT world. Although there has been a great deal of
hype about the industry, it has not generated the sales expected.
But Butler Group is of the opinion it is a viable business
proposition and will eventually become a successful industry.
It would appear that the predictions for the size of the ASP
industry are driven by a combination of the number of organisations
likely to take up the delivery model, and the size of these
organisations. Larger organisations are the target market for many
ASPs because of the bigger profits to be made; ASPs aiming at
smaller companies require high volumes to become profitable, but
still provide a unified delivery.
There are implications over the next year for small niche ASPs,
vertical sector ASPs, through to large, established organisations
(such as Microsoft and Oracle) enhancing their own ASP ventures.
For example, Microsoft has recently acquired Great Plains (a
provider of e-business solutions), showing it is producing not only
for the desktop market, but other applications as well. In other
words, Microsoft is competing with its customers in the ASP market
space. This is being viewed as predatory by many Microsoft-centric
vendors. However, many members of the ASP world have also greeted
this news with delight because the Microsoft name is adding a
measure of credibility to a volatile industry and, as a result, it
should be easier to sell ASP services.
 | | Who knows which of the huge
projections for the value of the ASP industry will be accurate?
Only time will tell | | | | | |
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The result of this acquisition is that Microsoft will have a Great
Plains Division. It is envisaged that the integration of
technologies from both companies will create a unified group of
business applications built on the .NET platform, deliverable as an
ASP solution (among others). This acquisition has been driven
partly by the diversification mentioned above, and also the quality
of the Great Plains offering in the mid-size market. Butler Group
believes that, in the longer term, this combination
| | Trust is an important element of
the relationship between ASP and customer | | | | | |
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will be successful in the marketplace; with the Microsoft name
behind a valued product, the opportunities are huge.
Many companies are looking at the simplification of Web application
development and deployment to carve out a niche in the marketplace.
However, the warning bells should be sounding here, as Oracle and
Microsoft are already on this bandwagon and it will not be easy to
compete against these giants. That these large organisations are
entering the ASP arena means the future of the industry is
perceived as important enough to be involved in.
What are the characteristics that Butler Group considers to be
important when determining the future success of the ASP industry?
The following nine aspects have been identified:
- Value and viability
Price- Service
- Security
Market projections
Web delivery
Consolidation
Early adopters or late movers?
What next?
Value and Viability
The viability of the ASP market
was brought into question last year when a number of high-profile
ASPs failed as a result of lack of take-up and withdrawal of
investment. Without customers there is no market, and this resulted
in a significant amount of negative press in the IT world.
ASP is marketed as being new and efficient and an essential
addition to the opportunities available to businesses today. The
original market-drivers still stand - the Total Cost of Ownership
(TCO) is generally higher for purchasing than using an ASP, it is a
faster time-to-market for delivery of applications, and the lack of
skilled IT staff in the marketplace for traditional organisations.
The speed of deployment is extremely important for businesses to
remain agile and constant availability is critical. As such, the
basic needs of the potential customer are unchanged, and are
probably even more pertinent today because of the advances in
technology.
So why is take-up still not at the rate expected? Factors such as
the negative publicity surrounding the market and the perceived
loss of control highlighted by larger organisations have
contributed towards the low-rate of customer take-up. Additionally,
Small to Medium-size Enterprises (SMEs) are unsure which the most
viable ASPs will be, therefore they are reluctant to take up the
model. The 'wait and see' approach has been adopted, particularly
in the SME arena.
Butler Group believes an ASP can help an organisation maintain or
increase profitability, when compared with purchasing and
maintaining an application in-house. The purchase and support of an
application is not the core competency of most businesses and, as
such, ASPs do this better. Some larger and enterprise-class
organisations have created their own IT departments to make it a
part of their business, but the danger with this is the problem
with recruiting and maintaining IT staff, plus the other headaches
that come with running your own IT department. Therefore, ASPs can
be utilised by different sizes and types of organisation.
Price
There are two aspects to price: actual cost; and
the billing mechanism.
It is looking increasingly likely that the cost of using ASPs,
particularly for customised solutions, is going to rise this year.
There are three possible justifications for this. Maybe the
original charges are too low to be sustainable, so ASPs simply have
to increase them to avoid failure. Or perhaps the ASPs have decided
to invest more to improve their product offering. Or maybe it's the
customers who want more and are willing to pay for a better
service.
The truth of the matter is that it is a combination of all three,
and maybe more besides. The original focus of the ASPs was on
customer acquisition. In order to obtain these customers in a
sceptical and unsure market, the cost of using an ASP had to be
low.
However, loss-leading charges are only sustainable in the
short-term; ASPs have to be able to provide customers with the
service they are expecting, and this needs to be paid for.
'Something for nothing' is a paradigm the industry, as a whole, is
beginning to move away from.
Additionally, ASPs need to continually invest in infrastructure,
but without demonstrating a move towards profitability, investors
are unwilling to provide more finance. Infrastructure improvements
are vital to the continued well being of an ASP - the rapid
advances in technology is one reason customers use ASPs, but it is
the ASP's responsibility to keep up with this.
Customers also want more from their ASP. The service element is
increasing in focus. The benefits that organisations gain from
using an ASP, such as regular monthly payments rather than a major
capital cost, have to be combined with support and flexibility. As
such, the ASP has to increase its prices to provide the extra
service the customer wants. ASPs are starting to focus on profit,
rather than solely customer acquisition, and are being pushed
towards profitability by their investors in order to deliver
results according to the business plan. A number of high-profile
ASPs, such as USinternetworking and FutureLink, have announced
staff reductions already this year, in their bids to move towards
profitability
As a result of this change in focus, customers must balance two of
their primary requirements - the ASP must stay in business, but
also charge them as little as possible for doing so. From the ASP's
perspective, as much profit as possible must be made to keep
investors and shareholders happy, and to maintain the business,
while attracting as comprehensive a customer base as
possible.
The standard charging model, in use by most ASPs, is
Per-User-Per-Month (PUPM). However, potential customers want
choices of how they are billed, and PUPM may not be the most
cost-effective for them. Other examples include billing for the
amount of time an application is used over a specified period or,
alternatively, per transaction.
Butler Group considers that it will be a big differentiator between
ASPs if some are offering only PUPM billing and others are giving a
choice of transaction-based, time-based, and so on. It would appear
that ASPs have begun to heed the requirements of their customers
and many are starting to implement software allowing a choice in
billing.
Service
Butler Group believes that the ASP industry
has developed further, to be focused on the delivery of software as
a service, rather than solely the delivery of applications on a
rental basis. This is a key requirement of many larger
organisations when considering utilising the services of an
ASP.
Furthermore, the service a customer expects is becoming much more
defined. Many ASPs are developing standardised Service Level
Agreements (SLAs) so that they are committed to delivering a
specified level of service to all customers. However, some
customers will require more specialised SLAs and which could also
state customer responsibilities with respect to delivering an SLA.
Butler Group expects there will be standard SLAs at the lower end
of the market, with the negotiated agreements being designed for
larger or more specialised companies. For example, some
organisations are demanding extremely high levels of guaranteed
availability, irrespective of cost, therefore these agreements need
to be carefully constructed by the ASP to ensure they are
viable.
Security
Customer concerns regarding security are
going to remain one of the key issues. Customers are demanding that
any potential ASP guarantee the security of their data (and
organisation, with respect to the service being delivered) before
any agreement can be achieved. Standard protection, such as
encryption and firewalls, are already in place, but more is in the
pipeline.
For example, security is being developed inside the application,
rather than outside. It is important that new ASP applications and
services are designed so that multiple customers can be securely
supported on the same image of the application, to enable the
economies of scale that ASPs so desperately rely on.
The other area the ASP needs to focus on is in-house security. It
may be a surprise to some that the higher security threat any
organisation faces is in-house, rather from external sources such
as viruses and hackers. Therefore, measures need to be in place to
counter proactively that threat to as great an extent as
possible.
Market Projections
The only thing clear about the
future of the ASP industry is that it is going to be big. The
figures being bandied around vary to such an extent that "big"
cannot be defined in much more detail.
Even the size of the worldwide market in the past is a subject of
some debate - figures of between $150m and $300m for 1999 have been
cited. Moving into the future, market projections are somewhere in
the region of $2bn and $20bn in 2003. With such an obvious
disparity, Butler Group believes it is not wise to take too much
notice of these figures, but accept simply that the market is going
to grow significantly over the next two to three years.
Although the figures we have discussed above are in US dollars, the
market is set to increase throughout the world. The ASP market had
its origins in the US, but is now increasing in prominence in
Europe and the rest of the Western world. For example, a couple of
years ago the US and Canada was thought to be well over 60 per cent
of ASP revenue and Europe was around the 20 per cent mark. In 2004,
it is projected that Europe will be in excess of 30 per cent and
the US will have reduced to the mid-40s. Although this is just one
projection of many, it shows the commonly held belief that Europe
is beginning to catch up on its American counterparts and the
potential market is huge.
Web Delivery
There has been a great deal of discussion
as to whether Web-enhanced applications can run successfully over
the Internet. One school of thought is for all existing
applications to be Web-enhanced and run on a thin-client model. The
reasoning behind this is that many organisations are unwilling to
pay the expensive levels of access necessary for broadband
(generally unavailable anyway) or the high bandwidth required for
running Web-native applications.
However, the opposing school of thought is concerned specifically
with performance and scalability. When an application is delivered
through a thin-client model to hundreds and thousands of users, it
is not always so easy for an ASP to add extra users or applications
at the touch of a switch. These applications were originally
designed for use on internal servers where bandwidth was not an
issue.
Butler Group believes it is the responsibility of the Independent
Software Vendors (ISVs) to produce Web-native applications sooner
rather than later. This can only be advantageous for them because
ASP delivery is fully monitored and the ISVs will get the
appropriate licence fees through this delivery model. Piracy is a
major headache for the software vendors and the ASP delivery model
should help reduce illegal software use.
To add to this, by developing applications for delivery over the
Web, the ISVs will be extending the market reach of the
applications they produce. It certainly appears that ASP will be a
model adopted by customers, therefore, it naturally follows that
there will be casualties in the capital sales of applications. This
market share needs to be retained through the development of
applications for delivery as a service, rather than a
product.
Consolidation
The huge ASP market value projections
have generated many entrants into the arena. One thing is for
certain about all the participants; there will be mergers,
consolidations and bankruptcies. Not every player will survive.
There are many ASPs offering a wide range of software and services,
and it is likely that this variety will serve to put off many
potential users until consolidation shows who the main players will
be.
The industry consolidation will take a number of forms. Firstly,
some players will fail to stay in business because of investors
withdrawing funds and/or the company is making insufficient money
to stay afloat. Mergers will take place when two (or more)
companies see complementary services being offered, which can help
each other increase sales/profitability if offered together.
Acquisitions could take place in a variety of circumstances, but
certainly weaker companies could be acquired by stronger
counterparts if the assets (such as customer-base) are desirable
enough.
Early Adopters or Late Movers?
Are the early adopters
in the ASP market place going to be successful, or are the late
movers going to learn the lessons of their earlier counterparts and
deliver a service faster, better, and more value for money?
Trust is an important element of the relationship between ASP and
customer. This trust can be gained in one of two ways; primarily
from having a recognised brand name through being in business a
significant period of time. The other way is for a new company to
come under the branding of a larger, well-established organisation.
As such, Butler Group considers that the early adopters, that have
been through very difficult growing pains, will be the winners in
the ASP world, rather than the late movers.
To add weight to this claim, the experience that these ASP
companies have built up will go a long way towards helping them
understand the market in detail and appreciate their customers'
requirements. Furthermore, if good service is being provided (and
it has to be assumed that in general bad service will result in the
ASP failing), then satisfied customers breed new customers and the
client base grows.
It is not only early-adopter ASPs that will be successful;
early-adopter ASP supply organisations should also reap the
rewards. These are companies that have developed solutions for
ASPs. However, Butler Group believes there will be more competition
in the marketplace here because the trust element is not so
important and the late adopters could achieve success.
What Next?
So what will ASPs do to ensure they survive
over the turmoil anticipated in the next year or so? What factors
will affect those that do survive? Butler Group believes
partnerships will be key, but there will also be other enhancements
that can be made over and above any issues defined earlier in this
section:
- Target Market - There are some applications delivered by
ASPs that are having more success at adoption than others. ASPs
could enhance their range of applications to include ones with more
market take-up, such as Sales Force Automation.
Technology - Delivery of applications as a service is a
complex undertaking and, over time, the ASPs will become more adept
at doing this, increasing opportunities for economies of scale to
be realised.
Market Understanding - The negative press that has
surrounded the ASP market will continue for some time yet. However,
it is anticipated that eventually the potential customers in the
market will have a more informed appreciation of the industry and
its benefits.
Integration - ASPs offering multiple applications are likely
to provide integration between those applications to encourage
customers to take up more services.
Of course, there will be more ways in which an ASP can improve
their offerings, and other factors that will affect their survival
in the marketplace. However, Butler Group considers the above to be
important elements that will see plenty of development in the
future.
Conclusion
The future of ASP as a software delivery
model is viable and sustainable. The needs of businesses that
spawned the ASP evolution are still valid today and, some could
argue, more critical than ever because of the advances in
technology. Take-up has been slow in Europe because of negative
publicity and a general misunderstanding of the marketplace. Yet
Butler Group is firmly of the opinion that organisations using an
ASP will find it beneficial in terms of cost and availability, and
possibly many other reasons as well.
Who knows which of the huge projections for the value of the ASP
industry will be accurate? Only time will tell. What is important
is that, in general, there is agreement that the industry will
increase and achieve growth through the acquisition of customers
and refinement of the market. The market is set to increase not
only in the US, but also in Europe (and the rest of the world) as
well; it has been suggested that by 2004 Europe could be spending
two-thirds of what the US does on ASP.
On the downside, the market consolidation already evident today is
likely to continue. This time next year a number of the ASPs we
have today will no longer exist. However, there could well be some
new players in the marketplace that have an eye on the market
projections and see an opportunity to build a successful,
profitable organisation. The longer-term survivors from this year
and last are likely to have a stronger brand awareness and be
building the necessary trust among potential customers. It will
therefore be difficult for these new players to compete.
Potential customers are still going to find it difficult to
determine which ASPs are going to stay in business and which will
not. There are a number of options the customer can take, the most
obvious one being 'research' of the potential suppliers. The
marketplace is gaining a greater understanding of ASP and its
potential, therefore, Butler Group believes that this process
should become easier over time.
ASPs are beginning to understand their customers' needs and wants.
It is most definitely the time to take customer comments and
requirements into consideration and deliver these to grow the
market. Without this, the ASPs will be lucky to struggle on and
deliver the success required to achieve the profitability they so
desperately need.
In general, the early-adopter ASPs are likely to achieve the most
success if they survive the turmoil of the consolidation in the
marketplace. This is because their established position in the
market means customers have a sense of trust in these companies;
something ASPs require to obtain the customers to make a turn
towards profitability.