If you don't build your idea into an Internet business this week, someone else will have done it. With e-businesses springing up by the hour, speed to market has never been more crucial. Small wonder that many choose to outsource the building of their systems. Outsourcing their management is also becoming increasingly tempting.
"E-business is the one application that really makes sense for the new generation of application service providers," says analyst Katy Ring, author of Ovum Research's report on application service provision. "The client gets a business system built in a fraction of the time it would take to develop it from scratch and the provider makes money by selling a generic system they've built over and over again which doesn't need too much configuring."
Therein lie the inherent strengths and weaknesses of outsourcing creation of an e-business.
Though the members of the new ASP consortium would not describe it as such, this latest type of service is arguably outsourcing and, going further back, computer bureau services revisited. The ASP model is already well advanced in America and furious growth is predicted in Europe in the next few years.
European companies will spend an estimated $14 million on this new service in1999accordingto Durlacher Research but will grow 700% by the end of2000,with $100millionbeing invested in it. From that, Durlacher predicts a $1.5 billion market by the end of 2004.
It is attractive for an e-business start-up to let an ASP manage its affairs. Initiatives like the Sun/Oracle business incubator programme for dotcom startups, or BT's partnership with Microsoft, show suppliers are resigned to some sort of connected economy. But what sort of pedigree do these huge companies have in dealing with the type of small company that launches into e-business. Very little, if their records are examined.
Nevertheless, for a new e-business, where time is at an even higher premium than bandwidth, the convenience of using an ASP outweighs any doubts about whether it's better to establish in-house control of IT. Building a stock inventory and managing the Web interface with the new distribution system can take weeks, if not months, always assuming you can find the staff with the relevant experience. An ASP can have a system up-and-running within days - which makes all the difference in a market that changes by the day. "In the short term, to establish a profile quickly, you're better off going with an ASP," says Ring. The problems will come later, however, when integration with back-office systems becomes a more pressing issue.
For a start-up e-business, this won't be an issue, since the entire infrastructure will be built around Internet applications. Any company that's already involved in trading in a particular market, however, will have some sort of back-office system that needs to be integrated. Contracting out to an ASP may solve your immediate problem of getting to market, but within a couple of years there will be a stage at which the new system will have to be integrated with the old.
The need for integration is the key to anyone doing business over the Internet, says Chris Sheffield, managing director of Eunite, which specialises in establishing Web presences for businesses. "If a company doesn't have a legacy to integrate, it means they're probably launching into a market they've never operated in. People are setting up electronic shops, for example, and taking on the established retail players who've got decades of experience in that business. There's a lot more to retail than building a better office application," says Sheffield.
Web-enabling an existing retail business, with its supply chain systems, retail outlets and sales teams, by contracting a third party to run the Web store, is like bolting wings onto a car and calling it a plane, says Sheffield. Better to get the painful business of integration done first, he advises. It may take time, but once completed, the business will be ideally placed to mop up the new generation of online shoppers who will rapidly find that the choice of online stores decreases. "There'll be a lot of fallout this year," he predicts. "A lot of these new e-businesses are going to come unstuck."
It's dangerous enough joining the e-commerce gold rush, with investors pitching headlong into markets with no experience, but many will have to be careful they haven't bought a technology supply with even less vertical market knowledge. "You have to choose your ASP very carefully because everyone's jumping into this market," warns Tim Foxlow, UK MD of TDS, a German enterprise resource planning integrator that is moving in on the e-business end of ASP. "Many of the consultants have very little vertical market knowledge or even project management skills." The key to finding a good ASP, he says, is to insist on seeing reference sites and demand proof of the numbers of users being supported.
A problem with a lot of ASPs is they don't want to do the integration for their clients, says David Caruso, VP of enterprise application strategy with US analyst AMR Research. Integration is the tricky part of service provision, and eats away at the profits. But this is the one part of the deal that customers are keenest on. "Usually it's the IT director who takes that responsibility in an SME," says Caruso, "but that defeats the whole object of the exercise."
According to Caruso, even the price model of an ASP contract isn't cheap enough to savings. "Save money with an ASP? Nothing is further from the truth. ASPs in the US have had to change their message because the stats don't back this up," says Caruso. What they do give the start-up e-business, however, is flexibility and access to skills that are in short supply. The premium for this can be as much as 20% to 30% of the price of hiring your own staff, he estimates. This should be weighed against the premium a business would pay by delaying its move into a market that gets more competitive by the day.
Security is another issue that will trouble the outsourced dotcom. The emotional component of this is not to be overlooked, says Caruso. "Will people be happy that their customer lists and their designs for new projects are sharing server space on someone else's system?," he asks. They may believe the logic of encryption and firewalls, but their gut feeling may persuade them otherwise.
For an ASP to be profitable, however, it needs one generic application for many customers. Once they are in the business of tailoring and customising, the expense mounts up and profitability is lost. But doesn't this one-size-fits-all approach to business-critical applications fly in the face of every marketing message suppliers have issued for decades? And what could be more business critical than an ecommerce system to an e-business? If IT is indeed the key to competitive advantage, what use is a system that's exactly the same as the competitors?
Britain often lags behind the US in technology adoption but there are reasons in the case of the ASP market. For ASP to work you need a connected environment in which bandwidth is a commodity and the UK has lagged behind the US in broadband access
For the new e-business the one unquestionable short-term advantage of contracting an ASP to build and manage the application is the time to market. Costs are open to question. There will be no shortage of companies willing to provide application services, but those with a good pedigree will be difficult to identify. Choosing an ASP could prove as perilous as building a system yourself and the short-term advantages could be undone in the long run as the business expands.
CASE STUDY - How TDS manages Hot's e-commerce
HOT was Germany's first shopping channel. Broadcasting live 16 hours a day, its operators take orders by telephone and the goods are sent directly to the customer's home within a few days. As well as using interactive TV, HOT sells over the Internet. With up to 100,000 hits per day, this requires a powerful Web server. When it launched it was impossible to predict its potential. Now it has a customer base of one million users and at peak times it takes more than 10,000 orders a day.
"Operators need to locate products and addresses in a matter of seconds, and the range of goods on offer changes by the minute," explains Pascal Radons, IT Manager at HOT. To be able to handle this volume of calls demands high system availability and short response times. "The demands made on us were too unpredictable and the deadlines too short, so operation of the system was outsourced," he says.
The infrastructure would have been far too expensive, says Radons, as would day-to-day operation and the resulting wage bill. Application service provider TDS was appointed to run its operations, installing PC workstations on site and hosting its e-commerce and back-end systems.
TDS operates this management information system - an Oracle-based data warehousing package directly linked to SAP R/3 - from its Neckarsulm computer centre. The centre is linked via a 2mbps leased line that can cope with the large volumes of data generated.
The R/3 system is used to check stock availability in real time at the three HOT call centres and for customer address and credit checks. The goods are warehoused by an external service provider and delivered via the post office, both of whom are linked directly into the R/3 system, which also embraces the accounts, operations and purchasing departments.
The servers used for HOT are hosted at the TDS computer centre. The three enterprise-class Sun machines each have four processors and 3Gbytes of Ram. The database currently takes up 210Gbytes, and the volume of stored data increases by around 3Gbytes every week. The data is stored on a Symmetrix 3430 sub-system from EMC, providing a gross storage capacity of 1.78Tbytes and is fully mirrored via a Level 1 Raid array. This gives a net storage capacity of 890Gbytes and reserves for further growth.
"The key to this is the flexibility it offers us," says Radons. "Nobody could have predicted the growth of business over the Internet, and we haven't had to gamble our resources trying to cater for it."
Cost comparison - DIY Versus ASP
A single-site bespoke SAP R/3 project for 50 end-users covering finance, logistics and HR functionality. A 50-user company would typically equate to a medium-sized enterprise with a turnover between £100m-£150m. Such a project would normally take six months and require four external consultants/contractors. The analysis does not include the soce of in-house staff or their training, managed service costs other than operational manpower, or disaster recovery.
Cost of doing project in-house
Annual operating costs
Cost using ASP At £299 per user the cost equates to £538,000 over 36 months, a saving of £387,000. No up-front costs. Implementation time is reduced to 3 months. Most ASP's will normally offer finance over the contract life-time. Thus an element of the monthly rental charge will include interest but this is small in comparison to the overall cost savings.
50 seats for SAP finance, logistics and HR