ASP savings myth crumbles

Renting software is not for everyone, but if you want a standalone application with no capital costs - and fast - ASP might be...

Renting software is not for everyone, but if you want a standalone application with no capital costs - and fast - ASP might be the answer, says Nick Booth

As bandwidth becomes a commodity, so many companies believe it will be cheaper to rent their software from specialist application service providers (ASPs) who will be able to pass on huge economies of scale. But while it's too early to say whether ASPs will always support an application more professionally than if it were managed in-house, the picture emerging in the US (where the ASP market is some 12 months ahead of ours) is that the cost arguments are redundant.

"An ASP's price model isn't cheap enough to offer a cost saving," says David Caruso, VP of enterprise application strategy at US analyst AMR Research. "In fact, nothing could be further from the truth. You can even pay a premium of 30% on the cost of employing those skills in-house. Then again, you may be getting better expertise."

If an application service is a product, then it will be profitable to the supplier only if it is something that can be mass-produced and sold without too much configuration. And that, says Caruso, pretty much destroys any argument about IT being a tool that gives companies a competitive edge.

It also means ASPs won't be willing to get bogged down in integration issues. Reconfiguring a system that can talk to legacy systems is a time-consuming task that would eat into an ASP's profits. "All the research we've done indicates that integration is the major cost. And that's the bit the IT director usually gets lumbered with," says Caruso.

So using an ASP is not necessarily cheaper, it nullifies your competitive edge (that's if you believe IT systems do give a competitive edge), and it still involves you in all the unpleasant integration work.

Which is why the use of ASPs should be limited to certain environments, according to analyst Katy Ring, senior analyst at Ovum Research. Massive standalone applications, such as the PeopleSoft human resources system, or ERP systems like SAP lend themselves best to the ASP model. These are often the really painful projects that sensible IT directors want to dissociate themselves from, at least until they've been successfully implemented.

E-business is another obvious application. "In the short term it's better to get up and running quickly to push your profile out there and get some early experience," says Ring. "An ASP can do that better than you can. Two years down the line, though, you will have to integrate it. And that will be painful."

New businesses will also benefit from using an ASP. And since they are making a completely fresh start, they can even take advantage of being able to outsource the management of their desktop applications.

Take consultancy CHPD (the Centre for High Performance Development). A 50-strong organisation with a turnover of $15m, CHPD has no IT department and, if its first tentative use of an ASP is successful, may never bother to have one. CHPD contracted Esoft Global to run all its business applications, from its desktop Microsoft Office packages to a customer relationship management system and the Platinum Era accounting system.

"The whole thing was pretty painless and quick," says Maggie Deere, new business development director for CHPD. "I've worked in companies that spent four years failing to get their ERP systems running, so the time we've saved here has been invaluable. At a conservative estimate I'd say it's a lot cheaper too, because our consultants are spread across the globe and we don't need to hire IT experts for 24-hour cover. I'd say it's 25% cheaper this way."

CHPD, though, is a rare breed, being perfectly suited to the ASP model. It's notable that its ASP, Esoft Global, is project-managed by the finance director and has no IT staff at all. Is this an early indication of the threat presented by the ASP market to an IT manager or director's career prospects? Who needs an IT director when you can get an agency to do the whole business quicker and more efficiently?

But according to Peter Slavid, business strategy manager at ICL and a veteran of the IT industry, ASPs offer no threat to IT directors. In fact, you could argue the only time IT gives you a competitive edge is when you have a system up and running before everyone else manages to catch up. This is where an ASP's speed at getting a system up and running is a big advantage.

Slavid has seen it all before with outsourcing contracts and the issues have not changed. "Managing the company's ASPs will become a full-time job in itself," he says. "Especially if you decide on multiple suppliers. The real minefield lies in the managing of contracts."

Application service provision has all the pitfalls you'd expect in the early stages of a new business model. Just as a lot of companies found it difficult to choose the right Internet service provider, and didn't know what to demand from a service level agreement, so a lot of ASP customers are going to find themselves unhappy with their service and powerless to do anything about it. It will also be a lot more painful than it was if you chose, for example, the wrong Internet service provider.

"The biggest problem come when contracts are terminated," says Slavid. "How does the customer get their data back? What format will it be in? How much of it will they get back - the historical data or only the most current versions? What provision will there be for managing the transition of, say, an e-mail system or an e-commerce site the customer no longer wants hosted? This is all an eventuality the IT manager will have to legislate for."

The best way to avoid the pain of having to change ASPs is to make a good long-term choice in the first place. This is not an easy task when there are so few proven service providers, but there's plenty of choice of suppliers, because everyone from BT to your local reseller is re-inventing themselves as an ASP and pitching for your business.

At the moment, though, there's a lot more in application service provision for suppliers than for their customers. Every hardware supplier, from manufacturer to reseller, is being hit by decreasing margins. Services will be a lot more profitable for them. Which is why so much marketing muscle is being employed to bend users' arms. To date, IT managers have been less enthusiastic.

And that's not the only imbalance between supply and demand. Suppliers are better suited to selling to big corporations. A large organisation can afford to hire an entire server to host its applications, while smaller companies will need to share disk space and processing power. With security a major issue in how a business can use an ASP, this doesn't inspire SMEs to use the service.

However, it is SMEs rather than big companies that are the most obvious ASP customers. "ASP suppliers are doing themselves no favours by pretending they are good for big corporations," says Slavid. "They will already have done most of the work anyway and any new system, unless it's completely standalone, will need to be brought into line with the existing ones." An ASP will be an enormous boon for any company needing an IT system that can run in isolation. If your company is a new one happy to outsource IT altogether, even better. The advantages in support and speed to market are immeasurable. The biggest issues will be your choice of supplier, and the wording on your contract.

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