One in five small firms plan to use an application service provider in the next year. Lindsay Nicolle asks how SMEs can ensure outsourced services don't decline after they have signed up
Application service provision (ASP) has been hailed as the latest IT saviour for small-to-medium enterprises (SMEs). But with less economic clout than larger companies, how can small users ensure service levels don't decline once they've signed on the dotted line? About one in five SMEs plan one or more ASP services in the next 12 months, according to research by BT's SME division.
These will cover utility-type applications, for example automated virus protection, remote back-up and archiving, online training and remote PC/software fault diagnosis/repair.
The ASP growth factor
Ambitious SMEs looking to farm out bread-and-butter business functions, to concentrate more on business growth and exploit e-commerce, are helping to make the ASP sector the fastest evolving in IT. US research firm IDC predicts that growth of e-business will cause worldwide spending on ASP services to grow at a compound annual rate of 92% over the next four years. Rival firm Dataquest estimates the ASP market worldwide will be worth more than $25bn by 2004.
The use of ASPs could tip the balance of power from big corporations to smaller enterprises, according to Rupert Merson, partner at accountancy firm BDO Stoy Hayward, and specialist in helping growing businesses with organisational development and management issues. He argues businesses don't fail to grow simply because they run out of money, they also run out of management. The use of ASP is the solution.
Merson explains, "As business develops, the earliest change is to professionalise the senior team by adding specialists. ASP has the potential to enable the internal IT specialist to focus on tactical and strategic business issues, allowing the business a better chance of keeping balance [of] competing forces as it wrestles with professionalisation. ASP could prove the biggest favour done to growing businesses in the third industrial revolution."
Choosing an ASP
But to realise this, small businesses need to ensure the ASP firm they choose understands SMEs are not small versions of big businesses. Both sides need to invest in a co-ordinated effort to evaluate functionality, operations, and the legal agreements behind their relationship before it begins. They must know what is expected of each other in detail, and also understand each other's business.
"Basic questions such as who, what, why, when and how need to be answered to ensure the customer gets the service expected," says Craig Pennington, director of ASP PSINet (UK)'s London hosting centre. "A provider cannot work in isolation, but needs to be aware of an SME's forward plans, so it can advise and take steps ensuring the IT system keeps pace with the growth and direction of the business."
Given that applications which fail to meet required service levels can cause considerable and irreparable business damage, (damage that cannot simply be undone by the existence of a service level agreement) SMEs should not accept an "it'll be all right on the night" promise from an ASP, based on an unsubstantiated performance assurance. It must be ensured that the ASP has the ability and the tools to thoroughly test systems from the outset.
Who do you trust?
Performance management software tools, such as those from Simulus, Advanced Datacom Systems, and Precise Software Solutions, are now available to enable ASPs to accurately model and simulate their IT systems. These are covering networks, databases, servers, sub-systems and applications and also run rapid behavioural simulations in a safe, cost-effective, virtual environment.
You should always ask for quantifiable evidence the ASPs will provide continuous availability, maximum scalability and robust performance. However, don't take the ASP's word for it.
"Poachers cannot be gamekeepers. There is an important role for an independent organisation providing a specialised monitoring, measurement and reporting service," warns Andrew Day, managing director of Advanced Datacom Systems.
You would think with so few SMEs and so many ASPs, the customer is in an ideal position: competition and opportunity should lead to the best service at the lowest price. To some extent, this is true. But it is important that the SME understands the nature of what is offered.
Peter Slavid, a business strategy director for services firm ICL, offers comprehensive advice to SMEs looking to make ASP work in the long-term:
Think ahead. Assume the initial contractual terms will be competitive and sensible. Now ask questions about subsequent years. These will test whether your ASP has given any thought to the long-term, and if they understand the services business. Questions worth asking include: How often will software get upgraded? What happens if I don't want an upgrade? What happens if I need an upgrade? How will an upgrade be managed? Will historic data be converted to the new format? What happens at the end of the contract? How do I get data back? And which data in what format?
Assume the worst. You want your ASP to be a company for the long haul. But the ASP sector is volatile. Many companies are losing large sums of money. So, think the un-thinkable, and ask questions accordingly. Ask about ownership, parentage and funding. Ask what happens if the company fails. Who owns what? What is the status of your data and of customised software. Depending on how critical that data is, you may need protection.
Slavid concludes, "The ASP industry has lots to offer, but stable industries are not built on hype, they are built on intelligent mutually beneficial contracts. It should not be your job, as a potential customer, to make sure ASPs are doing their job, [but] at the moment, that's just how it is."
What an SME should ask an ASP
Do you understand our business?
What does hosting mean and what are the benefits?
What do you expect from me?
Do you have any reference customers we can talk to?
What kind of guarantees do you offer that everything will work?
How will you know if there is a problem with our system and how long will it take for you to do something about it?
Do you have in place extra access lines to our site in case of failure?
Can I always get hold of someone that will know my system?
How do you guarantee security? What processes do you have to ensure site and network security?
Will you be able to manage our growth as we get bigger?
Will maintenance work to carried out at the datacentre affect me?
Source: Craig Pennington, director of the London hosting centre, at PSINet (UK)
The law firm which loved ASP
Law firm Martin Kaye specialises in injury claims and property law, a field where great efficiency is needed because profit margins are low.
The company has spent some years developing and improving its IT. With 54 staff accessing a range of applications, the IT systems were feeling the strain. An Exchange server, Internet Explorer, an Outlook package, and the Axxia legal practice management software were running on out-dated and cluttered desktops. The firm wanted to develop an extranet for its conveyance customers, and recruit and support more staff.
"We were introduced to Hub, a new ASP borne out of a local accountancy practice," says Chris Cann, the firm's systems partner. "It shared our professional values and gave sound assurances in security and reliability.
"I was nervous about entrusting our systems to a company whose datacentre is 90 minutes drive in Leicestershire, but after visiting the centre and seeing the security and back-up systems, I felt reassured." Today, a 512K lease line delivers all the legal firm's applications, from Hub's two Unisys ES7000 Enterprise class servers. Martin Kaye's old PCs act as dumb terminals, so no new systems were bought.
"Very little can go wrong at our end," says Cann. "Everything is managed by a team of technicians we couldn't hope to have at our beck and call in-house. The technology is the sort airlines rely on to keep planes in the sky. It is too expensive for us to purchase, but is as mission-critical to us as to an airline."
He adds, "Our data is more secure now than it would be on our inadequate boxes in the office. Once you get over the comfort factor of physically holding something to feel safe, the logic of ASP security and reliability is clear."
As for Hub's long-term commitment to its customer, Martin Kaye's planned extranet is now in development and the company has hired extra staff, equipping them with IT systems with one telephone call.
Cann says, "I reckon we have saved two thirds of my time and half of my office manager's. Of course, there is a cost, but it is a planned expense. I know exactly month to month what I will spend on IT. It is less than what I would have spent in-house."
The shop that hated ASP
Not every SME is impressed with ASPs. Charlotte and Robert Johnston run a barber's shop called The Gentleman's Shop in Hungerford, Berkshire, selling exclusive grooming accessories for men, including a shaving brush for £240.
The couple wanted to try e-commerce, but knew little about computing. They decided to go for the safe and easy option of buying space on a Web-based shopping mall. It was a decision they came to regret.
"It was expensive," says Charlotte Johnston, "with a minimum monthly charge of £50 and a further £15 for every additional 50 items listed. We could see ourselves, while tied to the site, having to spending £1,500 - £2,000 a year and to start from scratch if we moved. What's more, prices could go up at any time and we were getting more locked in."
She adds, "We found we couldn't update the site as we wanted. We had to use the mall company and they weren't responsive. It all came to a head when the programmer went on holiday in December. Our site disappeared on Christmas Day and didn't return until the third week in January, well into what was a good selling period."
Robert Johnston contacted a local ISP, Newbury-based Alto-Hiway, allied to e-commerce software specialist Actinic. "We knew of the Actinic Catalogue software", he explains, "but had earlier felt too inexperienced to use it. However, in desperation, we rang Hiway on New Year's Eve and its managing director personally dropped a copy to us that evening and helped us to get started."
Charlotte Johnston designed and developed the shop site, www.gentlemans-shop.co.uk, using a digital camera with Frontpage Express, Adobe Photo Deluxe, and Actinic Catalogue. The product pages, listing more than 400 items, are automatically indexed by search engines because Catalogue uses HTML-generated pages.
The Johnstons say Actinic Catalogue paid for itself in the first fortnight. Within months, the site accounted for about 20% of turnover. The couple anticipate online sales will rise to at least 50% as marketing takes effect. Eventually, the physical shop could become a showcase, with all sales via the Internet.
The pros and cons of using an ASP
- Access to skills and support unavailable in-house
- Rapid implementation
- Reduced cost of entry
- Possible reduction of staff in non-core areas of the business
- Gains in time-to-market for products and services
- An additional view on seemingly intractable problems and possible solutions from an external viewpoint
- Can decrease initial cash outflow if business is under-capitalised
- Can provide on-demand access to best of breed high-cost, infrequently required software
- Access to technical support
- Time savings, eg you can equip new customers and end-users in minutes
- Money savings from a shared service provider
- Solves the IT skills shortage
- The ability to focus on core competence rather than running internal systems
- Provides improved availability and quality of service, helping the business grow
- A new unknown relationship
- Higher overall costs
- Difficulty in getting business, IT, and legal managers to view the relationship from a unified perspective
- Canned functionality may not be exactly what you need
- Forced upgrades
- Security concerns
- Potentially a significant business risk
- Knowledge of a core business function is not held internally
- You have to pay more for something you don't own
- Can be limiting where requirements are complex eg in areas like enterprise application integration
- Can tie you in to a fixed term, eg a two-year contract
- The price of the get-out clause to revert back in-house can be high.