Balancing the books

Suppliers will tell you that taking the ASP route is cheaper, but there may be hidden costs. Computer Weekly finds out how to...

Suppliers will tell you that taking the ASP route is cheaper, but there may be hidden costs. Computer Weekly finds out how to assess whether an ASP model is good for your wallet

A backlash against the application service provider (ASP) market is in full swing. In spite of all the hype, adoption of the one-to-many application rental model has been relatively slow.

Nevertheless, in the current harsh economic climate companies are looking for ways to save money and ASPs believe that subscription-based software rental is a way to do it. IT managers have to evaluate suppliers' claims closely if they are to produce a cost savings analysis that will convince the board that it is worthwhile.

Bill Trail is director of sales in the ASPen Managed Services division of Progress Software, a company selling back-end software designed to help ASPs build their applications. He says it is easy for potential customers to analyse return on investment for the ASP model. Simply total the original cost of the licence, along with data migration to the new application, and support costs, which usually represent an additional 18-19% charge on top of the basic software license, he advises. The total cost of ownership for each PC that could be saved by switching to an ASP environment is about $1,000 (£701), in his estimation. This figure is cut down from a Gartner Group estimate of roughly $2,500 (£1,750), which includes costs for things like hardware support, which would also exist under an ASP model.

"The standard rule of practice is that for every application we bring in-house, we have half an IT person to support it," says Trail. "A fully trained IT person costs money." You can easily put these costs together and come up with a figure to compare with an ASP's charges, which are generally very simple and structured on a per-seat, per-month basis, he says.

Not so, argues Mary Hope, senior analyst at Ovum. She says that many IT experts don't have a clue about the total cost of ownership for their in-house software. If you tell them how much they are paying per seat, they are often so stunned that it's impossible to speak to them intelligently about adopting the ASP approach afterwards. If you are unsure about your total cost of ownership, then putting together a realistic return on investment analysis for the finance director will be difficult.

Nevertheless, some things can be said with a degree of certainty about the investment necessary for an ASP contract, says Hope. For example, the concept of minimal commitment is valuable when considering your overall expenditure on such a service. With off-the-shelf, purchased software, your initial outlay can be huge, risking a significant loss if the software turns out not to be satisfactory for your needs. On the other hand, many new-generation application service providers, unlike their predecessors whose core business was in shrink-wrapped software, are offering software services currently, rather than treating the ASP market as simply another revenue stream. They are willing to be more flexible with payment mechanisms, and in many cases offer a free trial for a limited number of end-users so that they can test the system out. This minimises your initial investment - and therefore your risk, and your overall project cost.

On the other hand, says Trail, ASPs can reasonably charge extra for their services. "You can justify a 30% to 50% surcharge over what the cost of ownership would be," he says, arguing that much like leasing a car, the convenience of owning an application without any installation problems, maintenance or upgrade issues represents an added value that customers should pay for. "The predictability is the biggest part of it," he says.

So, minimising your initial outlay by paying for applications on a subscription basis could cost you more in the long run if your ASP decides to impose a premium for the convenience of leasing rather than buying the software. There could be other potential financial disadvantages, too, depending on the financial advantages that the application service provider uses.

Mary Hope says that some ASPs charge for a particular application on a per-seat basis, on the understanding that only certain people in a particular department will want to use it. But for some organisations, it might be necessary to deploy an application across all staff, while only expecting them to use it a very small percentage of the time. Ovum, for example, has 300 employees, and unlike other companies, wants all of them to have access to the sales application that it uses. If an ASP is charging £50 per seat, per month, based on the assumption that users will be accessing the application heavily, then the ASP model suddenly becomes an expensive option, even in the short term.

According to Euan Davis, senior analyst European services at IDC, the world might be moving away from the existing notion of the ASP as a one-to-many application service provider anyway, and moving instead to the concept of an infrastructure provider (offering datacentre services), with a separate private application hosting offering on top. This would enable them to customise the application more effectively, while retaining control over data access and middleware infrastructure, for example.

While this seems like a more mature approach, it will inevitably muddy the waters with regard to investment models. Customising applications involves custom investment analyses, based on things like consultancy time and the extent of the modifications being made, not to mention the effect that they may have on other applications in your IT stable. Consequently, while the ASP pricing model has been simple thus far, a more mature industry will require more sophisticated investment studies.

At the end of the day, any investment in an ASP service is likely to simplify your budgetary spreadsheet no end, but you will pay for the simplification by sacrificing some control over your subscription payment model, and more importantly, some software customisation options.

To work out how much you will save by moving to an ASP environment you will need to evaluate how much investment in software licences you can avoid, and to analyse your support costs, and capital hardware expenditure.

One thing that is likely to remain the same, if not increase, is your investment in network infrastructure, which must be robust enough to handle the fast, reliable communications needed with an ASP.

Look out for the IDC return on investment analysis report for the ISP market, which will be appearing soon.

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This was last published in September 2001

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