Don't worry about ASP confusion

It appears that IT directors are confused about the role of application service providers (ASPs)

Ian Mitchell

City Briefing

It appears that IT directors are confused about the role of application service providers (ASPs) (Corporate users query ASPs' role, 6 July), what they offer and whether it represents a new business model or simply a return to the old bureau services offered during the 1960s.

I am not surprised they are confused. I have gone through the business plans of numerous ASPs, and so far their efforts have been almost exclusively concentrated on building their proposition rather than selling into the market.

Despite optimistic market projections from industry analysts, there are still very few deals signed in the UK, and many ASPs have not even put a sales operation in place. So it is no surprise that IT directors are unsure about the benefits of ASPs.

Crucial to gaining a proper understanding of how the market will evolve is understanding the differences between an ASP and a company using the ASP model.

The former are pure plays, attacking one segment of the SME market and using messaging as an entry point. The expectation is that as SMEs become comfortable with the concept they will allow more of their IT to be outsourced to ASPs.

An example of a company of this type is Netstore, the UK's only publicly quoted pure-play ASP. It is having to innovate to deliver on its business model, for example, in setting up the remote administration of systems, but it is creating new recurring revenue streams.

However, because the contracts it wins are small in value (though numerous) it receives little publicity for them.

Companies using the ASP model, however, are essentially using telecoms technology as a channel to market that is attractive both in terms of cost and levels of service. An example is Microgen, a business-to-business billing services provider.

Microgen has moved from print and post to distributing summary bills via e-mail, with a link to detailed information held in its database. This is an example of an application being delivered by the ASP model. But, while it is being used by many large organisations, it will not lead Microgen to take over the running of its customers' IT systems.

When you appreciate the differences between ASPs and companies that use the ASPmodel, it is easier to answer some of the more common questions.

For instance, a single supplier is best for SMEs but is not appropriate for large organisations where needs are complex and systems are crucial to competitive edge. Upgrades to software applications will be performed free of charge (although there may be a price differential to reflect increased functionality).

With the widespread roll-out of DSL in the next few years, performance (which is already OK for low-grade applications) will improve dramatically and cease to be an issue, opening up the market for mission-critical real-time systems.

So while ASPs are unlikely to take over the running of large companies' IT systems for many years, selective outsourcing of applications, delivered via an ASP model, is likely to have a more rapid take-up. Some of these will be applications that are already available for sale but are being adapted for ASP delivery (eg Cedar Financials) and others will be applications developed specifically to take advantage of the ASP model (such as Microgen Axess).

Users will have to look carefully at contracts, but there is nothing new in that. The best advice for now is not to close your mind to the concept or regard it as either hype or a threat, but address the opportunities as they emerge on their own merits. And don't be worried if you feel you don't know enough about ASPs - when they get their offerings right, companies will be falling over themselves to educate you for free.

Ian Mitchell is an ITanalyst with stockbroker Beeson Gregory. His opinions should not be construed as investment advice.

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