ASPs: A Host of Angels

Application service providers promise plenty: faster project implementation, less energy spent on recruiting and managing staff, and software upgra...
Adam LincolnDecember 1, 2000

Pennies from heaven. Saving graces. A gift from the gods. The celestial metaphors spring forth like streaming video when applied to the emerging technology push known as application service providers (ASPs). Why, an ASP might even be described as the answer to a CFO’s prayers.

What finance manager wouldn’t drool at the prospect of handing responsibility for running the corporate software applications to an external technology expert? Instead of forking out cash for expensive software licenses so that programs may be installed on each employee’s desktop computer, an ASP will deliver those applications over the web on a user-needs basis.

The ASP receives a rental fee for its trouble, while the CFO can budget for regular monthly payments. Staff members gain access to software — which might be anything from back-end accounting systems to leading-edge ecommerce modules — that help them do their jobs.

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In theory, application management becomes less abrasive. Not only does an ASP customer avoid a lot of upfront capital outlay — possibly as much as 80 percent — they acquire by proxy a rich vein of skills for tapping. This should mean faster project implementation times, and less energy spent on recruiting and managing expensive, skilled staff. When a new version of software is released, it is left to the ASP to acquire and deliver the upgrades — a process that end users may not even notice.

Relieved of such onerous tasks, a company is left to concentrate on more fundamental issues. “I believe outsourcing is the solution for everything but your core competencies,” says Jon Beizer, CFO of iAsiaWorks, a Hong Kong and California-based company that runs data-hosting centers in Asia and the US. Beizer would say that; he’s in the outsourcing business, after all. But as technology becomes more and more complex, and skilled professionals become harder to hire and retain, it’s a view shared by a growing number of executives.

Indeed, ASPs sound so good that bullish projections for the market are no surprise. The Gartner Group reckons the global pool will total US$25.3 billion by 2004. But there’s a catch. The US-based research company also predicts 60 percent of ASPs will fail by 2001, victims of bankruptcy, lack of venture capital, mergers, and good old-fashioned competition. Choosing an ASP that will still be around in a few years time is a huge challenge — while attention is heaped on the network security issues that come with handing over application delivery to an outsider, the financial security of the ASP is arguably more perilous.

“Today’s dotcom collapses will pale in comparison to the effect the pending ASP meltdown will have on organizations that use these ASPs,” says Audrey Apfel, vice president and research director at Gartner. “When dotcoms collapse, they implode and have little effect on their customers and other industries. The ASP consolidation will have a domino effect, affecting business systems like ERP and accounting systems for companies that have outsourced these functions to ASPs. Those failures can quickly spread the damage along supply chains.”

Dangerous Liaisons

Choosing an ASP that is worthy of the corporate faith is not easy. The market is cluttered and confusing. A report from US-based Mercer Management Consulting observes: “As currently applied, the ASP label is dangerously imprecise, lumping together an assortment of very diverse businesses, ranging from powerful incumbents to brash startups.”

The protagonists include businesses like iAsiaWorks, which houses, monitors, and maintains computer servers at its own facilities — clients may own or rent capacity by the “rack” — and looks after attendant needs such as bandwidth and security. While it does not explicitly market itself as an ASP, it is a cog in the wheel. Other players include telecoms carriers; startups that offer purpose-built remotely hosted software; traditional software vendors redesigning their products for remote hosting; and systems integrators that are extending their services to the “remote” environment. Interdependence rules the day: In order to compete, companies are beefing up their capabilities through acquisitions and alliances.

The upside, notes Kirk Kramer, vice president of Mercer in Hong Kong, is that some ASPs will mix and match software suppliers to suit a customer’s needs. “This might allow them to select so-called ‘best-of-breed’ solutions and perform integration so that it all works together.” With many Asian companies using technology a generation behind the West, ASPs offer a chance to leapfrog to more advanced systems. Fast-growing companies should find further benefits in terms of flexibility and scalability. “The software can be delivered for ten users, or a hundred, or a thousand,” Kramer notes. “If you’ve just opened an office in another country you can have the software delivered there. It’s an easier way to start up branch offices.”

But while acknowledging that ASPs can help companies overcome the issue of scarce IT talent, Kramer says companies should keep key people on staff. In other words, don’t sack your CIO just yet — high-end capabilities are best left in-house. “It is important that someone understands how all the applications will fit together and how they affect the productivity of the business. I think if you start giving too much of that away you start losing some of the value of an application,” Kramer says.

Indeed, deciding whom to keep and whom to outsource — and how to explain the decision to staff — is tricky. Like any outsourcing decision, the move to use ASPs can turn into an ugly turf war as IT departments fight to protect their territory. One bank in Hong Kong announced its outsourcing plans internally before finalizing the details, which precipitated a bolt for the door that decimated the IT department. Ironically, some who left were still needed under the new regime.

Do It Yourself

Some companies prepare themselves for ASP adoption down the track by developing a server-centric computing model inside the company. In effect, they become their own ASP, running a centralized data center that uses Internet lines to deliver software applications across the organization, irrespective of where staff are located.

That’s what Tesa Tape, a division of German conglomerate Beiersdorf, has done. In January 1999 Tesa Tape consolidated its operations in China, Hong Kong, Malaysia, the Philippines, Korea, Singapore, and Taiwan into one Asia Pacific unit. The company wanted to set up a regional IT hub in Singapore to manage its technology across the region. At the same time, it did not want to throw out existing infrastructure. But the main motivation was to cut its telecommunications bill.

Software called MetaFrame from US-based Citrix Systems provided a way to achieve all these goals. The Citrix software enables companies to run the latest software applications across old equipment. Specifically, data-packed applications can be shunted across low bandwidth networks with relative speed. This enables companies to centralize their IT resources and monitor IT activities at satellite offices. It also means that applications don’t have to be installed on each end user’s desktop computer. As a result, cheaper “thin clients” — computer terminals with less processing power — can be deployed.

Industry figures put the total cost of ownership of a corporate PC (factoring in things like annual maintenance costs) at around US$10,000. Nabeel Youakim, managing director of Citrix in Asia Pacific, says that a thin-client approach can cut this cost by as much as 70 percent. The server-centric, thin-client approach shares another key trait with ASPs: faster rollout of new applications across the organization. Youakim says it typically takes companies three to six months to complete application rollout across 1,000 PCs; in a company with 5,000 PCs it might take two years. In a server-centric scenario, it could take just days. It follows that globally Citrix boasts a following of about 600 ASPs.

Tesa Tape’s group MIS manager, Albert Han, is well aware of the potential benefits and the opportunity for further savings. By making better use of available bandwidth, Tesa Tape will spend S$300,000 on connectivity over the next three years, instead of S$1 million — a 65 percent improvement. And as he ponders a new ERP system, Han says the ASP model is definitely on his radar. “The Citrix system would allow us to move to an ASP configuration very easily,” he says. “It’s definitely an alternative we will consider.”

Nitty Gritty

Han admits to being surprised at how erratic telecommunications can be across the region — and to learn that connections between Singapore and Malaysia were being routed via the United States. Talks with ISPs (Internet service providers) fixed that. But the fact remains that an ASP is only as good as the infrastructure it can use to deliver the applications over the Internet.

Speed of access varies wildly from country to country; some have better broadband systems than others. If bandwidth is inadequate, the delivery of applications from a data center just a few miles away will be slow, impairing the productivity of managers and staff. “You want it to seem just like the application is running on a person’s own desktop PC or terminal,” Mercer’s Kramer says. What’s more, companies must ensure provision for “redundancy” — equivalent network capacity to fall back on if the main lines go down. “A lot of telcos in Asia don’t have the network infrastructure in place to give ASPs and their clients what they need,” Kramer observes.

Then there’s the matter of data security. ASPs go to great lengths to convince potential clients that their corporate information will be safe. Kramer, for one, thinks they can be taken at their word. “I don’t see a major difference between hosting data on your own premises or somebody else’s — somebody can still hack into your network.” Beizer of iAsiaWorks adds that prospective ASP clients should grill vendors on two levels of security: physical and virtual. Anyone entering an iAsiaWorks facility, which is monitored around-the-clock, is escorted. A client can decide whether it wants access to its systems to be subject to password or fingerprint recognition, and the applications themselves are protected by firewalls.

Ultimately, ASP evaluation hinges on a simple question: Will the service be better than what an IT department could deliver on-site? Mercer’s Kramer feels smaller businesses stand to gain the most — the larger the company, the better its chances of keeping applications up and running, and they are also better placed to defray costs across the organization. Nevertheless, some larger companies test the waters by hiring an ASP to deliver just one or two niche applications for use by a small number of specialist staff. Youakim of Citrix says that hype distorts what will, in reality, be a gradual adoption. He says: “I can’t see medium-to-large enterprises replacing all their IT infrastructure over to an ASP — yet. Certainly, some are looking at it as a way to deliver an application.”

In any case, Beizer of iAsiaWorks warns that ASPs and associated outsourcing should not be viewed as just a cost-cutting tactic. He refers to systems availability, or “uptime,” which makes all the difference to customer goodwill towards an ebusiness. “Being a CFO, knowing how we think, a lot of folks go into this line of business because they’re focused on analytics and the cost side of the equation. It’s hard to put a value on the less tangible parts of the business that have a serious cost implication, but you have to try.”

Adam Lincoln is an executive editor of CFO Asia.