Outsourcing the Geek Stuff: But Can ASPs Deliver the Goods?

Perhaps the biggest question on the lips of ASP champions in 2002 is this: why aren’t more organisations using their services? At face value, the benefits of using an ASP seem obvious. After all, what business isn’t interested in service that claims to deliver best-of-breed software applications for low capital investment whilst simultaneously reducing the cost of IT upgrades?

The other business benefits of using an ASP include not having to employ specialised IT people or worry about IT infrastructure, investment or management. Simply hand part or all of that to the ASP, which then becomes ready-made, (hopefully) highly skilled IT or business process department for hire.

Still little hazy on how it all works? Here’s simple overview: Your information technology or business services are managed remotely by an ASP using tele-communications link and internet technologies – those that use the internet protocol (IP). For low-risk applications and services, the communications link can simply be the public internet and browser. However, for business critical applications and data-intensive services, it is more likely to be monitored network that uses fast leased telecommunications line. Naturally, you pay more for this type of link. Those are the ASP ‘pros’.

However, while an ASP solution looks good in theory, there’s still reason for caution. Outsourcing to this extent isn’t for everyone and ASP ‘cons’ include the probability that you won’t understand or learn what you need to know about your own business data; ASP costs may outweigh the business benefit; the ASP may not survive; and some ASPs have data security issues.

In this article, we take close look at the global and local state of the ASP industry and consider how you can tell if an ASP solution is right for you. But first, new and clear definitions of ASP industry terms are called for.

Understanding the industry
Although best known as the “ASP industry”, the acronym – which stands for “application services provider” is misleading. ‘ASPs’ are now more correctly xSPs – with the x representing the many different types of outsourced services now on offer to businesses and even consumers. For example, some xSPs are business services providers (BSPs) which technology research firm IDC identifies as providers that “go beyond application access and take on the support and/or execution of business process”.

Examples of BSPs offering services include bookkeeping, payment processes, money management, advertising design and development, marketing campaign execution, analysis of client data, recommendations to improve business outcomes, and carrier selection and load tendering. Other common xSPs are web services providers (WSPs) which manage and host intranet, extranet and other e-business initiatives (including e-commerce enabled or information only websites); and storage services providers (SSPs) which own and manage storage assets for customers.

The traditional concept of the ASP – as provider that rents or hosts software applications – is also still relevant. The ASP can provide email, fax, payroll and customer-service solutions; or may take care of daily backups, upgrades to hardware, software and networks, and maintain internet and network security.

The future for ASPs
The ASP industry seems to be maturing globally. But demand could be better. IDC says that since the dotcom ‘crash’ businesses have been deferring their investments in e-business infrastructure. This has, understandably, affected the ASP industry, although it has not struck the ‘death blow’ some were expecting.
Instead, IDC predicts that ASP market revenue will grow from $986 million in 2000 to $23.8 billion by 2005 – compound annual growth rate of 89 percent. It reports that the global web-hosting market grew by more than 25 percent from 2000 to 2001. This is predicted to accelerate this year, eventually reaching US$20.8 billion (NZ$46 billion) by 2006.

IDC attributes this growth to desire by companies to streamline their internal business processes and open new channels for customer service, delivery, distribution, and procurement. According to IDC, the public sector is more attuned to ASPs, followed by distribution, finance, high-tech and manufacturing. And boom in demand for BSP services is predicted over the next five years, with spending in that area reaching $8 billion by 2006.

ASPs are gearing up to meet these markets. In 2002 survey of 60 ASPs in 13 Asia-Pacific countries, IDC found that 65 percent are partnered with data centres, compared with 25 percent, which own their own data centres. The rest use data centre partners combined with their own facilities. And 77 percent of ASPs are targeting specific industries. Of these, retail, discrete manufacturing and financial services are considered the most viable.

The business mindset
New Zealand’s leading ASPs report that larger organisations are the best educated about their services, but conversely they tend to employ their own IT departments and so may not need ASP services. Small businesses often can’t afford ASP charges. So the “sweet spot” for local ASPs is the small-to-medium sized business that doesn’t have the in-house skill to manage its own IT and business processes, but can afford to outsource them. But are these businesses really interested in ASP services?

According to survey by PMP Research (involving 1983 users from businesses in Australia, Belgium, Canada, Holland, Hong Kong, Italy, Mexico, Sweden, the UK and the US) only eight percent of the survey’s respondents said they were currently purchasing or renting applications from an ASP (although slightly more than 23 percent said that they would like to). PMP attributes the present low adoption rate to lack of education and customer confidence.

Of the companies that do use an ASP, the survey reveals that accounting applications are the most commonly outsourced, followed by e-commerce, customer relationship management software and, office productivity suites like word processing, spreadsheet and email applications.

According to international research group Gartner and IDC, some of the common barriers to ASP adoption in the Asia-Pacific region include poor infrastructure, lack of end-user awareness, cuts in IT budgets and continuing security issues. And while the “security nerves” of potential ASP customers had shown signs of settling this year, another IDC survey of 50 online ASP services stirred them up again. The survey found that about 25 percent of the ASPs surveyed were operating with sub-standard security, including lack of user authentication, virus protection, network security, and firewall services.

IDC research analyst Jessica Goepfert told the weekly NZ InfoTech that integral elements of security plan were necessary for organisations to be considered serious players in the ASP market. “While most ASPs have made adequate provision for security, it is unacceptable that some still offer applications in an unprotected environment,” she said. Goepfert then went on to say that IDC has witnessed announcements from leading ASPs (our emphasis) that demonstrate commitment to providing state-of-the-art security services. This suggests that the 25 percent of surveyed ASPs that were found to have substandard security were probably smaller and not as well funded as ASPs backed by significant parent operations.

Home-grown interest
There seems to be tentative support for ASP services in New Zealand. Aaron Kumove, managing director of e-business consultancy Horizon Consulting, says that while the ASP model has yet to “take off” locally, if customer trepidation can be overcome and cost benefits realised, the future of the industry should be secure. “This is country packed with small businesses that can’t afford big software packages,” says Kumove.
Tom Donaldson, partner with business advisers Deloitte, agrees. He says that while the cla

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