Over the last year, the buzz about application service providers (ASPs) has hit high gear. Much excited comment has been produced about the wonders and opportunities of this technological revolution, but little has been reported about the benefits to the customer. And with good reason. In Australia, there are only a handful of reference sites, and most of these are small and have only come on stream recently.
In September, the Canberra-based Department of Finance and Administration came online with new financials, and in the process moved the application out of the organisation and into the hands of the supplier, QSP, to host, manage, maintain and support. By doing this, CFO Alistair Cochrane expects to save as much as 30 per cent (or "a few hundred thousand dollars a year") on the cost of maintaining an equivalent in-house arrangement over the five-year contract period.
But is this ASP?
QSP certainly lists the contract under its ASP business unit. However, other suppliers have been offering similar services for some time. Unisys, for example, has been hosting the SAP, Oracle and PeopleSoft applications of its clients for 18 months. While it intends providing an Internet-based ASP service, the company admits that what it is currently providing could easily be labelled a bureau service -- although it says that the definitions are hazy.
To be fair, QSP does offer a range of categories which, it says, fall under the broader ASP umbrella:
¥ Application outsourcing -- the operational management of an application incorporating the server, the operational systems, database and the application software. This service is provided on top of the licence and professional service fees for the application; it is suitable for environments that require significant customisation, a large number of interfaces to other core systems, and is more appropriate to larger system users. This is the service provided to the Department of Finance.
¥ Application rental -- the "pure" ASP model, that is the 24x7 provision of an application across the Web where all costs of this provision are incorporated into a periodic rental charge.
¥ Application support -- the ongoing (functional) support for an application where the supplier could offer, for a periodic fee, the entire (people-based) support infrastructure for an application: that is, internal help desks, report writing, systems (functional) administration.
Most of those currently pushing the ASP bandwagon would plump for the second "pure ASP" definition as being the one, true ASP. But even so, what makes an ASP so apparently attractive ? And why the rush to hop on the bandwagon? Is the beneficiary of all this haste the client or the supplier?
Forrester Research estimates that the ASP industry will be worth $US6 billion by 2001. And judging by the numbers of suppliers joining the international ASP Industry Consortium -- launched in May and 100 members by August, almost 200 in October -- you'd think it was the hottest thing since Bill Gates was born. ASP is pitched primarily at small- and medium-sized businesses, many of which don't have the expertise or resources to support an in-house IT infrastructure. For these types of clients, the promoters say that ASP is a godsend.
But not without dissent. Software supplier Navision's Australian managing director, Garth Laird, is one who is less than convinced of the benefits. "Navision is considering ASP, because you'd be unwise not to; but we don't know if it's a good delivery mechanism or not -- I don't believe anybody does. I think it's something that's come to us by default rather than as an engineered approach over a period of time."
The Pioneers
The longest serving of the small fraternity of pure ASP clients is probably marketing consultants RH+ (that's "RH positive" as in the blood type). Managing director John Holland says his company's move to ASP late in 1998 was brought about by a combination of an office move and the age of his gear.
Moving from North Sydney to south-of-the-Harbour Bridge Ultimo two years ago meant that he no longer had access to the pay-as-you-go IT support he had enjoyed before. At the same time, "I recognised the age of my computers, the limitations that put on the software we could run on them," Holland says. "I wanted to look for something that could give me a bit of a lead, an advantage, make life easier for my team, and look at what some of the bigger guys were doing. There's no reason why a small organisation shouldn't have access to the same technology as a large organisation." He admits that the term "pioneer" doesn't sound like something you would apply to him, but he adds that "it just made sense".
Pioneering might also not be a word you would apply to his ASP profile -- Holland's ambitions did not push the applications horizon very far. The company now accesses MS Office, Internet Explorer and Outlook Exchange running on an NT server at BDO SynergyIT's premises, via a dedicated ISDN line, running on Citrix MetaFrame. Citrix is one of the leaders of the ASP industry, having been instrumental in setting up the consortium. Holland can also access the applications over standard modem connection from home.
Some have wondered why anyone would bother ASP-ing such basic applications as Office and Explorer. But to Holland, it's proved a godsend. He estimates that he is financially better off "once you start factoring in things like the training and level of support that we would actually need . . . I have an IT department built into the cost." He adds that scalability and the help desk service, which he considers lessens the need for staff training, are added benefits. Rather than stand-alone PCs, he now has an integrated suite of applications that have helped him standardise his outputs. He pays one monthly fee on a per-user basis, which covers both software and hardware.
A more recent convert to ASP, coming on-stream in October, is GME International, a specialist HR consultancy with offices in Sydney and Melbourne. With 15 staff divided between the two offices, the company had a problem with lack of integration, forcing duplication of systems and access. Faced with the prospect of new infrastructure, with either in-house or contracted support, the company went for a managed IT solution operated, appropriately, by Managed IT, a new joint venture of applications channel Professional Advantage and network company Com Tech Communications.
GME now runs its full business systems on server-based computing using thin-client devices on the desktop and a 256K ISDN connection to Managed IT's data centre, also using Citrix MetaFrame. Managed IT is hosting a wide range of applications on GME's behalf, including:
¥ Great Plains Dynamics on MS SQL Server¥ MS Outlook with Internet e-mail, MS Office and MS Frontpage¥ Web browsing using MS IE5¥ four line of business recruitment applications including document scanning¥ and a corporate Web site.
"Primarily what it meant to us," director Bruce Ebert says, "was that we could hand over those [IT] issues to experts to manage for us. And we could focus on what's important to us, which is making our business successful. It worked out fantastic for us, because it meant we didn't have to go out and build infrastructure ourselves. That's a saving for us in cost and time.
"What we're paying is equivalent to having to go out and source the software and hardware -- there's no cost disadvantage. For small organisations like us, it's very cost-effective." Plus there is the cash flow advantage of a known monthly payment.
Unicef might sound like a large ASP client, but in Australia the national committee has about 14 employees, not all of them full-time, divided between its two offices in Sydney and Adelaide. Its annual revenue is made up of $8 million from the federal government, and $5 million from the private sector, most of which goes to fund aid projects around the world.
For an organisation that makes two-fifths of its private income selling Christmas cards (the rest comes from various corporate schemes and individual donations), Unicef needs to run a tight ship indeed. Because it is a highly visible charity, "we need strict governance and accountability, which costs money", says CEO Gaye Phillips. "But we also need to return every' cent we get to the purpose for which it was raised. Thus we need to minimise costs. There's constant pressure to tighten margins."
Fortunately, Phillips has a dedicated, passionate staff; but she admits that even they feel the strain. To both keep up the enthusiasm and, more pragmatically, to make the best of limited resources, she encourages innovation. "Charities can be very innovative; I do some innovative things here with HR that [commercial organisations] aren't brave enough to try. So ASP wasn't a great leap for me. It's exciting," she says.
Innovative or not, Unicef has to take what it can get. Apart from volunteer staff, it has also used donated software that might not be the most suitable for the organisation. One package which looked after the donor list was recommended and supplied by Unicef headquarters. A slight problem was that it wasn't fully supported in Australia. Similarly, they've relied heavily on donated IT support, which meant waiting till someone could spare the time if a system went down.
A particular problem for Phillips was the lack of real-time communication between her Sydney and Adelaide offices. With stand-alone PCs, a custom-made membership database and a card mailing list that was not integrated with the donor list and not fully computerised, this meant keeping disparate databases, and running the embarrassing and costly risk of duplicate mailouts.
Thanks to the efforts of a volunteer and a finance manager with an interest in IT, Unicef approached accounting software house Solution 6, which was in the throes of developing its ASP (which now runs under the title of Centrum). "It was a risk for us because it hadn't been tested out there," she says. "But what they were offering made sense, because I lease things effectively most of the time. So this was just extending it into a software application."
What Solution 6 was offering was the big wheel of ERP solutions, SAP R/3, with a Lotus Notes front end. Being connected to her Adelaide branch means that communications can be instant, databases updated immediately, and Phillips can keep a tighter control of her Christmas card inventory. She can monitor supplies hourly, she says, and order reprints when needed. The Web communication also means that some of her staff can work from home, another factor in motivating people under pressure.
Solution 6 and IBM are acting as sponsors for Unicef, and while the deal is set up as a commercial undertaking, Phillips admits that, without the sponsorship, she "wouldn't have had a hope in hell of getting SAP". But is R/3 using a sledge hammer to crack an acorn? "I realised there may be some nuisance factor, extra key strokes," Phillips says, "but there would be benefits down the line. I don't have to use every single function of SAP today. I can take on a bit at a time. But it's accessible to me as business changes. It helped that Unicef globally has taken on SAP, because I felt this was a better synergy for me.
"I can still be in control. That was important to me. I said up front that, as soon as I felt that the tail was wagging the dog, I'd come and see if things can be changed. But it's like I'm moving towards an open space rather than being cramped by being forced to use obsolete gear and software."
What the pure-ASP fraternity lacks in size it makes up for in enthusiasm. None of the users complained of any significant drawbacks -- financially, technically or in terms of functionality.
Matters of Concern
One issue that is raised is whether ASP-derived applications are less customisable than their in-house versions. Does this mean the end of individuality?
Laird suggests that "if the expectation is that the small- to medium-sized business doesn't want flexibility, then it will work beautifully. If we're saying that the fellow who has built up his business for 20 years from nothing -- every year he's reinventing himself and changing with market demands; and if we're saying that in 1999-2000 IT is becoming more and more a strategic part of the business, [but now] we're about to take it backwards and give him less and less opportunity for flexibility and change, I wouldn't suggest that that's something that's going to be grabbed."
Phil Heggie, Unisys' practice principal in enterprise outsourcing, admits that configurability depends on the client. "If you're going for the small companies, you don't want to make the applications too configurable; if you're going for the mid-corporate, then you have to. If we're looking at providing [applications] via the Internet, we'd expect to be very vanilla . . . something that provides basic functions. It all gets reflected in what the client is prepared to pay. You can't afford to change your package to meet every client's way of doing business," Heggie says.
The question then arises: how much customisation does the market want and is the typical ASP client the sort of organisation that is happy to forgo detailed configurability for the convenience of a managed IT solution?
"Some organisations are very concerned about customisation, while some are scared to death of it," Kent Duston, general manager of Solution 6's ASP business, says. "The last time they heard customisation' was when someone came and charged them a vast amount of money for a system that still doesn't go. It happens in small organisations too. There are plenty of VisualBasic and Access-based applications that have cost them an absolute fortune to build and maintain and the last thing they want is more customisation."
All of the users in this article had minimal (if any) customisation. Even the Department of Finance, with more than 70 users, was wary. "Once you get past the magical 20 per cent modification, you lost a lot of the integrity of the base product," Cochrane says. "In my view . . . basically, the accounting for these [financials: general ledger, accounts payable, accounts receivable, fixed assets] is quite simple. We had to develop a number of interfaces with other systems, which is fairly standard, but that's not changing the core product."
As Duston puts it: "How many different ways are there to do accounts payable? We're not going to reinvent accounts receivable. We're not going to pretend that no reports exist within the system today, and we're going to have to write all reports from the beginning. But if you really want to sit down and configure down to the nuts and bolts, you can do that."
Most ASP suppliers are offering templates designed to suit specific industry sectors and functions. These, they say, have industry best-practice embedded in them, negating the need for detailed reconfiguring. Solution 6's system, Duston says, wraps a highly configurable Lotus Notes envelope around a less configurable but full-scale SAP R/3 suite.
Duston says the main constraint on moving specialised applications to an ASP -- applications which have been developed specifically by or for the client organisation -- is the fat-client architecture. The best solution he suggests is to link them to the ASP system rather than incorporate it. "This will supply real-time data flowing in and out of those systems, so it's seamless to the organisation, which is what business requires," he says.
Another issue is security and availability. Obviously, an organisation has less control over applications and data stored off-site. Duston says that, where required, his system can offer security to Department of Defence C2 security classification level, which means all data is encrypted. Additionally, the Centrum products are supplied over Telstra Big Pond intranet frame relay architecture, which he says obviates problems associated with Internet connections. As for availability, he says his contracted levels of 99.95 per cent (or about four hours of downtime a year) compare more than favourably with industry standards for NT servers (95 per cent -- going down weekly on average) and Unix (98 to 99 per cent).
While the issue of security varies between organisations, obviously those choosing the ASP route have accepted suppliers' assurances that their data is no less secure or reliable than it would be in-house. Instead, users point to added benefits such as the help desk, backup and disaster recovery facilities and compliance assurances that are offered as part of the ASP deal. Like any contracted relationship, ultimately it comes down to a matter of trust.
Last, the users have been suitably impressed with the implementation process, including training and support. The only fly in the ointment -- raised by several users -- is the time Telstra takes to install the connecting network, which even some of the suppliers admit is one of the main contributors to drawn-out lead times. As Holland bluntly puts it: "The ISDN line was as good as Telstra's usual performance, so you can guess how that was. It wasn't done on time."
Thin End of the Wedge?
One of the main motives given by all users of ASP is the ability to get rid of the hassles, as they see it, associated with an in-house IT facility:
"The benefits to us were that there was no need to build an in-house unit, and the fact that responsibility of the system was in one hand," Cochrane says.
"In-house infrastructure requires IT support," Ebert says. "If that means an IT service arrangement, it takes time to get repairs; if a full-time person, there's an automatic overhead of $100,000 in salary. But then, they tend to move on because the environment you've built is a small environment and it's not challenging enough for them. Or they try and load you up with a system that is far past what your immediate needs are."
"I thought if I could take that burden away, and outsource that part of my business, then that relieves the pressure from my business," Phillips says. "In my view, the average small business really doesn't want to be bothered with the detail of the IT stuff -- they just want it to work."
What, then, does this mean for the CIO? Is this the revenge of non-IT executives against an IT system they don't understand? Certainly, the ASPs are pitching their message towards the small and medium end of the market; but are there implications for larger organisations, which will have an impact on the IT department? None of the users claimed a cost disadvantage; some, like Cochrane, even claimed a significant cost saving. Details of Centrum's price structure and a price-comparison calculation model derived from Deloitte are available on Solution 6's Web site: www.solution6.comDuston claims there are distinct advantages for the CIO. "The IT department is not always great at supporting the accounting infrastructure that the business depends on. [ASP] gets a problem off the IT manager's back; he no longer has to support a system he barely understands." This, Duston says, will give the IT department more time to concentrate on what it does best: look after the front office and the internal infrastructure. "You're still going to require your PCs, your LAN, your MS Office. The CIO's job is still very much there. I don't think in any of our customers to date we've displaced any IT jobs per se . . . I don't think we've replaced any clerical jobs, for that matter."
Still, in smaller organisations there has been no IT department to replace. And in the Department of Finance's case, the move to hosting meant that the organisation could avoid taking on new people.
"I think what's happened is that people have been able to concentrate on more high-value things that are worth more to the organisation," Duston says. "Most organisations will be able to run much more sophisticated applications than they could ever do in the past." This means that organisations will, in turn, require more sophisticated technology and greater bandwidth in the LAN.
"At the end of the day, ASP to a CIO or a CFO is just a tool to do a job. What you do is pick the most appropriate tool to do the job. If you look at it from the point of doing [your] financials [you'd ask]: Can I get more sophistication for less money with better networking and integration? So there's a good tool to do the job.'."
Ultimately, it doesn't matter which definition of ASP applies. Whatever technological solution you choose, the important thing is the business benefit it offers. For some, it is integration and an end to duplication; for others, real cost savings; and still others see the convenience factor and the end to worries about IT management. As Holland puts it: "To me, it's logical that I'm outsourcing to a specialist organisation things that I don't need to know about. And I've got a very happy staff."
ASP Update
The ASP juggernaut continues to roll. In fact, it's almost impossible to keep up with developments. Week by week, new product releases from numerous vendors are appearing on the ASP scene. Since this feature was written, the number of initiatives and products available within the local ASP market has increased significantly. Here's the latest from the ASP front lines:
¥ In early November, a senior Microsoft executive predicted it would be at least five years until ASPs became commonplace. Despite this proclamation, the company announced two weeks later that it was throwing its hat in the ASP ring by planning to offer its software -- firstly the Office suite -- through an ASP model from May or June next year. According to company officials, at least 10 to 15 local partners are eventually expected to join Microsoft in its ASP program.
¥ Inprise recently joined the ASP fray, being the latest addition to its enterprise strategy. Under the new scheme, to be known as AppServices, Inprise customers will be able to access different business application sources through a Web-based portal that includes a unified suite of communication, collaboration and productivity tools. It is expected the service will enable end users to access their applications and desktop through any networked device, operating system or protocol, using a standard browser interface.
¥ One of the earlier Australian proponents of the ASP model, Citrix recently announced that 14 ASP providers have joined its program. These new recruits include AristaSoft, ESOFT Global, FutureLink, TransChannel and TeleComputing.
¥ The ASP lovechild of BDO SynergyIT and TheLearningStation.com, ApplicationStation.com is geared towards servicing the needs of small businesses and educational institutions with access to the latest software without the burden of in-house IT staff, equipment and maintenance overheads.
¥ A long-time player in the enterprise asset management space, Mincom recently announced the formation of a dedicated multimillion dollar operation to target the burgeoning ASP-based IT services market. To be known as Tequinox, the ASP initiative also involves a raft of strategic partnerships with the likes of Microsoft and Oracle.
-- Cass Warneminde
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