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Do you know enough to choose the right ASP?

Although customer awareness and adoption of the application service provider (ASP) model is on the upswing in the US, most customers in Asia are still perplexed by the bewildering array of ASP offerings, pricing and business models.

The evolution of the Application Service Provider (ASP) industry over the past two years has yielded recognition of the defining features of this new computing architecture as the next frontier in delivering application services. Why invest huge amounts of money on software applications when you can outsource and rent the complete suite - including value-added services - from a supplier?

Of course, the downside is a potential loss of control.

There are many definitions of ASP and many different types of companies now describe themselves as ASPs. But in this context, an ASP is defined as a provider of applications including IT infrastructure and support services to customers via the Internet or a private network on a subscription basis.

ZDNetAsia spoke to two industry players - Mr Mark Forgea, Senior Manager, Worldwide ASP Sales of JDe.sourcing and Ms Karen Fukumura, CEO and co-founder of etako.com - to hear what they have to say about ASPs and gain insights on how to find a ‘best-fit’ ASP for your business.

JDe.sourcing is a second-generation application hosting initiative that delivers collaborative commerce solutions directly to customers across the Internet. JDe.sourcing also works with ASP partners, such as EDS Taiwan, etako.com and Super-Office in Asia.

etako.com is an ASP that supplies collaborative commerce solutions to high-tech electronics companies throughout the Asia Pacific. It provides tier-one multi-product solutions to hi-tech customers in the region. ZDNetAsia: What are your views on the current ASP market in Asia?

Mark Forgea: From the provider side, I think there are three key trends that people are now starting to understand and accommodate in their business model.

First, the ASP model does not necessarily mean a dramatic reduction in cost. In other words, the value to be found is not in reducing your overall IT expenditure dramatically but in letting someone else worry about running your IT infrastructure and simplifying how the end-user accesses the software and then creating a vertical IS approach that integrates several components into a pre-configured solution for rapid implementation and ease of use.

The second trend is that ‘verticalization’ is becoming more important. As it appears, the more successful ASPs are those that focus on a particular business vertical. For instance, instead of trying to serve manufacturing, distribution, financial services, healthcare, hospitality etc., they may take one or two of these areas that may be complementary to each other and service that particular vertical niche as well as they can. By doing so, they can then focus their efforts on a specific industry and hire well-qualified people who know that industry well enough to talk with end-users and build the solution set. They don’t have to try to represent a hundred different products to meet that horizontal focus. They can represent just the products required to meet that specific vertical niche.

Lastly, while start-ups and dot-coms look attractive, there is a general trend among ASPs tending to serve the top end of the SME up to the very large corporation market. You will find that many ASPs prefer to have a few very large customers than opposed to many very small customers.

Karen Fukumura: Based on International Data Corp analysts’ expectations, the worldwide ASP market will be worth over US$7 billion by 2004. Enterprise ASP software sales in Asia, excluding Japan is projected to hit US$565 million by year 2004 with Hong Kong, Taiwan, Singapore driving the lead. Hence, I think that opportunities are certainly bright.

Moving forward, we believe that there will be certain industries that will kick off first. In our opinion, the first one will be those that have compelling needs to get their businesses online quickly and are probably facing tremendous pressures from external forces to change their systems. I think a lot of that is due to globalization, the push for e-commerce and the integration of supply chains across the world.

The target market we are going after is the high-tech electronics industry, which is going through tremendous pressures of shorter product life cycles, shortages of parts, and the urgent need to start collaborating much more closely. I guess what we are seeing is that companies are competing along supply chains and not as individual companies. So, the emphasis now is to collaborate. I think they call it collaborative commerce – c-commerce instead of e-commerce.

In summary, the ASP market is certainly in its infancy here. I think it will make less than a million or a few million dollars at best, but if you look at the growth, I think it will probably be a 100% annual growth rate over the next few years. The future is very bright but, before we can get there, there has to be a tremendous amount of market education. ZDNA: Where is it heading? What are your views on the formation of an ASP Consortium in Asia?

MF: Based on general guidelines, I think the consortium will be formed before Europe and probably before the end of this year because there is tremendous interest. I don’t know if there is a demand yet, but there is tremendous interest in using ASP to overcome three major difficulties.

Number one is finding the appropriate personnel to run the IT infrastructure in a company. Singapore is a great example where the unemployment rate is very low, the number of technology jobs open is very high and you cannot graduate enough people through college fast enough to meet all these openings. As a result, people move where they can earn a bigger paycheck and it is very difficult to hire people and keep them. The situation is worse in Malaysia, Thailand and Cambodia. It is very bad in the US as it is very difficult to find qualified people.

Number two: It allows a company to effectively reduce its costs. For example, we have a customer that has manufacturing sites in Thailand, Malaysia and Singapore. Now, they have a choice. They can either build an IT infrastructure three times and hire three times the staff, or they can do it once and service all the three sites from a central location. So, by doing that, they manage to reduce or avoid costs by not having to replicate the solution many times.

Third is speed. Companies today would like to start new businesses fast without heavy investments and lengthy software implementation. So, the ASP model becomes an attractive option.

I think these are the three key components that are driving the level of interests, which I believe will contribute to the quicker development of the consortium.

What one ASP consortium is doing in the US right now is to create a clearinghouse for information and allow members to share ideas and stories about difficulties in addressing the market. This leads to the development of a common vocabulary and standards. Our customers worldwide are still very confused on what ASP means as it depends on what ASPs set themselves out to be. Hence, a common vocabulary and common standards are two of the key ingredients in this clearinghouse approach to a consortium. I wouldn’t be surprised that a few of the leaders such as etako.com are already working on it.

KF: Actually, we had our initial meeting of the consortium right after the ASP Forum (in July). I think our next step is really for some of the key ASP players in Asia to determine what objectives we would like to achieve in the next six months.

One of the challenges we face working in a multicultural environment like Asia is that with ASPs coming from different countries, trying to meet the needs at the local level is going to be very difficult because a lot of us do not even share the same geographic location, let alone the fact that we are targeting totally different customers. Hence, trying to find some common issues that we need to address, I think, is going to be our biggest challenge.

That being said, I think the main one is definitely the standardization of terms. For that, we are communicating to the market and talking consistently, hoping to avoid any possible confusion and educate customers more effectively.

Our definition of an ASP is a company that provides standard applications through a hosted, centrally managed environment with customers accessing applications via Internet technology and paying a subscription fee for use of those applications on a rental-based model.

One keyword in that definition is “standard”. Standard application means no customization. If the customer wants a unique application, we can still build a customized one-to-one model just for them, and if that is outsourced, that’s what we call IT hosting. In our ASP model, we would usually build an application that I can sell to many people. And that is how an ASP reaches its economies of scale; it is a one-to-many model.

“Hosted” is another key word in that definition. Hosted means the infrastructure is sitting on a third party’s site. Some ASPs use third-party data centers, some build their own. I think the trend is more towards ASPs partnering with a data center.

Third is how people access applications. Clearly this whole business model is taking off because of the Internet so people can have very affordable means to communicate and get to that data center from any part of the world. The complexity is of course how stable, secure and fast are those pipes in order to provide good performance to the end-users.

The fourth key concept of the definition is certainly the subscription-based model. In the past, customers used to have to pay all the money up front – a capital investment usually costing them millions of dollars for enterprise-based applications. Now, customers pay a monthly fee and it is more of a ‘pay-as-you-grow’ model. With this, customers not only do not have to fork out millions of dollars up front, they have the flexibility of scaling up. So, if you only have two users today, you only pay for two users, and if you need 100 users next month, you can scale up to 100. This is very good for very fast-growing companies that want to basically pay as they grow.

ZDNA: How do you differentiate yourself from your competitors and where’s your niche?

MF: We had a very easy time attracting world-class partners for the ASP model. We have 13 partners in the US and three in Europe currently. Companies are coming to us wanting to partner us probably for these good reasons:

  • They know that as a company we work well with partners. We have been working with partners in system integration, software development and software positioning through companies like Siebel where we are its tier-one reseller worldwide for a number of years. We also had Arthur Andersen for 14 years. For more than half our lifetime we have worked with various partners. We try to avoid channel conflict by making sure that everyone has a clearly defined space to sell its service/software.

  • Our products are mostly two to three years ahead of most of our competitors in terms of architecture and interoperability.

  • Our vision for the future is that we do not want to be proprietary but to be as open as possible. So, our plan is to remain as flexible and agile as we can in order to accommodate the next new thing.

    KF: One way we differentiate ourselves is clearly that we are not selling personal applications or collaboration tools such as e-mail messaging. Our focus is at the enterprise-level. On the enterprise side, I think there are much higher barriers to entry and, typically, people who get into that space got to have pretty good consulting background.

    Secondly, you can enter the market either as a horizontal player, meaning you provide a solution for all industries or be a vertical player where you service one specific industry. We decided to go vertical in the high-tech electronics industry, providing a one-stop shop for hi-tech and electronics companies. We are one of the first - if not the first - to focus on a specific industry in Asia.

    The third differentiator is that we offer very high-end applications, known as tier-one products because our customers demand very high levels of performance as they cannot afford downtime. So, we have to have not only the best software but the best type of infrastructure.

    The fourth is that we are regional as compared to many other ASPs which are more country-specific. Our customers are regional and not only do they need support on a regional level but on a global level. So, we are forming alliances with people around the world to provide that global supply chain support.

    ZDNA: What are the challenges ASPs face today?

    MF: The biggest challenges are:

  • Education of the customer base. This is a challenge worldwide.

  • Creating a buying environment where the customer understands what they are paying for isn’t just software, but software plus service. It is the value-added approach to what the ASP can do for a company as it specifically relates to that industry, creating a vertical focus as opposed to horizontal.

  • Creating common ASP standards, vocabulary and terminologies.

    KF: Our challenges are:

  • Finding good and qualified people who understand this new technology, and have the right risk attitude. People here tend to prefer a little bit more structure. They are less able, on a personal level, to handle an environment where business models change and evolve very quickly. So, finding people who are able to work in an unstructured environment, help management put structure around it, and be prepared to make mistakes and move forward is a big, big challenge for any IT company here. There is just such a great demand for IT people here and telling people why your company is better than another is also a challenge.

  • Specific to an ASP of course is education. As we are targeting the hi-tech electronics industry, our customers know technology and they are comfortable with an outsourcing model. This is one of the reasons why we want to target at the hi-tech and electronics sector as we believe their adoption rate will be pretty quick. But, for the ASP market in general, it needs a lot of education.

  • Structuring of all these ASP partnerships. The whole ASP model relies on your ability to deliver a pre-bundled solution. As an ASP, you not only have to know what products and services to offer, but how to screen partners and form strategic alliances, deal with service level agreements, as well as how to integrate all the products and services so that the customer sees only one product and deals with only one vendor. Integration is a very big challenge and there is no right answer. So that’s why many ASPs are looking for the best practice.

    ZDNA: What are the opportunities for ASPs?

    MF: Let me point out two very specific sets of opportunities for ASPs in Asia:

  • New start-ups. This is a very fast-moving market with companies adopting and implementing new tools all the time.

  • Companies with a need to relocate their manufacturing or distribution facilities to places with lower operating costs.

    A third may be seen in MNCs, particularly in the US, which have divisions located in countries as far as Singapore or Malaysia, and they want to maintain centralized information exchange. So, this centralized information exchange may be an ASP model that keeps everybody on a common system. With that, there is team control and management where reporting, training and problem-solving become easier. Also, it becomes less expensive every time you get to a greater degree of commonality and less customization of writing special code.

    KF: There is clearly a big growth potential for ASPs. Things are really picking up in the US this year but here I think we are still at the ‘pushing’ stage. Once we get over the introduction stage, it should pick up and enjoy an exponential growth path.

    In the future, I think customers are going to demand solutions from a few ASPs and not just from one. So, the ability to integrate ASP solutions is going to come with it. Hence, that’s an opportunity to look forward to in the future – more partnerships and strategic alliances – and this, in turn, offers tremendous opportunities for customers to do a true ‘plug-and-play’. They can pick and choose what they want and I think that’s really valuable for customers who need very unique solutions for them to move forward on their strategy.

    From the people side, there are tremendous opportunities to learn a very diverse set of product knowledge and skills as the market is always pushing for the latest and greatest technologies. So, I think ASPs are well-positioned for driving the induction of new technologies into Asia.

    ZDNA: What are the things to look out for when choosing an ASP?

    MF: With regards to the ASP’s financial position, management team, and business philosophy (vertical or horizontal focus), you must understand two elements:

    One is corporate stability – will they be there for the long haul and is there a good fit. An ASP relationship is truly a partnership where you entrust them with your mission-critical business processes while they provide you a business solution with data integrity and security. This speaks a great deal about why you want to look for corporate compatibility with company culture, as an example.

    The second measure is the scalability of the solution. You can ensure that a company provides a scalable solution based on its complexity or robustness and the number of users. So, the question to ask is whether the ASP can provide solutions or business intelligence that scale up with your business requirements or do you have to change the relationship.

    Finally, the ASP’s notion of service-level agreement (SLA). Is that a bare-bone contract or are there metrics built in that will define what the system uptime will look like? Negotiate on when to do maintenance and back-ups. Do they have a change-management and change-control policy that is well-stated and well-organized? For instance, when new releases of software become available, do they just force it on you or do they ask you if you want it?

    KF: I think it is important for customers today to ask the ASP: Do you know my business? Does it have the domain expertise not only on building a model once but supporting that model on an ongoing basis? Because your business is going to change and you will want your ASP partner to move along and, hopefully, be ahead of you to make better recommendations. So, domain expertise is number one.

    Second, whether the ASP has a fully integrated solution with everything covered all the way from the infrastructure to the applications - all tightly integrated.

    Third, SLAs. I think the industry as a whole is kind of struggling with it. In Asia, we are having a harder time trying to guarantee a certain level of performance because of the international flavor that we are dealing with. So, I would advise customers to push and make sure that they are comfortable with the ASP to deliver a mutually agreed service level.

    Fourth is definitely security - a very big issue in Asia. How is an ASP going to manage your data, what are the different levels of security that the ASP has to put in place to ensure that your data are fully protected.

    Lastly, can the ASP support your regional business? Is the ASP willing to make a commitment to deploy resources to your remote locations. In Asia, we also have to consider multilingual capabilities. Does the ASP have the software to support multi-languages and do they have multilingual call-center support? ZDNA: How can companies ensure foolproof SLAs?

    MF: The ASP has to be honest with the customer. Let’s face it, there is nothing that is 100% sure. That’s why I say it is very important to be honest up front. There is a term called “5-9 reliability or 6-sigma reliability’. This means in any 365 days, we will only be down 3 hours, planned and unplanned. Not even the phone companies do that and they are the ones that have the most reliable data systems.

    So, if someone were to ask me for a 99.999 reliability, I will tell them honestly that I cannot do that. Nobody can do that. So, when you set honest expectations, then an SLA becomes a very solid document for understanding what it is that the service provider can actually deliver and the customer can then say he got what he paid for, and I think that is as foolproof as it gets.

    ZDNA: How do you ensure that you deliver what you promise?

    MF: In our case, our objective is flawless execution, and we make it easier on ourselves by again telling the truth up front and by building as robust a model as we can.

    For instance, we have our own data center at our facilities in Denver, and in that data center, we have redundant sets of servers. We have 3 different layers of security to protect our customers’ interests. We make certain that we have more than one phone carrier that goes in and out of our facilities so if Worldcom goes down for whatever reason, we can immediately switch over to Qwest or AT&T. So, this is an example of how you create redundancies that allow you to promise honestly what you can deliver and know that it’s possible because you have actually built it into the model.

    1. Tell the truth concerning what you are technically capable of providing, so you under-promise and over-deliver.

    2. Develop a well-scripted SLA that is carefully negotiated with the customer and walk through that agreement with your customer without hiding anything so he understands what he’s actually going to get.

    3. Maintain a very open system for reporting on the service agreement that you have negotiated. For example, for a company with a service component, we will provide online reports available 24x7 to our customers showing the response time and all other metrics that we have agreed to. We will provide them with a written monthly report, a 1-800 number so that they can call the account managers assigned to their enterprise for continuing support and service. On the other hand, we will make sure that they have an obligation to inform us whenever there is a change in their local network configuration or usage pattern, for instance.

    ZDNA: What are the common mistakes companies make when sourcing for an ASP or while engaging an ASP?

    MF: Cost is a big issue. ASPs now realize that they can either deliver cheap solutions or, more likely, reduce the amount of value-added services. As we always say, it is not about cost reduction but about value-added services. So all those things that go into building a very robust model are more important to an average user once he is educated.

    KF: A lot of times, customers do not know what they want. There is a difference between what you want and what you need, and often you want the latest and greatest and you probably do not need it. So, I think people need to be realistic and understand more of the change-management issues than using technology to push its business into the future.

    ZDNA: What practical tips and advice would you offer potential ASP clients?

    MF:

  • Clearly understand what your needs are and why you think an ASP model is right for you. Are you just looking for really inexpensive service, is it because you cannot hire the people you need, you don’t want to use the scarce resources that you have to just run the back-office solutions or you simply want to focus on Web store front-ends or customer intimacy tools?

  • Have a very realistic expectation as to what can be delivered and what you can afford. If you are looking for a world-class “5-9 reliability” solution and only willing to pay US$1 per month per user, you will probably have a problem matching up those two needs in a real environment. So, set real expectations for yourself before you shop.

  • Very clearly understand what your options are in terms of the providers out there, what they are capable of doing and how they match up their services/solutions with your business needs. So again, that gets to the company culture, how long they have been in business, do they look like they are going to be in business for a long time, what are their corporate capabilities etc.

  • Understand that an SLA is a living document – a negotiated document that sets the expectations of both parties at the beginning of the relationship that you can measure.

    KF:

  • Focus on what you need and not on what you want. Don’t focus on cost. In the ASP model, the benefit is not the fact that it is lower in cost. The benefit lies in that it allows you to focus on your core competencies and letting the ASP deal with all your infrastructure and IT staffing problems. That is the real value.

  • Understand how you can partner with an ASP and how to get the most out of the ASP. How can you use their people to help you understand the industry better, and how do you get the ASP to work with your IT staff on the transfer of skills and knowledge? In short, learn how to maximize your value-for-money.