ASP Business: Cautiously Bullish 

A Frost and Sullivan market study estimates ASP revenues in India at $2.89 million for the year 2001. The revenues are projected to hit $43.1 million by 2004. This will be at a compounded annual growth rate of 146.15 percent. 

Perhaps the study was conducted when the dotcom fever was at its zenith. So we may have to take the revenue figures with a pinch of salt because so far the ASP business has made very slow progress. 

Says Sunil Raghavan, Country Manager - Net Generation Group, IBM India Ltd, "Several players have announced their plans but are still watching the market before they begin investing in the infrastructure. We believe that there is strong trend that predicts the ASP take-off in the Indian market, though the exact time-frames are not clear."

According to Gartner Dataquest, the ASP model is showing three unmistakable trends. One, several SMEs are looking at ASP as a source of applications software solutions. Second, ASP is a challenge to the traditional revenue sources of software vendors. And lastly, the market will see inevitable collapse of many ASPs due to poor infrastructure and funding, which would continue for the next five years. 

Market awareness

The awareness about ASP in India is gradually rising. "The ASP concept is still new in the country and it will take time for users to appreciate the benefits of renting an application," says Atul Gupta, Head, ASP business, iFlex Solutions Ltd. He believes that factors like increasing the customer base, need for computerization in many sectors, affordability of various applications and the computer literacy in India will influence the growth of ASP. 

M Ganesh, Country Manager, Ariba - South Asia agrees with Atul when he says that India's huge population of SME organizations, with a collective turnover, which is greater than $ 100 million will be able to harvest benefits of high-end enterprise applications offered by the

ASPs. 

However, Atul points out that the infrastructure required for ASP is currently available only in big cities. Says he, "It may be pre-mature to judge ASPs' success in India because it is still in the take-off stage."

Commenting further on the usage of ASP services Sunil of IBM says, "We expect the SME segment to form a strong user base for ASP services." He also believes that given the Internet access growth (which is about 70 percent CAGR) this segment will have insufficient resources to invest in full-time IT staff and infrastructure. Instead they are likely to enjoy the cost and operational benefits that the ASP model would offer .

Nevertheless, the initial successes are yet to make the splash in the market. "The market is bullish but cautious and the decision cycle is a bit longer than expected. This is because ASP calls for a change in mind set and requires a lot of education within companies," points out

Atul. 

Currently, applications which are not mission critical are already available with ASPs and are becoming quite popular. Atul firmly believes that small and medium enterprises are also going ahead with mission-critical applications. Today, i-flex offers core-banking application on ASP mode, which has been adopted by several financial institutions.

Type of ASPs

The market has always been debating on the different components that make the ASP model. ASPs are independent third-party providers of software-based services, which are delivered to end-users via their own networks or the Net. This model enables users to access files and applications which reside on the ASP's server. According to IDC reports, this market can be broadly classified into Enterprise, Collaborative and Personal ASPs.

The ASP Family

The ASP Family

• Tend to offer managed or extended services based on analytical vertical,
  
  ERM, CRM and enterprise e-commerce applications.
• Directly host or tie-up with hosting providers such as Exodus and
  
  UUNet.
• Provide consulting, implementation, ongoing support and maintenance for the
  
  customers
• Focus on a wide range of industry sectors.
• Deliver a select range of high-end business applications. 
• Offer custom configuration and service.
• IDC expects this will be the domain of ASPs that have a moderate to strong knowledge of systems integration and business needs first and
  
  foremost.

• Collaborative applications are positioned more towards the middle or lower left corner of the market
  
  model.
• Often may need to consider their offerings in light of specific enterprise needs and to link their application services to enterprise
  
  systems.
• Develop and deploy email, messaging, calendaring, scheduling newsgroups and other collaborative applications on an out-sourced
  
  basis.
• IDC expects this to be the domain of ASPs that have a strong blend of network reliant applications and network expertise. 

• Personal ASPs are positioned in the lower left quadrant of the market model. 
• Applications offered include office suites and consumer
  
  applications.
• Their primary responsibility is to guarantee network access to the
  
  application.
• Minimal application and systems integration capabilities are
  
  required.
• IDC expects personal ASPs to target their services at SOHO and consumer market. 

Benefits of adopting ASP

There are several benefits that enterprises can look forward to from ASP. And the cost factor tops this list. "The cost benefits are manifold. When enterprises embrace ASP, they don't have to invest on infrastructure, manpower and maintenance," points out Sunil. 

ASPs also solve the three key friction points of IT:

• High up-front cost of a packaged software license;
• Difficulty of recruiting and maintaining in-house IT human resources to install and maintain the software; 
• High cost of building and maintaining the IT infrastructure necessary to support the application. 

The software market has evolved dramatically over the last 20 years from custom applications to one increasingly dictated by packaged applications. "Every major software category has a viable packaged software solution. Packaged software incorporates industry knowledge and best practices from multiple development experiences and customers and the result is a low-priced, functionally rich product," says

Muralidharan. 

He also points out that packaged software has scaled up the popularity level in large organizations mainly due to the lesser time and costs taken to develop and implement these solutions in their systems. Compare this with a scenario where the high cost of a packaged solution keeps many SMEs from buying these applications. 

Forrester Research estimates that less than five percent of small businesses have automated basic internal operations like financial and HR (this would compare with 100 percent at large organizations and 50 percent plus at middle market firms). 

Moreover, the high license cost causes many larger organizations to think long and hard before deciding to make an initial purchase and/or perform an upgrade. Even if an organization has the financial resources to buy the software, it may not be able to find the human resources to install and maintain it. Despite the availability of IT solutions, staffing and recruitment firms, the lack of in-house expertise can often be a deal breaker. 

Finally, many packaged applications, from email to ERP, require tremendous amount of IT infrastructure and connectivity in order to run at optimum levels. Most organizations do not have the in-house talent or the financial resources to support the necessary infrastructure. 

ASP value proposition

The turnkey solutions offered by several ASPs provide software, hardware, systems development, integration, and management into one package. The result is that the role of the CIO is played by the ASP, reducing the decision-making time and administrative burden significantly. 

The ASP model also offers a predictable cost and lower up-front investment. ASPs typically price their offerings using contractual monthly fees. Because of the lower up-front costs, an ASP can allow a company to get into a more sophisticated software product than if purchased outright. 

Prices vary depending on the type of software, the level of customization, number of users, and the length of the contract. If there is an up-front cost, it will usually relate to the implementation. The license cost and ongoing maintenance and connectivity costs are part of the monthly fee. 

ASPs can generally deliver software to a client more rapidly than in-house resources or an external systems integrator. There are two reasons for this. One, ASPs typically do not provide a deep level of customization. Second, an ASP installs different software products on its own hardware, a configuration it is familiar with. 

For example, a typical ERP installation at a client site can take anywhere from six months to two years. Enterprise ASPs such as Corio and USinternetworking can deliver ERP solutions in 90-120 days. Also the model enables scaling up rapidly.

Additions to an existing user base and applications, leverage initial investments and exhibit rapidly diminishing marginal costs. 

Though ASPs do not typically perform a high level of software customization, upgrades to a customer's applications can be done more easily. Since the customer does not pay a license fee up front, he will prefer getting software upgradation regularly. Companies like

JobStreet.com provide free upgrades to existing customers, a feature that may become the norm in the highly competitive ASP market.

The ASP mode becomes a viable solution to a mobile, distributed work force. Firms are increasingly coping with a work force that is very distributed and often mobile. An ASP can allow a firm to provide employees with access to all relevant applications simply through a browser. This makes it easier for the employee to sign on and work on the network remotely and significantly reduces the firm's burden in maintaining a distributed computing environment. 

It also improves focus on core competencies. Most organizations would agree that their core competencies are something other than running IT systems. Despite this, most organizations spend a tremendous amount of time and money on these systems. ASPs may or may not reduce the cost of IT, but they will allow for increased focus on the client firm's core competencies. 

And the pitfalls are ...

The biggest pitfall in the ASP model is security and several companies today host their own servers on their office premises to avoid illegal access of company's critical data. Especially, in the current e-commerce scenario, ensuring the secure transfer and storage of information is an issue for every sector in B2B and B2C. 

The ASP model will succeed only if customers can be convinced of the complete security for their data and applications. For most ASPs this will involve partnering with companies that specialize in security issues. Several ASPs across industries offer their customers service level agreements (SLAs) in which they define the level of security, tracking, performance, support, contingency and upgrades their customers can expect. But these agreements have failed to attract confidence from users, which has hampered the growth to a certain extent. 

Today, CIOs and CEOs are still coming to terms trying to rely on third-party with the company's core data and applications of their business. Once organizations realize ASPs will provide complete physical and electronic security with minimal downtime, they will be able to trust the heart of their business in the hands of their ASP partners. Says Ashok Dongre, an independent consultant, "Until and unless trust is established, it is difficult for ASP to take root in the Indian marketplace." 

Another factor, which has hindered the ASP growth, is the inadequate infrastructure in terms of bandwidth availability. What happens when the Internet fails? 

This question is very impertinent because ASPs provide their services through the Internet. Thus, reliability of the Net is critical the success of ASP in vertical segments such as finance and banking. 

Sharing his views on this, Sunil of IBM points out that the government has taken initiatives in laying fiber optic cables across the country and this issue should be resolved in the coming months. 

Back-end services

Muralidharan of Jobstreet.com points out that the ASP market operates on a different platform from typically licensed software product and the back-end services are the key in this model. Hence pirated software may only have a marginal impact in this business, if the gray market distributes critical products at cheaper price. 

There are others who believe that pirated software does not hamper the growth of ASP at all. Says Atul of iFlex, "ASP will reduce piracy as it will provide genuine software with a affordable price tag." He also feels that the piracy may be a silver lining for players in the ASP space. 

Also, enterprises consider their IT purchases far more seriously. When it comes to IT investments for critical applications, they would opt for legal software. "Pirated software is not largely used here and the cost factor drives the decision in favor of ASPs," says Sunil of IBM.

The ISP-ASP transition

The inevitable trend that could be seen in the ASP market is the ISP-ASP transition. Sources say that the telecommunication service providers, who are setting up fiber-optic networks, are definitely entering the ASP business as it can bring them lucrative returns on the huge bandwidth at their disposal. 

There are nearly 35 companies including ISPs, systems integrators and independent software vendors who offer ASP today. ISP's too are looking at the ASP market in India today, especially with Internet services being quoted at very cheap rates. 

In fact, N Muralidharan, MD and VP of Jobstreet.com India believes that to remain as viable businesses, ISP's have no choice but to look at value-added ASP services.

Atul also shares this opinion. According to him it is comparatively easier for an ISP to become an ASP. He feels that ISPs would however like to capitalize on their core competencies first, before enhancing their action in ASP. "It may be the next step for an ISP in the value chain. We may see this trend in future," adds

Muralidharan. 

P Muralidharan, Head - Corporate Business, Communications Services of Wipro Infotech echoes this sentiment. According to him, today ISPs like Bharti and Tata Nova are already talking about their plans in ASP.

On the other hand, Ganesh believes that it is a different ball game for ISPs to address the enterprise needs. Says he, "The transition might happen, but ISPs will have to first strengthen their operations team to focus on the ASP model. The only saving factor could be their IT infrastructure." He also believes that the delivery model is much more severe in the ASP arena. 

While the market is talking about several ISPs looking at ASP, interesting developments are also taking place among systems integrators (SI). Several SIs are looking at opportunities in ASP. 

SIs on the ASP ramp

One obvious trend that the ASP market can expect in the near future is the entry of SIs in this space. Says N Muralidharan of Jobstreet.com, "SIs are definitely looking at becoming key ASP players in the future as they have the required experience in setting up IT infrastructure." 

However, he also believes that SIs will have to work hard to develop software expertise that can match their infrastructure knowledge. "Here, multi-function IT companies such as Wipro can definitely take the lead," points out Muralidharan.

Ganesh of Ariba believes that users today bargain on a single window offerings from ASP players. This need will give raise to packaged SI services, which will be included in this model. According to him, several existing players will look for extending this service either on their own or will engage SI partners for the same. 

There are likely to be other opportunities for the SIs in the ASP delivery model. Since the model depends on quick implementations of the applications, the SIs are expected to partner with the ASP providers for the business rather than on a case-by-case basis. 

On the other hand, Ninad Karpe, CEO of Computer Associates-Satyam ASP believes that SIs act as a catalyst to enhance the market presence of ASP model, apart from setting up the services and bundling its solutions. Whereas Sunil of IBM portrays SIs to be the backbone of ASP providers. 

Portraying the offerings of SIs in ASP, P Muralidharan of Wipro Infotech says, "The opportunities are tremendous as the customer-end integration and roll out will be done by

SIs."

"The opportunities are immense and even we are keen to enter this space, but what we really need is the right kickstart," says Himanshu Chawla, National Business Manager, Iris Computers. "We realize the fact that we can earn the marmalade for our bread from here," he adds. Though he feels that the revenue will come from hardware, SIs can look forward to earn some neat margins out of the ASP market. 

Boon or threat for channel 

Will the channel be in trouble when ASP becomes stronger? "The answer is no," says Ninad Karpe, "ASP business can only expand, enhance and embellish the current channel business." According to him, ASPs enable partners by giving them constant support and if there is any threat for channels it is only in the mind. 

Ganesh of Ariba, on the other hand, sees the ASP model as another channel to deliver software products. He also feels that the distribution model of both a channel partner and an ASP player will remain the same and they may not cross each other's ways. 

All said and done, with the uncertain growth of ASP in the market, it is obvious that box pushers will continue to thrive. Today, ASP players are trying to optimize on delivery, cut time-to-market and product costs, which gives out a message that channels too have to move up the value chain. And the best way to do that would be by improving their knowledge and implementation skills for applications and aligning themselves to the market trends. 

Sunila Paul in Bangalore with inputs from Bobby Anthony, Mumbai and Mohit Chabbra, New Delhi.