A wolf in sheep's clothing? - Industry Trend or Event

Communications News, Oct, 1999 by Bart Taylor, Dan Taylor

We have come to accept the presence of services companies in our midst. They offer an important way for enterprises to tap expertise on a project basis and to offload some labor requirements. Value-added resellers (VARs) have emerged in every facet and specialty--seeking margins justified by the value-add. Resellers and integrators today offer a range of packages, customization, and financing for enterprises buying hardware and software. Working in partnership with customers, they manage the point of sale for technology, as well as most aspects of integration and ongoing support.

Enterprises that pay the bills for this massive services industry may be seeing some drastic changes in the way services are sold. Namely, services companies are adding new offerings for hosted enterprise applications. Not all of these hosted applications will be offered by the same SIs (system integrators) and VARs you currently deal with, but many will. Not all of the ASP (application service provider) services will appeal to enterprises, but some, at least, will provide a fit. This column is about the real question concerning the new ASPs: "What's in it for me?"

Hosted applications are a reality in most enterprises today. ASPs are, in part, an extension of the emergence of "new" e-commerce and Web-hosting companies you may be turning to. Centrex, VPN, and 800-number services have long been hosted by telcos, although some enterprises provide them internally.

But the appearance of "rental" software for enterprise resource planning (ERP) applications should quickly suggest a link between the transactions business--which enterprises at least consider for outsourcing--and ERP, which many new companies are offering as standalone ASPs, supplying enterprises with applications as a fully outsourced service. E-commerce is, in this light, just the tip of the iceberg for the next wave of hosted applications that include everything from messaging and office suites to seismic imaging, financial applications, and CAD.

As this business grows, some integrators and VARs will be eager to convert, on the logic that it offers new revenues and higher margins. For the services companies, this leading edge is survival. As intermediaries, they have consistently had to seek new sources of margin, as their underlying business has been turned into a commodity. This trend started long ago in the hardware business; today, there is immense turmoil as hardware vendors realign--and, in some cases, eliminate their reseller channels by selling direct.

Are the new ASPs the proverbial wolves in sheep's clothing, trying to sell you their problems? No. Most of these companies are just offering a variant on what they've already done for a long time. It is true that networked delivery of applications creates new challenges--but, again, very large enterprises are clamoring for just this sort of thing. Internally, many of them are seeking to reduce client management overhead and, in effect, create their own internal "ASPs."

Therefore, it's an important time to let the commercial ventures know exactly what you're looking for in picking outsourced applications. First of all, choosing the applications makes sense, but--typically--enterprises are turning to outsourced applications they want to get up and running fast, without a huge upfront commitment. Beyond this, we came up with a list of buying criteria--a definition of what a good ASP must be able to offer to you.

Better Bundling: Customers just shouldn't have to worry about dealing with all of the hardware and software integration issues. They shouldn't even have to deal with selection. Integrators have long sold "complete solutions" based around "best practices." ASPs are converting this to a service, with customization, of course, for larger customers. The result: a bundle of different elements, expressed in terms of quality of service--uptime and reliability for applications and the network services.

Better Delivery: ASPs should be no different than their SI/ VAR cousins, and in fact, they should go one better. Just as software and telecommunications can be bundled together, the end result should be configurable and measurable. This will require the creation of standards for network and applications quality of service. The push for a new technology to support enterprise-wide delivery of hosted applications is also enabling third-party service providers to enter the market.

Better Financing: Here's the rub. In order to be really, truly a shrewd customer, we recommend enterprises look at ASPs as a risk-shifting strategy and as a form of financing. ASPs should be willing to take on at least some of the risks of cost overruns. At the same time, enterprises should be willing to bargain for a true subscription--if they can't get out of it at any time, at least it is not a long-term decision. The biggest leverage customers should be able to get from an ASP is paying according to the number of seats. This reduces the risk of over- or under-investing in IT.