TECH TALK: The Coming Age of ASPs: Like Search in 1999

In 1999, Search as a business was all but given up as a dead business by the incumbent players. And then along came Google – and the rest, as they say, is history. Today, there is perhaps no technology business as hot as Search. Everyone is clamouring for a piece of the action. What dot-com was once, Search is now – but with a difference. There is a clear revenue model – built primarily around advertising.

Along with many ideas, another business category died in the 2000 era. That was the business of providing software applications on a hosted basis. Application Service Providers (ASPs) were once touted as companies who would change the face of software delivery and make most of the incumbents obsolete. What happened? Little changed. Even though we have a few companies like Salesforce.com which comprise the next-generation of ASPs and have built successful businesses, for the most part, ASPs still remain few and far between.

Just because a technology or idea did not do well once, it does not mean that it needs to be written off entirely. For example, Apple’s Newton was way too early while the Palm Pilot had both timing and the right feature set to succeed when it came out. Timing is, in fact, very critical for the success of innovations. If one is too early, then one will languish till the critical mass is built. In the process, any number of things can go wrong.

Going back to the Search case study, companies like Yahoo, Lycos, Altavista and Excite led the charge. But they could not monetise the traffic that was there. As a result, investments into search technologies shrunk. Users were disillusioned with the results dished out. Attention shifted from search to all-encompassing portals. Advertising was limited to banner ads and suffered from diminishing returns.

Into this market strode Google with a clean user interface and a technology that dramatically improved the quality of results. Users once again flocked to search engines. Google (and Overture) came up with the idea of linking ads to search results. As Joe Kraus (an Excite co-founder) put it, Google figured out how to monetise the long tail of searches: “We couldn’t figure out how to make money from 97% of our traffic. We couldn’t figure out how to make money from the long tail – from those queries asked only once a day…Overture figured it out, Google perfected it and we all know what happened from there. Those guys figured out something revolutionary -- the long tail of search was a advertising marketplace.”

I believe that the ASP business is where Search was in 1999 – ripe for new entrants to come in and make a mark from the long tail (of enterprises). But first, let us take a walk down memory lane to understand the promise of ASPs and then analyse what went wrong in the first wave.

Tomorrow: Rationale

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TECH TALK: The Coming Age of ASPs: Rationale

Application Service Providers (ASPs) offer applications over the Internet using their own servers to customers, who pay a regular fee for the use. For companies, there is no need to own either the application or the underlying infrastructure. For service providers, it helps them aggregate a large number of customers providing economies of scale. Using the Internet as the distribution medium, ASPs can reach out to customer globally.

HowStuffWorks has more:

There are many other ASP-like models that most of us use every day. For example:

Shipping companies - Instead of maintaining your own distribution network for packages, you pay a low incremental fee to ship a package with the post office, Fedex or UPS. BMW and McDonalds are examples of companies that do so much shipping that they actually own and operate their own truck fleets -- but this are a rarity.

Telephone companies - It would be extremely difficult for a company to justify the cost of owning and operating its own nationwide fiber optic network, so we all pay an extremely low incremental cost for each minute of long distance time we use.

Power companies - It would be possible for each homeowner and business to generate power, but not for 10 cents per kilowatt-hour. Therefore, it makes sense to purchase power from a power company that distributes the high capital cost of a power plant across all of its customers. Some companies -- especially companies that deal in forestry products -- can actually generate their own power affordably because they have a source of free fuel or waste heat from some other process within the company.

There are cases where we do not go the ASP route. For example, a huge number of Americans own and operate their own automobiles instead of using the ASP called "public transportation." Most large businesses can justify the costs of large copying machines, while smaller companies rely on the ASP called Kinkos.

The point of all this is simple -- ASPs are all around us in many different forms. We choose whether or not to use ASPs based on economic factors that are driven largely by our frequency of use and the cost of entry and maintenance.

A formal definition comes from ASPnews.com:

An ASP is a third party entity that deploys, hosts and manages access to a packaged application and delivers software-based services and solutions to customers across a wide area network from a central data center. Applications are delivered over networks on a subscription or rental basis. In essence, ASPs are a way for companies to outsource some or almost all aspects of their information technology needs. ASPnews.com breaks the industry into five subcategories:

Enterprise ASPs — deliver high-end business applications.

Local/Regional ASPs — supply wide variety of application services for smaller businesses in a local area.

Specialist ASPs — provide applications for a specific need, such as Web site services or human resources.

Vertical Market ASPs — provide support to a specific industry such as healthcare

Volume Business ASPs — supply general small/medium-sized businesses with prepackaged application services in volume. ASPs also may be commercial ventures that cater to customers, or not-for-profit or government organizations, providing service and support to end users.

Tomorrow: Business Model

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TECH TALK: The Coming Age of ASPs: Business Model

Wikipedia has more on the ASP model:

The application software typically resides on the vendor's system. XML and HTML processes on the client's computers interact with this software.

There are a number of advantages to this approach, including:

Software integration issues are eliminated from the client site.

Software costs for the application are spread over a number of clients.

Vendors can build more application experience than the in-house staff.

There are some inherent disadvantages, including:

The client must generally accept the application as provided since ASPs can only afford a customized solution for the largest clients.

The client may rely on the provider to provide a critical business function, thus limiting their ability to handle that function to that of the provider.

Continuing consolidation of ASP providers may cause changes in the type or level of service available.

HowStuffWorks has more:

The ASP model has evolved because it offers some significant advantages over traditional approaches. Here are some of the most important advantages:

Especially for small businesses and startups, the biggest advantage is low cost of entry and, in most cases, an extremely short setup time.

The pay-as-you-go model is often significantly less expensive for all but the most frequent users of the service.

The ASP model, as with any outsourcing arrangement, eliminates head count. IT headcount tends to be very expensive and very specialized (like pilots in the airline example), so this is frequently advantageous.

The ASP model also eliminates specialized IT infrastructure for the application as well as supporting applications. For example, if the application you want to use requires an Oracle or MS-SQL database, you would have to support both the application and the database.

One thing that led to the growth of ASPs is the high cost of specialized software. As the costs grow, it becomes nearly impossible for a small business to afford to purchase the software, so the ASP makes using the software possible.

Another important factor leading to the development of ASPs has been the growing complexity of software and software upgrades. Distributing huge, complex applications to the end user has become extremely expensive from a customer service standpoint, and upgrades make the problem worse. In a large company where there may be thousands of desktops, distributing software (even something as simple as a new release of Microsoft Word) can cost millions of dollars. The ASP model eliminates most of these headaches.

On paper, the ASP idea looked like a great win-win for everyone. So, what went wrong?

Tomorrow: What Went Wrong

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TECH TALK: The Coming Age of ASPs: What Went Wrong

An October 2002 article in Baseline summarised about what went wrong with the business model of Application Service Providers (ASPs):

The idea was that the customers, then primarily dot-coms, would be freed of purchasing and maintaining software and could use their dollars elsewhere, perhaps to bolster their marketing budgets and build their brands. And the rent would provide ASPs with a steady source of income.

But two things went wrong. First, there were few companies that thought renting was a good idea. Most wanted to own an asset as important as software, and they were not about to turn over anything that controls their critical business processes to an outsider. Second, the Internet stock-market crash wiped out most of the customers.

An earlier October 2001 article in Network World Fusion explored the issues in greater depth:

The ASP industry is experiencing growing pains common to any emerging technology as IT executives slowly warm to the idea of changing the way they do business. The difference is that instead of providing a tangible product, ASPs are delivering a service that is somewhat difficult to define. Add to that the inherent complexities of remotely delivering applications designed for a client-server environment, and the troubles quickly mount. Nevertheless, the notion of software as a service is here to stay. The question is which vendors will figure out the winning way to deliver that service.

In addition to some shaky business models, ASPs were facing difficult technical hurdles. "There were last-mile concerns, concerns about security over the Internet, transaction volumes over the Internet, things like middleware to write and maintain interfaces," says Rob Unger, CEO of Agilera.

So while early ASPs targeted dot-coms and small businesses that required little integration and customization, and accessed their applications largely via the Internet, maturing vendors struggled with how to provide the same service to more demanding large corporations.

Corporations were worried about security, connectivity and integration, observers say.

What's more, big companies didn't want the "vanilla" applications ASPs were set to offer, preferring customized software that could be integrated with their internal systems.

Assembling the infrastructure necessary to deliver hosted applications isn't inexpensive. Most ASPs have found it difficult to establish the customer base and recurring revenue they need to offset debt.

There is no question the ASP market will thrive, observers say. But you probably won't know the players as ASPs. Software as a service, it seems, is what we'll call the next big thing.

Tomorrow: Hagel’s Analysis

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TECH TALK: The Coming Age of ASPs: Hagel’s Analysis

John Hagel’s book “Out of the Box” (published in 2002) has an extensive discussion on ASPs, what the early companies did wrong, and how it can be done right. He writes: “ASPs in many respects presented a false start in the efforts to break out of the enterprise straitjacket. In particular, few of them adopted Web services architectures as their technology platform. Instead, they attempted to build businesses on the Internet using traditional technology architectures. This proved a significant flaw in the early ASP model.”

Hagel first outlines the ASP promise:

Capability Leverage: ASPs offered the promise of access to world-class capabilities from specialized providers, rather than an enterprise’s having to develop them internally.

Economic leverage: Many ASPs claimed to reduce substantially the total cost of ownership of enterprise applications by providing customers access to large-scale and highly specialized (and therefore presumably lower cost) operations and facilities.

Speed and Flexibility: Since customers would forgo the time-consuming tasks of hiring specialized operations staff, preparing facilities, and installing complex application software on their premises, ASPs appeared to be able substantially reduce the extensive lead times involved in implementing enterprise applications.

Hagel then discusses the ASP reality:

Product Complexity and Lack of Flexibility: Traditional enterprise applications were designed to meet the complex needs of a large enterprise. Small- and medium-sized enterprises rarely needed the full complex functionality embedded in these applications. As a result, the applications proved unwieldy in smaller enterprises – they were slower and more complicated than necessary. [Also,] applications designed using conventional technology architectures presented major challenges when businesses tried to customize them or connect them with their existing applications.

Product Performance Concerns: Within the firewall, CIOs had much better control over performance. Outside the firewall, they worried about both technical and corporate performance.

Vendor Performance Concerns: ASPs were new start-ups, with a very limited track record. CIOs found that ASPs had very limited operating history to provide reassurance that their management processes had been tested successfully in high-volume, mission-critical environments.

Challenging Vendor Economics: Customer concerns about ASP performance and the lack of compelling product benefits contributed to much higher customer acquisition costs than anticipated. Sales cycles were also longer than anticipated. [As a result,] ASPs found themselves caught in a potentially life-threatening economic bind.

Among the lessons learnt from the first wave of ASP failures:

Leverage is Essential but Not Sufficient: Companies must be assured that they will be able to trust the applications supporting their most important business activities.

Customization and Integration are Key: Customers will need more customization and integration over time, not less. Competitive pressures are forcing companies to develop distinctive approaches to the market, but also to customize these approaches to the needs of individual customers.

Business Focus Enhances Viability: The first wave of ASPs generally tied to do too much, especially in the early days...which had the perverse effect of increasing risk, rather than reducing risk.

Application Functionality Needs to Rapidly Evolve: [ASPs need to] easily develop new functionality in one part of an application without worrying about malfunctions of existing applications created in other areas. ASPs will also [need to] enhance functionality of existing applications by identifying creative new applications developed by others and plugging them into their existing applications.

Hagel’s key point: the Internet is not simply a new distribution channel. It often requires a fundamentally new set of products and technologies if a business is to exploit its full potential…Web services architectures are the key to unlocking the full business potential of the Internet.

That is the starting point for rethinking ASPs. But there’s a lot more to ASPs than web services. We also need to rethink the markets they address. We will begin by looking at what’s sparked off the renewed interest in ASPs in the developed markets.

Next Week: The Coming Age of ASPs (continued)

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TECH TALK: The Coming Age of ASPs: What’s Different

Application Service Providers (ASPs) are set to make a comeback. The term used to describe this shift in software pricing and delivery is “software as a service.” Bill Burnham considers the factors driving this trend:

First off, the main costs required to offer software as a service have declined dramatically. As Ryan McIntyre outlines in his excellent post on data center economics, datacenter/hosting costs have plummeted in the last 10 years with bandwidth costs declining 88%, storage costs declining an amazing 99.7% and CPU costs declining an even more amazing 99.9%! (When you think about this from a business economics standpoint it really is stunning.) With lower costs, the upfront investment required to offer software as a service is actually now quite reasonable.

Outside of lower costs, three other developments have helped make software a service much more attractive. First, developers have created new applications that have been engineered from the ground up to be offered as a hosted service and even many existing applications have been re-engineered to make them more “hosting-friendly”. Second, the advent of XML and web services has made it easier for companies to integrate hosted applications and data into their own legacy systems. From a technical perspective, this has removed one of the last major drawbacks of hosted software. And finally, 10 years of exposure to the web has made many corporate managers much more comfortable with the idea of hosted-applications. Even many IT managers, who at first resisted hosted applications as a potential threat to their jobs and influence have now warmed up to hosted-apps as a way to quickly meet business unit needs without adding significant costs to their own organization. For many developers, selling a hosted software solution is now an easier and faster process than selling installable code.

Business Week wrote recently: “Companies like Salesforce.com, NetSuite, and newly public RightNow Technologies are reinventing the way customers buy software. They're all making basic corporate software to manage finances or a sales team, run a business or run a call center -- not new stuff, and in many cases, with fewer features than existing products. But the innovation is in the business model. These companies deliver software over the Internet –- a Web service, if you will -- and companies pay as they go with monthly fees. That means less costly integration, no hiring an in-house administrator, and no big up-front contracts. It's a considerably cheaper and easier approach that gives these software-as-a-service companies an entrée into the last wide-open sector of software customers: Small and midsize companies.”

Tomorrow: What’s Different (continued)

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TECH TALK: The Coming Age of ASPs: What’s Different (Part 2)

KB Chandrasekhar of Jamcracker writes what is different this time around:

When Software as a service (SaaS) was introduced in earnest in the late '90s the SaaS providers were working on such thin margins that there were no significant cost savings compared to traditional software implementations.

On the demand side, the companies consuming the software were flush with money.

Today, with improved on-demand delivery and management solutions, software providers have gained significant efficiencies-of-scale in delivering SaaS, which in turn helps make for some very attractive price points.

On the demand side, companies have faced severe economic challenges over the last five years, forcing CIOs to do more with less, and to focus on bringing more discernable value to their companies.

SaaS pricing coupled with the experience of CIOs burned by massive implementations that didn't deliver promised value, means the SaaS supply and demand sides have both moved 180 degrees to where they are now in sync.

Today, while CRM dominates the on-demand market, there isn't a segment of the software spectrum from ERP to supply chain that isn't represented by a SaaS provider.

Generic functionality of the offerings is sufficient to meet the needs of most organizations, and specialized vertical offerings go even further. If customization is needed, on-demand technology has progressed to the point that it can be done much easier and more cost effectively than before.

SaaS providers are also using technology such as Web services to make it easier for their offerings to integrate with their customers' infrastructure.

All of these factors combine to make the on-demand model more attractive for the larger enterprise, and as a result, we are seeing increasing adoption in this market segment.

But the real driving force for acceptance of SaaS today is the increased focus of CIOs to deliver value. This means expending resources on projects that are mission-critical to the company.

CIOs do not want to spend time and resources installing and maintaining transactional applications that fail to differentiate the business or provide a competitive edge for the company. They want to provide the functionality required to run the company with the least amount of resources expended.

Improved technology, converging economic models, greater security (real and perceived), offerings that meet the functional needs of the enterprise, and CIOs working with leaner resources and a greater need to deliver real value have all impacted the attitude of companies considering SaaS and have breathed new life into a once left-for-dead industry.

Phil Wainewright adds:

The problem I have with talking about 'software-as-a-service' and 'on-demand software' is that these phrases continue to give the impression that the model is all about delivering software, with the underlying implication that all that's changed is the delivery mechanism. In truth, the transformation is far more fundamental than that. The most important point to bear in mind about these net-native, on-demand independent software vendors (ISVs) is that they own and operate the software themselves. They take responsibility for making sure it's up and running before the customer starts using it. What the customer pays for is not the software itself, but the working functionality the software provides.

This is a distinction that the conventional software industry has a lot of difficulty understanding. They're so used to customers paying them simply for shipping out software that they think 'software-as-a-service' means signing a service contract for the same thing spread over three years. Think Microsoft Software Assurance (I know it's not a service in the same sense but it's symptomatic of the problem), in which the only thing assured is that you'll keep on paying Microsoft for the term of the contract, however much or little turns up on your doorstep, and irrespective of whether it works. The conventional ISV's view of 'software-as-a-service' cannot help but be tainted by all the defects and limitations of their current software-as-a-product model.

Tomorrow: Software’s Long Tail

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TECH TALK: The Coming Age of ASPs: Software’s Long Tail

An interesting viewpoint about the software supply-demand scenario comes from
Joe Kraus of Jotspot:

The purpose of software in business is to support the way a business does business – from the way a business runs it’s hiring and firing to the way it orders materials to the way it tracks sales. In the market-speak that surrounds the technology business, the purpose of software in business is to support these “business processes”.

Let’s do some simple math. First, every business has multiple processes. Things like hiring, firing, selling, ordering, etc. Second, while some of these are pretty common in name from business to business (recruiting, for example), in practice, they are usually highly customized. Finally, there are simply a large number of processes that are either unique or that are common to millions of very small markets and therefore not traditionally worth the effort to buy software for (for example, the process by which an architecture firm communicates between it’s clients and the city planning office).

These three facts

every business has multiple processes

processes that are similar in name between businesses are actually often highly customized

there exist a large number of processes unique to millions of small clusters of industries.
means that there is a combinatorial explosion of process problems to solve and, it turns out, little software to actually support them.

Said another way, there is a long tail of very custom process problems that software is supposed to help businesses solve.

In the past, software’s long tail has been generally inaccessible because software has been

Too difficult to write

Too expensive to write and distribute

Too brittle or expensive to customize once deployed.
It just hasn’t been economical for someone to create a custom software company to help architecture firms.

That’s why, in the software business, the traditional focus has been on dozens of markets of millions instead of millions of markets of dozens. The traditional software model is to make software have enough features and address enough of a homogeneous market that you can sell millions of copies of the same software. In the past, that’s been the only way to make money.

Joe Kraus’ company, Jotspot, is one such ASP, with a focus around “application wikis.” Joe adds: “JotSpot is a company that is building a platform to make it easy and affordable to build long-tail software applications. To take those Excel spreadsheets and turn them into real web-based applications where you don’t have versionitis, where updates find you instead of you looking for them and where you can integrate data in your hard drive with data from the web, email and other applications.”

Jotspot is just one example of an emerging category of companies which are offering software as a service for the long tail of enterprises – the SMEs.

Tomorrow: Emerging Market Perspective

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TECH TALK: The Coming Age of ASPs: Emerging Market Perspective

What we have discussed so far have been arguments put forth from the developed market perspective. Let us now shift gears and consider the emerging markets and why Application Service Providers will have a key role to play as enterprises adopt IT.

First, there is a growing recognition in the IT companies that the next untapped frontier for growth is in the emerging markets. As these countries develop and build their physical infrastructure, the digital infrastructure and information pipelines also need to be put in place. This is where time needs to be compressed and scale needs to achieved rapidly. Making “business process portals” which cater to the next enterprises is the fastest way to reach out in an environment where the alternate distribution channels are not fully formed.

Second, there is an entire category of users who are completely underserved in these markets. I call them SMEEMs – Small- and Medium-sized Enterprises in Emerging Markets. They have been largely unaffected by the Internet – other than email usage and in some cases, a minor web presence. The software they use for their business remains almost identical to what they used five or more years ago. [In India, this is limited to mostly pirated copies of Microsoft’s Windows and Office, and Tally for accounting.] They are the weak links in the information value chain.

Third, the growing availability of reliable and affordable broadband connections in emerging markets means that the Internet is now becoming an extension of the local network. People have become comfortable with using the Internet in their lives as consumers. Even in India, broadband connectivity is becoming available across the country through the phone companies and cable operators.

Fourth, the dramatic growth in mobile phones has shown people the value of instant and always-available connectivity. Mobiles have hastened the pace of business – people can call or SMS each other. In many ways, mobiles are becoming the “computers of the East.” But the mobiles have limitations and need to be complemented by desktop computers along with applications and services. The need for multi-device access will drive the shift from desktop-based and LAN-based computing to centralised computing platforms.

Fifth, in the avatar as consumers, people have already started trusting their data to centralised services. Email service providers like Yahoo and Microsoft’s Hotmail are used by hundreds of millions of users. Various ecommerce providers have our credit card information. ASPs like Salesforce.com have also demonstrated that even businesses are willing to host sensitive customer data on central servers outside the firewall.

Finally, there are a number of technologies like web services and Ajax which can serve as the foundation to create applications that are modular and integrated at the backend, and have rich user interface not traditionally associated with web-based programs. These may be old technologies, but they are being applied in new and innovative ways by companies who don’t have a legacy to protect and sustain.

The ASP ideas have tremendous potential in the context of building out the IT infrastructure in emerging markets. They are the only way to rapidly bridge the gulf that separates the SMEs from their larger brethren. Today, the lack of IT usage by SMEEMs poses a threat to efficiencies that companies need to generate across their value chain. So, how do we get the ASP model right this time around? Let us start by taking a closer look at the SMEEMs.

Tomorrow: SMEEMs

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TECH TALK: The Coming Age of ASPs: SMEEMs

SMEs in Emerging Markets (SMEEMs) have a twin focus for their business: how do they grow, and how do they ensure that they manage this growth efficiently. Business growth comes from getting new customers and retaining existing customers (and upselling to them). One of the key ways to bring in efficiency in operations comes from automation. Smaller companies are more focused on generating newer business opportunities since they have a greater control on costs. Mid-sized companies need to more focused on ensuring business efficiency – they already have business coming in, and that needs to be managed better. So, the basic mantra for SMEEMs can probably be summed up as: automation for growth.

Technology can play a role in helping SMEEMs achieve both the objectives. Business growth can be enhanced via the use of the Web through a website, email newsletters, use of CRM (customer-relationship management) software, and search-engine marketing. Automation can be achieved by streamlining the flow of information across the value chain – to complement the flow of products and services, and money. What the right use of information technology can do is to ensure that the right information is available to the right set of people at the right time – so that decisions can be made appropriately. In essence, what IT can do is to enable SMEEMs to become event-drive, real-time enterprises.

The problem has been this goal of super-smooth, frictionless information flow rarely happens. Information is locked up either within people or inside closed business applications. As a result, managers do not necessarily have the right information they need to make decisions. At a time of increasing competition and the demand for faster response times, this can be the death-knell for businesses. The right use of IT can make a significant positive impact on SMEEMs. But so far, investing in IT has been largely limited because of lack of appropriate IT personnel within the organization, coupled with the cost of applications and their limited availability. Even the applications available only succeed in creating silos – because the cost of integrating different applications can be quite substantial.

It is this world that the next-generation of Application Service Providers need to target. There are many areas of improvement within SMEEMs and across their value chains. By providing the right set of integrated, hosted solutions with a utility-like pricing model, the ASPs can provide three clear benefits to SMEEMs. First, since software is delivered over the Web, there is no need for anything more than a computer connected to the Internet within the enterprise – complemented by the mobile phone. Second, a wide variety of integrated applications can ensure that multiple functions can be automated rapidly. This addresses the desirability issue. Third, monthly payment options allows the SMEEMs to link payments to business outcomes, thus addressing not just the affordability issue but also the ability to measure return on investment (RoI). As Ray Lane puts it: “I define software as a service as tying supplier revenue to a business outcome: the supplier sees the client’s end result, measures its success, and receives revenue based on the results achieved.”

Next Week: The Coming Age of ASPs (continued)

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TECH TALK: The Coming Age of ASPs: The Market Opportunity

For long, SMEs in Emerging Markets (SMEEMs) have been the ignored market – caught between the consumers and large enterprises. While companies like Dell and Microsoft can provide the basic hardware and software infrastructure for SMEEMs, there is no equivalent of an SAP or Yahoo for SMEEMs for their business software needs, even as companies like Salesforce.com and NetSuite target the SMEs in the developed markets. This is the ASP market opportunity. In a country like India alone, there are an estimated 4 million SMEEMs employing about 40 million employees who need to process information. Of these, just over a tenth have access to computing. So, if the market exists, why haven’t companies rushed in? To understand the answer, one needs to first consider the two other segments – consumers and large enterprises.

Consumers are the mass-market – targeted by the likes of Microsoft on the one hand, and Yahoo on the other. Microsoft’s strength comes from its Windows and Office franchise. Desktops have been the way most computing has been done for the past two decades. The Internet added the additional dimension of services delivered centrally from a browser, which has become a window to the world. In the past decade, consumer email has already migrated to the Web for most people. For much of this period, the distinction between the desktop and web platforms has been maintained.

Of late, this is starting to get blurred as the likes of Google and Yahoo seek to extend the services they offer. Google’s Desktop Search which also integrates results from the Web is one such example. In addition, various portals and websites have become part of our lives, starting with the search engines. We rely on these sites almost as much as we do on our own memory! From storing wish lists to buying items from storefronts and auctions to participating in online communities, the Web’s influence on our life has grown. In a sense, portals like Yahoo, Amazon and eBay were the very early “application services providers.” We just didn’t call them ASPs! In fact, as consumers, there’s almost nothing we cannot do online. A “thin client” with a browser would suffice for most people as long as there is a broadband connection – which is increasingly starting to happen.

Software for large enterprises has been, for long, the domain of companies like IBM, SAP, Oracle, Computer Associates and Microsoft. In the enterprise software world, SAP and Oracle are slugging it out for leadership in a maturing market. Most of the large enterprises buy infrastructure software and business applications for use within the firewall on their own networks. Deal sizes are large, and enterprise application integration is an important requirement to stitch together various software packages.

Sandwiched in between are the SMEs. For long, they’ve managed with a limited set of applications. A spreadsheet doubles as a sales- and customer-tracker. Email is used for all kinds of workflow. Even though many companies have tried to target SMEs, only a few have succeeded. A fragmented market (SMEs are everywhere), channels who are little more than courier companies, customers with limited IT infrastructure and understanding of what IT can do have all combined to limit the penetration of IT in SMEs, especially those in the emerging markets – the SMEEMs. In short, the market is ready for a disruptive innovation. And this is where ASPs come in. The needs of SMEEMs form what Joe Kraus has termed as “the long tail of software.”

Tomorrow: SMEEM Needs

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TECH TALK: The Coming Age of ASPs: SMEEM Needs

Let us begin by identifying the various needs of the SMEs in Emerging Markets (SMEEMs). We had classified the two primary drivers as business growth and automation – or to put it more succinctly, automation for business growth.

The fundamental question that SMEEMs need to ask themselves is: “How would we do our business differently if everyone had a computer on their desktop?” While this pre-supposes that IT is good for them, this is not an incorrect assumption. IT brings down transaction costs and eases the flow of information. If only a fraction of employees who need to process information have access to a computer, the flow will be more paper-driven or verbal, rather than electronic. Consider email for example. If only half the organisation has email access, then its use is severely limited. Starting with the basis that everyone who needs a computer can and should have access to one creates the foundation for building an efficient enterprise.

For business growth, SMEEMs need to ensure that they use the Internet well for their communications and marketing, to complement offline activities. While many SMEEMs have websites, they don’t necessarily have the latest information – because updates are hard. Using blog-like content management systems can simplify the website management process. An RSS feed can ensure that customers can be alerted whenever new products and services are launched. (Email newsletters were effective until recently – increasingly, the use of spam filters ensures that they may not reach their targeted audience.) While much of this is very easy to do for an individual writing a blog, this is still quite difficult to do for an enterprise – and this is of the first areas than service providers should target.

The second key need centres around the marketing, sales and support processes. These are activities which are critical to ensure that prospects are converted to customers efficiently, and customers are well-supported. This is where the likes of Salesforce.com have made a strong impact in the US. CRM and SFA functions can be handled by ASPs and companies are more likely to want these activated quickly because it helps them grow.

The third area relates to internal interactions and smoothening the flow of information internally. Email has its limitations and collaborative business processes can be done via the Web. From activities like group calendaring and scheduling to contacts management, from sharing information across teams to internal workflow-driven processes, ASPs can offer a “process portal” to allow enterprises to pick and choose the ones that they want to use. We can think of these as business services for employees.

Beyond these three, there are other processes which can be made available via ASPs. For example, SMEEMs can be offered an online e-business suite which extends the customer management processes to accounting, inventory management, and supply chain management. In addition, on the security front, ASPs can take care of ensuring that all emails received are free from viruses and spam. Taken together, these processes will help the SMEEMs automate their businesses faster.

Tomorrow: Technology Building Blocks

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TECH TALK: The Coming Age of ASPs: Technology Building Blocks

There are a number of building blocks which can be assembled together by ASPs to bootstrap the process of building the SME Services Grid.

1. Applications Grid Infrastructure

ASPs need a centralised computing and storage platform for delivery of applications. This is akin to the “Internet OS” that Google, Yahoo and MSN have built for enabling them to deliver consumer services, and IBM and Sun are offering to large enterprises for running their applications. This would be built out of commodity server hardware and open-source infrastructure software. It would make it easy to deploy and manage applications as they get deployed on this grid.

Salesforce.com is doing just that with its Multiforce initiative. Tech Beat writes about what Salesforce.com CEO Marc Benioff calls "the first on-demand operating system."

Salesforce.com started off as a simple thing. It was software running on the company's own computers that customers could use to manage their sales forces. By subscribing to Salesforce.com, customers avoided the cost and trouble of buying their own software and computers, setting up a system, and keeping it running. Over the years, Benioff added more capabilities, including tools that clients could use to customize their service and that independent software outfits could use to build related applications. That helped Salesforce.com round up over 13,900 customers with 227,000 individual subscribers.

Multiforce takes things a big step further. The technology, which is to be introduced in June, turns Salesforce.com into a platform upon which customers can run any number of on-demand applications--all of which run on its farm of computers and tap into one gigantic database. Computer users can essentially live their professional lives in the Salesforce.com interface and click back and forth between their most-used programs. This positions Salesforce.com as the counterpart in the online world to the role Microsoft plays in the PC world.

Siebel has lined up its Universal Application Network initiative to counter Multiforce, according to InfoWorld. “UAN is the moniker for Siebel's integration platform, which, according to Keith Raffel, group vice president of products at Siebel CRM OnDemand, does more than just connect applications to the Siebel infrastructure. UAN offers prebuilt connections to applications that can be reused and will speed deployment.”

IBM too is working on its own platform. eWeek writes: ““IBM and a group of ISVs (independent software vendors) including Seibel Systems Inc., Intacct Corp., Concur Technology Inc., Employease Inc., Peopleclick Inc., and Ultimate Software Group Inc., have formed what's informally referred to as the IBM SaaS (Software as a Service) Partner Council to develop and deploy a model that enables users to pick and chose software that is pre-configured and pre-integrated, and available on demand. IBM's work with the model boils down to the development of an architecture that provides a common framework for application integration. The pre-configured building blocks from hosted vendors would sit on top of that platform, and users would have the ability to choose capabilities at will, for whatever length of time that capability is needed.”

These applications grids are targeted at ISVs in the developed markets and the mid-market enterprises. SMEs in Emerging Markets (SMEEMs) need their own equivalent platform at much more affordable price points.

Tomorrow: Technology Building Blocks (continued)

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TECH TALK: The Coming Age of ASPs: Technology Building Blocks (Part 2)

2. Open-Source Software

The past few years have seen a rapid growth in the adoption of open-source software (OSS). It has moved up the software stack. Consider what SpikeSource uses for its IT infrastructure, according to SiliconBeat:

They run their whole website using OSS. Features include:
- discussion forums - PhpBB
- trouble tickets - OTRS
- Naming directory - Open LDAP
- Web Server - Apache
- Servlet container - Tomcat
- Database - MySQL
- Search - Nutch

They use OSS on intranet. Here is the list:
- MoinMoin wiki for capturing processes, policies, feature requirements, evolving design etc.
- Bugzilla for bug tracking
- Subversion for source code versioning
- Intranet Portal - JetSpeed
- Web email client - SquirrelMail
- Naming Directory - OpenLDAP
- email server - Courier-IMAP

Desktops:
- Operating System and desktop - RHAT, SuSE
- email client - Ximian Evolution
- desktop productivity tools - Open Office
- Browser - Mozilla, FireFox
- Source code editor - Eclipse

Customer relations:
- SugarCRM

It should be possible to make many of these applications available on a hosted basis from centralized servers so that the SMEs in Emerging Markets (SMEEMs) do not have to worry about setting up their own IT infrastructure. Open-source software can, at times, be hard to deploy given the cross-dependencies that packages have. These problems go away in the case of the applications being delivered from the Internet.

3. Web Services and Service-oriented Architectures

Web services can help glue the various software components together into composite applications. Bill Burnham writes: “While the term ‘composite application’ has rapidly become a kind of marketing catch-all term for any kind of next generation EAI or web service technology, the most straight forward definition of composite applications is that they are applications created by loosely coupling several different services and data stores via standardized message layers. Theoretically, the component parts of a composite application can be mixed and matched, much like lego blocks, allowing developers to create a wide variety of applications with a relatively small set of services.”

What will be needed is that existing applications (open-source or from independent software vendors) will need to have a web services interface, which will allow them to be integrated on the services grid. The alternative to this is writing applications from scratch – this can be an extremely time-consuming and expensive process. Companies like Grand Central can play an important role in providing the glue services.

Tomorrow: Technology Building Blocks (continued)

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TECH TALK: The Coming Age of ASPs: Technology Building Blocks (Part 3)

4. Single Sign-On

Identity Management is the broader theme. Access to applications and processes can be controlled via an identity manager, and users can be given a single login and password which works across all the applications. Companies like Oblix offer services in this space.

5. Ajax

Ajax was coined by Jesse James Garrett of Adaptive Path. It uses a combination of asynchronous Javascript and XML to create rich client applications. What is interesting about the Ajax idea – as demonstrated in Google’s use for its Maps and Suggest feature – is that it can help creative interactive client-side applications and potentially also reduce the bandwidth needed for server-side interactions. This could be very useful for SMEs in Emerging Markets (SMEEMs) because the broadband infrastructure is not yet fully in place.

6. Thin Clients and LAN-Grid

One of the key factors in ensuring the success of both the automation of SMEEMs and the ASP model is that there will be a computer on every desktop in the enterprises. We are still far away from this reality. In countries like India, perhaps there is just over 1 computer for every 10 employees who need to process information across the 40 million who work in 4 million SMEs. Putting the computing infrastructure in place is therefore a critical part of ensuring the success of the ASP model.

It should be possible to build a thin client for no more than $110 (Rs 5,000) – about $70 for the computer and $40 for a refurbished monitor. (A new monitor would add about $40 to the cost.) The thin client itself would have the guts of a cellphone with the capability to run Linux, a browser, and support remote desktops so as to shift processing and storage to the server. It would also have the capability to connect key drives via the USB ports. By using the chips used in mobile phones, we can dramatically reduce the cost of building a thin client. [For comparison purposes, an x86-based thin client would probably cost about 70% more at $120.]

Besides making computing affordable, thin clients also increase manageability – since these computers would not fall prey to viruses, require no upgrades for 5-7 years (or even longer), and have no local hard disks on which users could load their own programs. Thus, the thin clients can be remotely managed – reducing the total cost of ownership.

Complementing the thin clients would be a LAN-Grid – a server-centric computing platform which would deliver the necessary applications. It would centralise all processing and storage. The estimated cost for a LAN-Grid infrastructure would be about $50 per user, given a minimum of 20 users in an enterprise. The LAN-Grid can be managed and updated remotely.

Taken together, the thin clients and LAN-Grid can help create a 1:1 computing infrastructure (one employee, one desktop) for as little as $160 in capital expenditure. Amortised over a 4 year period, the cost per user would work out to less than $5 per month, even assuming some server maintenance and upgrade costs. By ensuring that every user in the enterprise has a desktop connected to the Internet, ASPs can get a jumpstart for their services.

Next Week: The Coming Age of ASPs (continued)

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TECH TALK: The Coming Age of ASPs: Technology Building Blocks (Part 4)

7. Mobility Integration

PCs and Thin Clients are not going to be the only access devices. In emerging markets, mobile phones are starting to become complementary devices to the desktop computers. For many, they are the “PC of the East.” Yet, mobile phones have not been integrated into business processes. While devices like Research In Motion’s Blackberry have popularised push email and calendar synchronisation, much more needs to be done to architect mobile phones into the SMEs in Emerging Markets (SMEEMs) workflow.

Mobile Enterprise Weblog points to a white paper by Cingular Wireless and Accenture and comments:

At issue here is the fact that mobility is not a set of technologies in search of a "killer app." Instead, Cingular posits that there are business processes that need to be mobilized. We can put the consulting-speak aside and investigate these basic categories:

* Workflow Enhancers
* Knowledge Enhancers
* Transaction Enhancers
* Reporting Enhancers

Essentially, the mobile phone must become an equal partner to the desktop computer as Application Service Providers (ASPs) focus on SMEEMs. Users in these enterprises will already have mobile phones. The mobile phone can be used for alerts and notifications, and also making queries to databases via SMS. On higher-end phones equipped with GPRS and CDMA connectivity, much more can be done. For example, field support engineers can fill out forms on the phone itself and data can be sent to the central servers via the wireless network.

8. Information Dashboards and RSS

The automation created with IT will also create a flood of information. What SMEs in Emerging Markets (SMEEMs) will need are information dashboards on their computers and mobile phones to let them focus on the flow of information, products and money. This will be enabled by RSS. Employees and top management can set up subscriptions to the information and event streams that are of interest to them, along with appropriate filters to ensure that exceptional events are reported immediately. Information dashboards thus become the interface to the real-time enterprise that ASPs and the concomitant IT infrastructure will enable.

A related idea which can help in the process of creating information dashboards is datablogging. Here is how John Robb describes it: “Data is usually locked up in monolithic applications (CRM, ERP, etc.). Application seats are expensive. Training is expensive. Etc. People that need the data often can't get to it. What if human readable data flows (via RSS) could be generated by these applications? It would allow the development of easy to read weblogs (that republished these RSS flows) that almost everyone in the company would find valuable. The combinations are almost limitless and the flow is completely automated. The flip side is also extremely valuable. Using a weblog model of data entry, it would become much easier to train people to enter data in a timely fashion. Further, they get immediate feedback on their efforts since the data they post is transformed into an entry on the blog.”

Tomorrow: The Buyer’s View

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TECH TALK: The Coming Age of ASPs: The Buyer’s View

So far, we have seen that buying software as a service makes great sense from a customer perspective – in our case, the SMEEMs (small- and medium-sized enterprises in emerging markets). The key benefits are: there is no need to invest in any IT infrastructure, payments are made monthly and can be tied to business outcomes, and it is possible to get an integrated solution which automates key business processes. David Coursey has more:

1. The app provides functionality many businesses need, but isn’t terribly different from one company to the next.
2. The service allows customization, but the Software as a Service (SaaS) model prevents clients from doing too much reinvention. This saves money and grief. It also encourages best practices.
3. The service brings together information from several sources and presents it to the user in a friendly, web-based interface.
4. Hosted services are easier to get running, partially because of the limited customization potential but also because there’s no hardware to buy and no software to install.
5. There’s also no software to manage, fix, upgrade, etc. All that is the responsibility of the vendor. Customers get a semi-custom application without having to hire developers and people to keep it running.
6. SaaS costs are predictable and typically usage-based.
7. If the vendor doesn’t meet your needs, there usually is no long-term commitment and it’s easy to switch. This keeps SaaS vendors responsive.

Ed Sim adds: “While every piece of software should not and will not be delivered as a service, it is also quite clear that customers are tired of buying expensive software products with large upfront licenses, expensive hardware to purchase, manage, and maintain, followed by expensive professional services to get the product up and running. From this backdrop, it is easy to see why reducing complexity and simplifying technology for customers is a big driver to more rapid adoption of products. It is also easy to see why reducing complexity for the customer also helps reduce complexity for the vendor, lowering the friction to sell and deliver its product. This means a more capital efficient business model, one which would hopefully scale much quicker and cost less to build product, sell, and support customers.”

From an emerging market perspective, buyers have few choices once they decide they want to automate their business and invest in IT. Most current packaged software solutions continue to be priced in the dollar-equivalent in local currency making it far too expensive for most enterprises. The home-grown solutions packaged software solutions may not be good enough. This leaves them with three unpalatable options: non-consumption (which does not help them do what they started out to do), piracy (which tends to happen quite a lot in the emerging markets but is limited to some of the more basic applications), or customised development (which can leave them dependent on a mon-and-pop software company, take time and over the long run, prove quite expensive). Thus, buyers in emerging markets will look favourably at ASPs. Given their lack of legacy in terms of business applications, it may actually help them leapfrog with state-of-the-art software applications – delivered over the Internet, and integrated with their mobile phones.

Tomorrow: The Seller’s View

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TECH TALK: The Coming Age of ASPs: The Seller’s View

What about the software vendor? What are the benefits for software companies to sell software on a hosted basis as a service? Ed Sim enumerates the benefits for the vendor:

1. Easier to sell
-shorter sales cycle-do not have to test extensively in a customer's environment
-lends itself to telesales, can demo over phone and web, do not need a huge sales infrastructure to close deals (just need quota bearing reps without a huge staff of sales engineers and professional services guys to get the job done)
-not a capital expense, usually sold as monthly or annual subscription which can many times be taken out of business budget as opposed to IT budget

2. Easier to install
-no messy installation process, long testing process, or even waiting for hardware to be delivered to customer
-can leave a customer and simply point them to a URL, train them over the phone, and get them up and running
-all of this means that the business can scale rapidly

3. Cheaper to support
-browser-based delivery and richer client interfaces like DHTML make it easy to use for the customer=less training=less customer support costs

4. Easier to integrate
-standard APIs make it easier for software delivered as a service to integrate disparate systems
-once again, reduces costs to deliver product to customers and also removes obstacles to getting customers

5. Cheaper to build
-versus a few years ago, you now have much cheaper bandwidth, storage, servers, and software
-think Linux, Intel boxes, cheap bandwidth, commodity software stacks, and smarter entrepreneurs changing the economics of building and delivering software as a service.
-the economics speak for themselves

Ray Lane adds:

Many established software companies will see the benefits and figure out how to make the transition: A service delivery and pricing model gets software vendors out of the “hockey stick” sales dynamic at the end of the quarter. It gets the customer out of having to buy something before they can use it.

Even the largest, most entrenched suppliers can start by offering software online, especially to under-served markets and incremental offerings to existing customers. Companies can also use the down market and its lower expectations to begin offering more remedial commercial arrangements, such as term licenses or leases, for example. And then, vendors must learn to say “no” to big discounts to get deals done in the quarter. Every deal done for quarterly gratification by a sales team or analyst expectations erodes long term value. Customers already know this and drive supplier to highly discounted deals, which many times turn to shelf ware.

Small private companies starting up have an advantage. They can develop a service model from scratch and use it as a competitive advantage…It boils down to simple economics. With a large customer, you can discount very large product sales up front and erode the value of a relationship or develop a long term relationship that is a win-win in terms of price/value that builds a more sustainable and predictable business. Any economic analysis will show that the service model will offer a better opportunity long-term for profits and cash flow, despite more required investment in the short term.

From an emerging market perspective, sellers have few choices. If their packaged software is good, it will likely get pirated and they will be forced to increase their prices which can further encourage piracy. Most software companies then opt for customization – which locks the customer, but prevents them from building a large, scalable business. In India, accounting software maker Tally has been the only exception – even as it ahs built a near-monopoly market share, it too suffers from very high piracy levels. It has now reduced pricing of its single-user version to under Rs 5,000 ($110) and backed it up with a large advertising campaign and channel building exercise to capitalise on the adoption of VAT across India. Software companies will need to learn from the Chinese gaming companies: shift to an online model to eliminate piracy and increase reach. Going the ASP route is going to be the only option for ISVs seeking to build a large and profitable business.

Tomorrow: The Problems

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TECH TALK: The Coming Age of ASPs: The Problems

Having discussed all the benefits of the ASP model, it is only fair we look at some of the problems associated with it. They are five key issues – the two most important deal with Customisability and Integration. In an article last year, The Economist laid out the arguments – and the responses:

[There are] two main arguments against the ASPs. First, software as a service is much harder to customise for the special needs of big firms. Second, it is harder to make it work with a firm's existing software applications. “Companies want their CRM to integrate with their billing system and everything else,” says George Ahn, the CRM boss at PeopleSoft. Salesforce.com's motto—“No Software”—is thus hot air, says Mr Ahn, because it takes lots of software and fiddling to get it to link to the rest of a client's systems. “There is no magic pixie dust that makes integration go away.”

Mr Benioff shrugs (note to regulators: this was before the quiet period). The evolutionary advance of the second generation of ASPs over the first is precisely that customers can now customise their pages, as easily as consumers arrange their Yahoo! or AOL pages to their liking. And the task of integration too has been solved. In fact, argues Mr Benioff, clients can do themselves a favour by letting Salesforce.com worry about hooking their various systems together. Increasingly, the vision says, all that users need to understand is how to navigate a web page, leaving them to get on with life. That is the same for Salesforce.com as for Google.

The third issue deals with Performance, which is related in part to the bandwidth available, and the fact that a rich client interacting with a local server will always be faster than a browser talking to a server over the Internet. The bandwidth bogey has been there since early days. While it is not much of an issue in the developed markets, it is still a serious issue in emerging markets like India. But the good news is that telcos and Internet service providers are working to bring down the cost and improve speeds. With regards to the rich client, technologies like Ajax hold promise to bring the experience ofa rich client within the browser.

The fourth issue deals with Security. Can enterprises trust a third party with all their mission-critical data? The response to that is: we already are. Banks hold our financial information and provide us online access. There are many sites which have our credit cards. Some of us even use public email providers for our business mail. In fact, all our email is sent unencrypted over the Internet. The success of ASPs like Salesforce.com (nearly 14,000 enterprises and over 200,000 individual users) is testimony to the fact that we are getting more comfortable using online services. But this still means that ASPs will have to demonstrate that they have adequate safeguards in place before customers can trust them with their confidential business information.

The fifth issue deals with Data Lock-in. What is the ASP decides to shut down? Or suddenly increase its rates? Wouldn’t business users be locked in because they may have no option? To tackle this issue, customers need to ensure that ASPs have standard mechanisms to export data out should they wish to move. This needs to be verified before the business starts using the ASP as part of its processes. With technologies like web services, this should be much easier to ensure.

Tomorrow: Looking Ahead

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TECH TALK: The Coming Age of ASPs: Looking Ahead

In this series, we have looked at the Application Service Provider (ASP) model in detail – with special emphasis on the emerging markets. I have argued that even as globally ASPs are making a comeback and software-as-a-service seems likely to define at least a part of the industry, in emerging markets, the opportunity for both SMEs in Emerging Markets (SMEEMs) and the ASPs is significant. This is because of the lack of legacy infrastructure – enterprises have simply not invested adequately in IT over the past decade because of issues like affordability (dollar-denominated pricing), desirability (lack of relevant applications) and manageability (not enough skills to manage technology). Now, with the ASP model, all of this can change. As businesses realise that they have to automate for growth, software vendors have an opportunity to fulfill this market need.

In fact, I believe that from the perspective of emerging markets, the ASP model of software-as-a-service is a disruptive innovation. The competition, for the most part, is non-consumption, as SMEEMs use only limited software for their business. The need in these markets is for ASPs and SME Tech Utilities. ASPs build the back-end and SME Tech Utilities provide the whole solution to the customer (thin clients, LAN-Grid, broadband connectivity, and perhaps, consulting to ensure that they can make appropriate use of the software).

One way to accelerate the process would be to build Tech 7-11s in business neighbourhoods. These multi-purpose Tech 7-11s can be the last mile bridge between the ASPs and the SMEEMs. In emerging markets, businesses will need greater hand-holding as they automate their businesses – and this is where the Tech 7-11s can play a starring role. In addition, their physical presence will also reassure customers wary of dealing with faceless service providers.

SandHill.com quoted Amy Wohl as part of an article outlining the key trends in 2005: “We are about to enter the age of the ASP where software - nearly any kind of software - is available as a service. Not a service you buy and pay for by the enterprise, by the year, but rather a pay for usage model, where a user can buy as little as a single picture or the one-time use of a special font - or budget software for his 20-person company for the next three months, extendable at will."

The Age of ASPs is upon us. SMEEMs are the last frontier for technology companies. They have only used IT sparingly so far. They are also the engines of growth for their countries. As emerging markets develop, these enterprises will grow and need to leverage IT and best practices to ensure they are not the weak links in the real-time value chains of the large enterprises. Technology companies seeking growth will do well to look at SMEEMs and using the service model to delivery software to these enterprises. This is where the next Black Swan (a la Google) is waiting to be born.

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