Bus. Std: The Return of ASPs

My latest column in Business Standard:

Application Service Providers (ASPs) are set to make a comeback in an avatar that is also being termed on-demand software or software-as-a-service (SaaS). 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 entre into the last wide-open sector of software customers: Small and midsize companies.

KB Chandrasekhar of Jamcracker wrote recently on ASPNews.com about what is different this time around: 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.

SMEEMs ((small- and medium-sized enterprises in emerging markets) 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 use the service model to deliver software to these enterprises.

The opportunity for both SMEEMs and the ASPs is thus 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. A number of factors will enable this shift.

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, 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.

Third, 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.

Fourth, in the avatar as consumers, people have already started trusting their data to centralised services. Email service providers like Yahoo and Microsofts 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 (Asynchronous Javascript and XML, also called remote scripting) 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 dont have a legacy to protect and sustain.

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 in an article on Sandhill.com: I define software as a service as tying supplier revenue to a business outcome: the supplier sees the clients end result, measures its success, and receives revenue based on the results achieved.

For the business, 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. Software companies who so far have only limited success in selling software to businesses – 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.

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. ASPs can change that. The Age of ASPs and software-as-a-service is upon us.

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.