ASPs set for take-off

Predictions about the Application Service Provider (ASP) market have been unvarying — the market will explode, or so most analysts say. Yet so far the Canadian market has remained calm, perhaps the quiet before the storm.

Getting your applications from somewhere else can be beneficial for various reasons, depending on where you get them from, according to analysts. But for the most part, the benefits touted boil down to the fact that ASPs can save you time and money. They can allow you to focus on other pressing IT issues and can enable the entire company to focus on its core competencies.

So if ASPs can provide benefits this significant, why hasn’t the market taken off?

The industry needs examples, explained Lars Goransson, an analyst with IDC Canada Ltd. in Toronto. People want to see instances where users have saved money, or have accomplished new things. But with the market still so nascent, there’s still not much to see. Bottom line? It may just take some time.

“There is a lot of hype right now, but not a lot of revenue,” Goransson said.

A recent study conducted by IDC Canada focused on the national ASP market, and its results revealed that presently the market is very small, Goransson said.

“I think our overall estimate is at around $20 million from 1999, so it’s very, very small, but growing very fast — that’s our forecast,” he said. “We found that approximately 30 per cent of the firms that we interviewed were very interested in the concept, but that means that 70 per cent were not.”

Goransson said 30 per cent is a large number for such a new concept. In fact, the idea is still so new that a lot of people still don’t know what an ASP is, Goransson said.

“Thirty per cent is a large chunk,” he reiterated. “To me, that it’s so large so early on is still a good indicator that there is a lot of pent up demand.”

For example, Goransson explained if five per cent of companies can be convinced to rent from ASPs over the next two years, the result would be a skyrocketing market with the potential for even more growth after that.

Jim Lysyk, the Alberta industrial sales manager for Westburne Electric in Calgary, doesn’t need to be convinced of the advantages of using an ASP. He’s been using one for over nine months.

Westburne, which is headquartered in Montreal, is a wholesale distribution house of electrical, heating, plumbing, refrigeration, voice/data and communication equipment. The firm had been having difficulties with its network for some time and decided to outsource all its IT operations, including applications.

The company’s sales force and inside sales team now use client management software from ONYX, which is supported through Irvine, Calif.-based ASP FutureLink Corp., Lysyk said.

Lysyk said he’s happy with his ASP arrangement, because Westburne employees now have more time to spend on customers.

A lot of companies are adopting the same opinion, according to Nancy Henderson, vice-president for alliances at SAP Canada Inc. in Toronto. SAP has been in the application hosting market since early 1998.

“For a while companies were really feeling like they needed to keep all of their information, applications and resources in house,” Henderson said. “What they’re finding now, is with globalization, with competition, with deregulation, they really want to focus on their business, their customers, their customer service, value-added services to their customers, and they don’t want to focus on the technology.”

In the U.S., Henderson said SAP is finding a lot of interest from the dot-com companies.

“They see it as a benefit,” she said. “It frees them to concentrate on, I like to say, the application of technology, not the technology of application.”

But as for the bigger companies which have internal IT infrastructures, Henderson said alleviating some of their costs is where the benefit lies.

John Girard, an analyst at the Stamford, Conn.-based Gartner Group, said that saving money by using an ASP is a definite benefit, especially over time.

“I really don’t need to build a mountainous data centre to house all of my applications, where if I’ve got one that I’m thinking of either rejuvenating, expanding, or tearing down, I may be able to halt expansion, contain my expenses there and start using a wholesale-type approach,” Girard said.

He explained that once people gave themselves permission to think about running applications over LANs and WANs, they realized that the old centralized model of computing wasn’t so bad. That, Girard said, is why the ASP market is so open and why there is interest.

Jenelle Helt, the director of application services at Interliant Inc., an ASP headquartered in Purchase, N.Y., said interest in the market is also being piqued as time goes on and technology progresses.

When Helt first got involved in the ASP market, security was foremost on customers’ minds. They didn’t trust the Internet, and didn’t know much about it. That has obviously changed considerably, so people are more receptive to using the Internet for more than just surfing.

Another significant change involves the applications themselves, according to Helt.

“Applications that are being developed as a service from the ground up as well as some of the larger application developers out there creating the applications…that is really much more of a service entity than it is a product,” she said.

With all the different offerings and providers, and with the market still just beginning to make its appearance, it can be a difficult task to decide whether the move to outsource your applications is right. It could be an even more difficult task to choose an ASP.

The hunt was not an easy one for Westburne’s Lysyk. The ASP industry is “pretty non-existent,” he said. “There’s no exposure, and there’s not a lot of customers. I just went by word of mouth and then went and searched on the Internet and found all I could find.”

He also suggested attending user conferences, to get an opportunity to ask questions and meet one-on-one with experienced customers.

While he said it did not really matter where the applications came from, it was important for Lysyk to have local representation from the ASP he chose.

Gartner’s Girard said it is also wise to consider who the end users of the service will be. You will then be able to “apply your knowledge of building a scenario around that type of user to make sure you’ve painted a very clear picture of the quality of service and service level agreements you need,” he explained.

Finding out about current and planned capabilities in those areas is a good idea, and you would want to build exit clauses into the contract based on problems that you anticipate might occur, advised Girard.

Also include “a reasonable amount of time to resolve them, a reasonable protocol for the ASP and the end user company to notify each other, and if it can’t be resolved in a timely fashion, you want an exit clause,” he said.

Part of the reason to go with an ASP is because you want to reduce downtime and increase productivity, and if you don’t have these fully investigated before you sign up, then both are in jeopardy, Girard said.

If you do decide to go with an ASP, Interliant’s Helt also warned to be prepared for problems that may arise, especially during the transition period. Education internally about how the solution is being offered is important, as well as understanding who has control of what. Transitioning to an outsourced model could mean an adjustment for the IT organization.

Despite all the adjustments required, ASPs can be just as appropriate for large organizations as small ones, Girard pointed out.

“A large company that wanted to move quickly in developing new products and has money to throw into development but doesn’t want to run it through their standard, inside, politically charged, automatically-delayed process can use an ASP for rapid application development and rapid prototyping,” Girard said. “And I am getting a lot of calls from Fortune 500 companies saying they want to do that. So there’s definitely interest.”

Right now it’s really just a waiting game, according to Goransson, but this year is an important one for the Canadian ASP market.

“It will either start taking off seriously (this year), or it will be pushed off another year or two in the future,” he said. “And I think it’s really dependent on some customer examples right now because there’s no real customer success stories that are being bandied around, but there’s no customer failure stories either.”

SAP’s Henderson said there will be a surge of activity in the next six months, and that there will be more growth with every year that passes.

“I would say every year for the next 3 years we’re going to see this grow by 80 to 90 per cent per year. What is going to make it grow…is the Internet, it’s globalization, it’s competitiveness, it’s profitability,” she said.

Kevin MacIntyre, a senior product manager of Mpowered solutions at Aliant, a Halifax-based ASP, agreed with that time frame based on what he has been seeing.

“In Canada, obviously, we’re not as aggressive as in the U.S. in terms of technology adoption. But software as a service, I don’t see in Canada. Today I see it as being in extreme infancy,” he said. “When the whole software and technology can become a service, then I see a market opening up, especially in the small business marketplace. In Canada, I think we’re still six to eight months away from an ASP market forming.”

Customers are showing less and less need and want for customization, according to Interliant’s Helt. They do show

“the willingness to maybe get 80 per cent of their needs, as long as they can get the solution faster.” A lot of the reason for this is related to time-to-market and costs, she said.

But she added that in the past the application vendors created, essentially, platforms where customers could do whatever they wanted, and the emphasis was on a lot of choice. While in the past that was a good thing, Helt continued, now it means that customers may potentially be overwhelmed with all the choices they are facing.

“I think internally organizations are much more flexible from a growth perspective and a change perspective than they’ve ever been. They’ve had to be to be successful in the market.”