Outsourcing is one of the fastest growing areas of business. After farming out mundane necessities such as office cleaning, vehicle management and catering, the most popular activity is likely to become information technology.
What began a couple of years ago as software rental has developed into complete computer services by application service providers (ASPs). Software is held on servers at a remote location, accessed in the customer’s offices via the Internet or in some cases by leased telephone lines.
It is all done under contract and gives a business the computing power and software it needs without the headache or distraction of choosing, buying and running an in-house IT operation. So far, big companies, often in financial services or sales and marketing, have been at the vanguard.
Now timber is joining other sectors in getting involved. Weyerhaeuser has outsourced much of its information technology as part of its efforts to streamline support services. And Jewson has linked its 385 branches in a software deal – and it could be the first of many.
ASPs are proving particularly popular with SMEs, both as start-ups and small companies looking to expand into e-commerce. Without an ASP, a start-up company requires an IT package for general operations and the costs go up as more functions are added. Fitting out a computer operation is expensive and there is no guarantee it will do all the things expected of it once has been installed. ASPs overcome these problems.
Increase predicted
A survey earlier this year by international business information service Datamonitor predicted a huge increase in ASP business. In fact, the wider area of customer relationship management (CRM: previously known as outsourcing) will get the majority of its growth from SMEs switching to an ASP.
Datamonitor says ASPs generated a mere US$3m worth of revenues for CRM software vendors in 2000, but will buy applications worth US$390m in 2005. One insider has ventured that the sale of boxed software in the business sector could be a thing of the past within three years.
Another Datamonitor survey says the European ASP market will be worth US$16bn by 2005, with about 1,000 ASP companies vying for a piece of the action.
The idea comes from the US and extends the philosophy that the information a company uses is the important factor and not the donkey work of manipulating and transporting it to produce an end product. This is especially so in non-core software such as
e-mail, word processing, spreadsheets and other run-of-the-mill commercial applications used in the back office.
This is the attraction for Jewson. While it has a sophisticated computer operation for trade, the new deal with UK ASP FutureLink is a fully managed and packaged service for the back office, using Microsoft Office 2000 Suite. It provides each branch with Word, Excel and Power Point, plus Microsoft Outlook to replace the company’s old text-based e-mail system. Jewson staff can access any of the applications through a web browser from any location.
Ideal solution
Jewson IT infrastructure manager David Hall said: ‘ASP is an ideal solution for Jewson, enabling us to quickly introduce valuable office productivity and messaging software into our UK outlets.’
In some sectors, suppliers of so-called core activity computer power are looking at becoming ASPs in their chosen fields. Rather than selling specialist software, the supplier holds the software on servers at its own premises and provides customers with a link via the Internet.
Outsourcing computer requirements is not new. For years IBM has operated on-site mainframes on one-to-one contracts for big companies.
An ASP is an independent company servicing lots of customers from its own central facilities. This provides economies of scale, plus new and additional services customers would not have afforded just for themselves.
Customers sign up for three or four years and get all their IT needs for a monthly fee, perhaps a fixed price based on the number of users, or in some instances a pay-as-you-go arrangement from a metered source. This is useful for start-ups, reducing one-time costs and overheads. It is also attractive for e-commerce customers who will pay only according to sales on their websites.
However, it can be expensive initially. Weyerhaeuser, according to the company’s latest accounts, spent US$26m. Jewson would describe the cost only as ‘a significant sum’. Some ASPs admit you could probably set up your own IT operation for less but it would take time, there would be ongoing costs and no way to chop and change without throwing everything out and starting again.
Customer spend
A survey in the US showed the cost of most ASP applications are beyond businesses generating less than US$1m as the average ASP is looking for a customer spend of about US$1,000-plus per month.
For that, the customer has no responsibility to provide, run and maintain servers, they have access to the most up-to-date versions of software and have back-up from hard-to-find and expensive IT professionals.
Also, a customer does not have to worry about the obsolescence of hardware and software. And it can grow or shrink its IT use in line with the fortunes of the business.
It is almost like gas or electricity, having it on tap and paying for what you use.
Sun Microsystems, a big player in providing kit to ASPs, has called it ‘data tone’ after the telephone dial tone.
The big change has been the Internet. Much of the momentum behind the ASP model has been from Internet service providers trying to offer added value to their Internet services.
The Web Works in Newcastle has opened a server-farm called the North East Data Centre to run dedicated servers for web hosting with the latest marketing software from £1,300 per year. The centre can accommodate thousands of racked servers at its high-security building.
Other services
Customers get all hardware, operating systems, configuration and maintenance in the package. Other services include server clustering, data warehousing, leased lines, firewalls and remote back-up.
However, one of the major reasons businesses are cautious about ASPs is the perceived loss of control. Company data is in the hands of the ASP. They store it, transport it and guard it. They have to ensure no-one, such as competitors, can access it and make sure it remains in working order. They also need a foolproof disaster recovery and survival plan.
Confidence in an ASP is vital, which is why Sun Microsystems has started its SunTone certifications and branding programme. SunTone acts as an industry-wide initiative to brand-mark network services and applications to a rigorous set of criteria for quality.
This allows potential ASP customers to identify the applications and services that come up to scratch. It also helps service providers select suitable applications and checks on how they build their data centre infrastructure, their business practices, integration processes and the deployment of applications services.
Datamonitor research shows that cost is also a restraining factor, especially in communications. And security is also an issue. The cost of communications will inevitably come down and for security, customers could look at a virtual private network, a secure encrypted Internet connection.
Another area of resistance is within IT departments, where ASPs are seen as a threat. In the Datamonitor research, 78% of IT managers said they had never heard of the term ASP. Cynics might say they just don’t want the word to spread.
It is clear the market has reached a critical point, where potential users are poised to switch, but are waiting and watching. Analysts predict the market will begin to consolidate as bigger players swallow the pioneers, using takeovers to buy up subscribers.
