ASP: Death of the disc

Software upgrades are the bane of businesses everywhere, but now on-demand alternatives look set to change the way we work forever. GrowthBusiness investigates the growing trend for ASP.

In just six years Marc Benioff has carved quite a reputation for himself in the IT world. At 6’ 5″ and with a manner more akin to the great American showman PT Barnham than the traditional Silicon Valley geek, he has consorted with rock stars, offended followers of the Dalai Lama and consistently taunted rivals and (former) friends. Moreover, through – the business application developer he founded in 1999 – he has busied himself informing all and sundry that business software (in its current form at least) will soon be no more.

Benioff, you see, is a consummate promoter of the application service provider (or ASP) model of software delivery, an idea that is, in itself, rather basic.

According to this model, software is not a fundamental business brick that needs to be bought and imbedded into the business foundations. Rather, it should be considered as little more than a utility, which helps a business to reach its full potential. ‘When you build a hotel you don’t build your own nuclear power plant or dig your own well to get the necessary power and water,’ he analogises, ‘and likewise we don’t think companies should have to build their own IT systems either.’

Instead of employing the likes of a Siebel or SAP to install and deploy complex software and hardware onto its own system, a business can simply access the application via an internet connection. In theory, the customer wins on both cost and simplicity – a powerful draw when you consider research group Gartner’s damning pronouncement that around 50 per cent of traditional business IT projects fail.

So why the change?

ASP (aka ‘managed services’, ‘software on-demand’ or ‘apps on tap’) is by no means a new concept. In fact, a plethora of software companies touting the approach came to market in the late 1990s and early 2000s only to subsequently fall by the wayside. With the benefit of hindsight it is easy to see why many failed.

The main problem was bandwidth. Anyone who has used a dial-up internet connection will be aware of how long it can sometimes take just to open a single web page. At such speeds, paying a credit card bill online can be time-consuming enough, let alone running a business application.

The past two years, however, have seen broadband take off in a major way (there are now well over four million connections in the UK), and since a standard broadband line today is up to 40 times faster than a dial-up connection, the use of sophisticated applications online is becoming increasingly feasible.

For those who have long supported the ASP model the transformation has been remarkable. ‘When I started at the company five and half years ago people were very worried about ASP – these days they’re seeing it as more of a genuine business proposition,’ comments Craig Sullivan of US-based customer relationship management specialist Netsuite.

A question of mobility

For certain applications – typically, software such as customer relationship management (CRM), which require the updating of large company-wide databases – ASP delivers a number of significant advantages, principally mobility.

First Derivatives, an IT venture based in County Down, Northern Ireland, which sells its wares predominantly to companies on the UK mainland, is the classic example of a growing business able to benefit in this way. The key, says chief operating officer Michael O’Neill, is that with ASP all a worker needs to access their employers’ systems are a laptop, an internet connection and the relevant security clearance. ‘If, like us, you have 30 or 40 people out of the office at any one time it becomes absolutely invaluable,’ he says.

For First Derivatives, the case was so compelling that it set about developing its own suite of ASP products (including CRM, project management and e-procurement functions) to help run its operations smoothly. A deal has since been struck with BT, where the telecoms giant markets these applications to its own business customers in turn. ‘We believe in this because we couldn’t run without it,’ O’Neill concludes.

CRM leads the way
Given the experiences of First Derivatives and the prominence of both and Netsuite, it should come as little surprise that CRM has been among the first applications to attract customers to the new model. While on the road, sales reps can access a company’s central system and work as if they are in the office. This not only makes them more mobile, but also affords sales managers and directors an ability to monitor and analyse the progress being made in real time.

Levelling the land
For smaller, faster-growing firms, ASP offers several additional advantages. First and foremost, it helps level the playing field by providing such businesses access to more sophisticated systems that they might have otherwise been denied.

Via the traditional software model, large multinational software vendors simply had nothing to gain by providing complex systems to smaller firms and the necessary implementation, hardware and maintenance costs were uneconomic.

‘If you wanted to buy a legacy document management system,’ notes Mark Suster, chief executive of on-demand software business BuildOnline, ‘it would cost £1 million to buy the software, 18 months to implement and customise the solution and you’d then have to hire specialised staff to manage it. Mid-sized companies have never really had access to this because of the cost and complexity involved.’

Supply the software online, however, with customers being charged on a per-user basis and suddenly businesses of all sizes can benefit from the full strength application.

Through ASP, customers are also spared the pain of integrating and maintaining their systems. For most growing businesses IT is a pain, albeit a necessary one and, as Salesforce’s Phil Robinson notes, ‘with traditional software offerings you have to worry about installation, maintenance and a whole horde of other issues. In fact, you need your own IT department and, with smaller firms, that’s a huge issue. We can take away the burden of having to run their own system.’

‘There are benefits in terms of both headcount [namely that you don’t need to employ specialist IT staff] and hardware,’ agrees Neill Lloyd, chief executive of IT group Netstore. ‘You don’t need to worry about buying a big box to host the software in as we’ve already assembled all of this ourselves.’

Making it easy
Last but by no means least, there is a clear message of simplicity ingrained in the on-demand model. Software upgrades are typically provided regularly and for free, with those using the system benefiting instantly as the service provider only needs to flick the relevant switch.

And most of the applications them-selves try to be more intuitive to potential users. Having previously worked as a software integrator, BuildOnline’s Mark Suster recounts that, ‘I found the more features you provide, the less people will use. Unless you use things day in, day out you forget how to do things and you stop using them. Most people only scrape the surface with things like Word and Excel but still manage to achieve what they need to.’

Have no fear
For many, the biggest concern related to the move to ASP is that it is, in essence, a form of outsourcing and, as Netstore’s Neill Lloyd concedes, some will be scared by ‘a certain loss of control’.

It is essential to remember that in exchange for the benefits highlighted (increased mobility, lower costs, fewer maintenance and integration demands), your data will no longer be stored on your own servers. Instead, the likes of Netstore or Salesforce will host this data for you and will provide you with the means of accessing it.

To BuildOnline’s Mark Suster, the European market in particular is warming to this slowly, especially as there remains a sense of ‘oh my gosh, you mean YOU host OUR data!’ among potential customers. But he also points out that ASP firms such as his are likely to possess more advanced and secure systems than the average growing business and should, in any case, be able to provide complete data dumps and audit trails on request. If things don’t work out it is relatively simple to resort to a more traditional system.

Much the same can be said with regard to security. Those pursuing the ASP model must ensure the providers they are speaking to can address any concerns they have. In turn, providers should have appropriate security issues in place and be willing to discuss these.

Ultimately therefore, switching over to the on-demand model is an issue of personal preference and willingness to hand data over to a third party. With Gartner forecasting that around 30 per cent of all IT will be delivered in this way by 2010, however, it seems that familiarity is starting to breed trust.

The future
One way or another, there seems little doubt the way we buy and use IT and software is changing. CRM has been the first market to really benefit because, as Mark Benioff puts it, ‘Salesforce was in the right place at the right time [and is now regarded as one of the fastest-growing IT companies in history].’

The more general implications are profound too, with other applications, like finance and payroll, human resources and document management, becoming increasingly relevant as businesses continue to expand geographically and the move towards a mobile workforce continues.

Perhaps most significantly of all, even the big boys are joining in. IBM, Microsoft and Oracle are among those now touting their on-demand credentials and more or less any IT CEO you care to talk to will tell you that ASP, in some form, is the future. Growing firms should be among those benefiting the most.

Need to know – What is ASP?

An application service provider (ASP) is a company that offers individuals or businesses access over the internet to application programs and related services that would otherwise have to be purchased outright and located on their own personal computers or business servers.

The ASP is responsible for hosting the software application and data servers. The client just pays a licence fee to access the software and a hosting fee to access their own data/information.

The main benefits of ASP are:

  1. Cost – ASPs are becoming an important alternative for companies of all sizes. For instance, small and medium-sized ventures operating within tight IT budgets can now access and utilise software/services that were previously out of their price range. For larger companies, an ASP provides the perfect IT outsourcing service.
  2. Efficiency and investment – the ASP is responsible for improving, upgrading and maintaining the software and services they offer. This is supposed to save users time, staff resources, money – and hopefully a lot of worry.
  3. Remote access – ASPs provide a remote access service for the users of an enterprise (perfect for those ‘working at home’).
  4. An off-premises local area network (LAN) to which mobile users can be connected, with a common file server.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

Related Topics