Technology: This Software Is For Hire

TECHNOLOGY
This Software Is For Hire

Don't buy; rent. That's the apps-on-taps model application service providers are wooing customers with.

Ashutosh Sinha

Dusk Valley Technology (DVT) is not what you would call a software biggie. The company is closely held and boasts a modest turnover of $ 2 million. So, why does it find mention in the first line of this composition? The answer lies in its business model. For DVT, and a rash of other software companies-ranging from front-pagers like Satyam and Microsoft to their lesser-known contemporaries like Intelligroup and Eastern Software Systems-are trying to tap the nascent Application Service Provider (ASP) market. That, for the uninitiated, is the hottest three-letter abbreviation doing the rounds of the tech industry. Cleopatra would have approved.

To get the definitive definition of the term out of the way before you can say, well, ASP: an application service provider is a company that leverages the Net as a delivery mechanism to provide applications from an on-line data centre to a community of users. Phew! If that sounds too complex, just call it what the techies do: apps on taps.

Put simply, instead of buying and installing the software required to run an application (say, payroll processing), and housing the data required to run this application on site, a company could outsource the entire activity from an ASP. The concept of an ASP, then, is derived from two fundamental principles of doing business in this century: one, companies can improve their own productivity by outsourcing certain activities from specialists; and two, the Net makes it possible for them to do so, on-line and in real-time. Says (that's a weak word to describe the almost evangelical fervour with which he does so), Anil Menon, 32, Country Manager, Citrix Systems: ''This (the ASP model) is the future of the software services business. It is the logical convergence of technology, outsourcing, and services.'' The numbers do indicate that this is a revolution in the making: Forrester Research puts the size of the global ASP market at $6 billion by 2003; and the ever conservative IDC India estimates the size of the Indian slice to be Rs 100 crore by 2004.

One infotech-heavy aspiring to be an ASP puts it best in its ad: Do you have to pay for the cab when you take a ride? Pay-per-use is the essence of the ASP business model. To use a rather simplistic analogy, a householder is unlikely to retain plumbers, electricians, or carpenters-let's call them off-line ASPs-on a permanent basis. Two attitudinal changes are a pre-requisite for the acceptance of the ASP-concept.

At one level, software companies have to be ready to move from a business model built around projects or products with high one-time revenues, to one built around a pay-as-you-use service. At another, companies have to be ready to not worry about issues of ownership and, instead, focus on accomplishing tasks without compromising efficiency or quality of service. The innovators in the ASP adoption curve will, as tech-pundits have been crying themselves hoarse predicting, be SMES (Small and Medium Enterprises-pronounced Sammys) who cannot afford what it takes to buy software applications and (or) have infotech or consulting firms install it for them. Agrees Ashutosh Yadav, 30, CEO, I2DC Ventures, an incubation firm that counts a few ASPs in its brood-to-be: ''The potential of breaking software into smaller components, and the flexible pay-per-use concept is a strong attraction for the SME segment.'' Even larger companies could outsource non-mission-critical applications (to begin with) from ASPs.

Driving the ASP thing

Tick all the usual suspects like cost, time, and shortage of manpower. Add a few unusual ones like insurance from obsolescence, and simplicity. These are the factors that should drive the acceptance of ASPs.

First things first- cost. Renting something-even a Beamer-is certain to be cheaper than buying it outright. Says Rajeev Mehrotra, 33, CEO, Corpserve India: ''Even if you factor in data-transfer costs, using an ASP is certain to be much more effective than buying the software and training your people to use it.'' Which could explain why Anil Bakht, the 46-year-old CEO of Delhi-based software hotshop Eastern Software Solution, moved from his old model of selling Makess, an Enterprise Resource Planning (ERP) package developed by his company, to offering ERP-on-tap. Explains Bakht: ''Then, I could sell the Makess Software package for Rs 5 lakh for unlimited user license to a company. Now, the same can be rented for Rs 9,000 a month.''

For strings of code that invariably promise to endow the user company with speed, most software applications take a significant amount of time to install. And some even require the customer to train a few of its employees in the use of the application. In contrast, using an ASP will be as easy as switching a desktop on. If neither cost nor time is a constraint, manpower is sure to be. Few companies possess the human resources to write, or even manage, high-end software applications (indeed, given the shortage of manpower in the entire infotech industry, even software companies must consider themselves lucky if they do). Confirms Menon of Citrix Systems: ''Companies need a large number of people to run their ERP. Now, if they can't get the number and the profile you want, looking for an ASP is a good option.''

The not-so-obvious benefits of outsourcing from an ASP are far more compelling. All software becomes obsolete: it could take a year or two, may be more, but obsolescence isn't something software can escape. A company that chooses the ASP-route doesn't have to worry about ageing; its ASP does. Says Mehrotra of Corpserve: ''It is my job to ensure that the upgradation (of software) takes place for all customers as and when new releases are announced. So, there, is no question of obsolescence, and the customer does not have to bother at all.'' If an ASP doesn't do this, its clients could just move to another at the cutting edge. Expectedly, the switching cost involved in changing ASPs is close to nothing.

It isn't just the imperative to deal with obsolescence that devolves around ASPs. They also have to live with complexity. Thus, no matter how complex a particular application is, they have to present the customer with a simple interface.

Take the example of DVT. A client sourcing the services of DVT-let's call it xyz corporation-can forget the hassle of managing its accounts system. DVT will develop inhouse, or buy, the accounting software, take charge of the need to upgrade the software, and manage the interface with xyz and its other clients. Every time an accounting entry is made at XYZ corporation, a server at DVT registers the data. The complexity does not impact the end-user since when it is time to prepare a weekly or monthly report for the CFO, all that XYZ's accountant (you don't need an army of them) has to do is click 'print'.

Retrieval of data-recovering it if the entire system crashes-is also not a big issue because most DVTs will have to ensure near-zero down time. Thus, the front-end of the ASP model is as simple as a desktop interface while the back-end is as complex as can be. And the security and integrity of data isn't compromised.

The benefits aren't all one way: software companies can't but gain from the steady stream of revenues that the ASP business promises. In most cases, this runnel of revenues is likely to complement those from the sale of software (big clients will continue to buy software for some time to come). Indeed, many analysts believe software companies adopting the ASP model has a better chance of navigating the future than those that don't. That could well explain why Microsoft, Ariba, Intelligroup, sap, and a few other companies came together in July to create the Forum for Application Service Providers in India (FASPIN). Microsoft, expectedly, is the company to watch. Rajiv Kaul, Microsoft India's man in charge of the ASP business (his card reads director, marketing) agrees that software prices will fall under the ASP model, but adds in the same breath that Microsoft will announce the prices for its ASP offerings in the next quarter or so.

The earnings equation

P2P in the ASP business model will not just be a function of direct revenues. Indeed, ASPs that offer a service and expect subscription to take care of their costs and provide them with margins will end up disappointed. To succeed, an application service provider will have to take three critical decisions.

The first is focus. Does the ASP wish to be horizontally focused-offering a functional application like supply-chain management, or payroll processing-or vertically focused-offering its services to a specific industry such as banking or automobiles. Given the Indian context, horizontally-focused ASPs are likely to find lots of takers, initially, although vertically focussed ASPs will be more profitable.

Explains Vilas Kanyal, 32, the Head of Business Development, Thirdware Solution: ''Domain expertise is important. Therefore, vertically-focused ASPs will do better, but only in the long term. By the very nature of their business, vertically focused application service providers will offer high-end applications. Most customers for these services will be large companies that wish to do things in-house for some years to come.''

The second critical decision an ASP needs to make is whether it should be a pure ASP, or move into the adjoining node of hosting. The applications that companies outsource from ASPs need data resident on the company's (or someone else's) servers. And server-hosting is already a big business. Ergo, it makes sense for ASPs to diversify into that node of the value-chain, and for hosting services companies to do the reverse.

Hosting-major Exodus, for instance, has just announced plans to upgrade its server-hosting business through value-added services from companies like Cacheflow and StorageNetworks. And Exodus founder K.B. Chandrashekar's next venture is an ASP named Jamcracker, which provides single (remote) access to a range of services including hr administration, and sales force automation. Says Mehrotra of Corpserve: ''Data hosting when combined with the (pure/ASP business is a very good model. We will look at doing that in the second year of our operations.''

Third, ASPs need to decide whether they wish to go it alone or forge alliances with telecommunications companies. The rationale for these? Telcos boast last-mile and first-mile access. These companies also have strong relationships with their customers, but not the expertise to offer them value-added services. An ASP-telco combine, therefore, could well be a tough act to beat. In late July, for instance, SAP, PricewaterhouseCoopers, and Telstra Corporation announced a three-way alliance to host the first's ERP solution in Australia and New Zealand.

The future of ASPs

Although it is clear that the ASP business model is far more refined than anything else infotech has thrown up in the recent past, there are very real reasons why companies (especially the large ones) will be reluctant to outsource applications. Primary among these is security. Not about the safety of the data resident on the ASP's server, or on the server of a hosting company with which the ASP has an alliance-after all, an ASP, by virtue of having many clients can afford to invest far more in security than any single company can but about the misuse of data by the ASP itself? Avers Partha Iyengar, 39, Head, The Gartner Group: ''Security is a real issue. But more than security, companies should be worried about data integrity, back-up, recovery, and disaster management. Especially since most ASP do not have a good handle on these issues yet.''

The biggest threat to the success of the ASP model, however, comes from within. According to ASPnews.com, a site for (and about) ASPs, the business of application service provision can be broken up into four sub-businesses and four types of companies: solution providers, who combine the technical and business aspects, software providers who write the code that enables the finished service, infrastructure providers who take care of things like hosting, call-centre maintenance, and the like, and network service providers who essentially form the communication and data-transfer backbone. Few companies aspiring to be ASPs have the resources to function in all four areas. Thus, customers end up dealing with one ASP, which, in turn, outsources one or more of the four sub-businesses from other companies.

Some analysts posit that the reason for the slow acceptance of ASPs in the US market is primarily that customers are a trifle confused when it comes to understanding the ASP model. FAQ #1: Does the company have to operate in all four businesses to be classified an ASP? The answer, obviously, is no. FAQ # 2: Who owns the customer? That question doesn't have an answer yet, although several application service providers believe that setting up a channel network to redistribute their services will create an army of front-line employees who manage the customer relationship.

Says Doraisamy Balu, 43, Managing Director, Compaq India: ''... issues such as these can only be resolved by having a solid partnership model between all the solution providers (who are providing solutions to the ASP), bound by stringent service level agreements.'' When that happens, the industry will finally have a new-e variant of the industrial economy's make-or-buy dilemma: rent-or-buy.

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