Looking for an ASP
You are not alone if you have not heard of application service providers (ASPs) or have troubles finding someone who uses these hosted software solutions. But it will not be that way for long.
-- Modern Materials Handling, 1/1/2001
Rent or buy? That was a critical question before the era of work stations and powerful desktop computers. Faced with enormous hardware costs and limited information technology resources, many companies found it cheaper to lease computer time from an IT outsourcing company.
Although computing hardware has never been cheaper, the rent or buy question is back in vogue. That's because companies looking to upgrade their software systems or get into the e-commerce game can face enormous licensing, implementation, and integration costs at the outset. Then there's the matter of ongoing maintenance and upgrade costs in the future. Application service providers, or ASPs, lower the barrier to entry for companies that can't afford the upfront costs or lack the IT resources to manage their own system.
They do it by hosting your software application and related databases on their server. Rather than buying the software, a company leases it, paying only for what it actually uses, and accesses it over the Web. And that's a powerful model.
In fact, if 1999 was the year of the e-tailer, the year just concluded could arguably be called the year of the ASP.
"Any new software company is delivering their solution via a hosted model, or offering a hosted component," says Adrian Gonzalez, a senior supply chain analyst with ARC Advisory Group, Dedham, Ma. "One start-up last year told me that without an ASP model, venture capitalists wouldn't provide funding."
Despite the attention, much of the hype around the market was just that–hype. Actual ASP customers are in short supply. "There is a lot of flag waving out there by startups, but in many cases, the ASPs are still at the PowerPoint level," says Gonzalez.
For 1999, ASP revenues for supply chain management software (enterprise resource planning, supply chain planning, customer relationship management, warehouse management and transportation management systems) totaled just $77 million, according to ARC.
While revenues grew to $300 million in 2000, most of the fees were for financial and human resources applications, not mission-critical, real-time applications like warehouse management systems (WMS) transportation management systems (TMS), and supply chain planning (SCP). In fact, the biggest hurdle to ASP growth is getting over the reluctance of companies to put real-time manufacturing, distribution, and transportation systems in the hands of a third party.
"Most of the supply chain companies I'm talking to are coming up with one beta customer, if any at all," says Chris Newton, a senior analyst with AMR Research, Boston, Mass.
Nevertheless, the market may be poised to take off. ARC estimates ASP revenues in those five supply chain management categories will grow to $8 billion by the end of 2004, representing about 18% of the total supply chain application market.
Why the change? For one, major providers of software we use all the time are adopting an ASP model. "If you look at a company like Oracle or Microsoft, they're re-making themselves to be Web-based," says Dick Armstrong, president of the supply chain consulting firm Armstrong & Associates, Inc., Stoughton, Wisc.
For another, information technology is no longer a competitive advantage, it's an imperative for many companies just to compete.
Outsourcing to an ASP allows a user to quickly implement a new solution and scale up or down according to their current business needs. "Clients have the flexibility to increase or decrease their usage of the system based on the ebb and flow of their business," says Ken Lewis, CEO of Provia Software, a Grand Rapids, Mich., provider of supply chain execution solutions. "If only six employees use the software this month instead of the 12 they had last month, they would only pay for the six."
Just what is an ASP?
The ASP Industry Consortium (www.allaboutasp.org ), a trade organization representing ASP providers, offers a simple but complete definition.
"An application service provider manages and delivers application capabilities to multiple entities from data centers across a wide area network, giving customers a viable alternative to procuring and implementing complex systems themselves," the organization states. "In some cases, ASPs provide customers with a comprehensive alternative to building and managing internal information technology operations. ASP customers can control the total cost of technology ownership more precisely through scheduled payment schemes."
The ASP assumes the responsibility of implementing and integrating the solution, maintaining the software and system on its servers, and upgrading the software as new releases become available.
ASP customers access the software using an Internet or Intranet connection and a Web browser. In return, users pay a "by the drink" transaction fee based on usage, or a monthly subscription fee per seat or per user.
Subscription fees vary but typically range from $395 to $795 per seat per month, depending on the application. Beware, however, when comparing plans. While one ASP may include customer service in its package, another may offer a basic program with a menu of premium options, much like cable television service.
Three ASP models are emerging
Pure play ASPs license software applications from a variety of vendors to provide an integrated suite of off-the-shelf applications that can be rolled out quickly and economically.
The second model involves best-of-breed software providers that host, maintain, and distribute their products over the Internet as another channel of distribution. While hosted solutions are typically packaged, software providers may customize their product to fit individual needs.
One advantage of working with an established software provider is the experience they bring to the table in various verticals. But some pure-play ASPs are also targeting specific industries. "We think the successful ASP is going to be the one that focuses on best-of-breed solutions for specific verticals," says Paul Rowinski, vice president of Virtual ESI. The company is a Charlotte, NC, based ASP that provides ERP solutions to several industries, including food processing and consumer packaged goods.
A third model emerging is the convergence of ASPs and electronic trading exchanges and marketplaces. Bringing a vertical expertise to the table is the reason both pure-play ASPs and Web-enabled software providers are exploring partnerships with these marketplaces and exchanges. The idea is to offer services beyond the simple buy/sell model of most exchanges today. In that model, a transportation exchange would not only provide a place to find spot carriers, but also to access transportation management software.
Who would want an ASP?
The initial target audience has been the small- to mid-tier company with limited IT resources and limited funds to invest in a system. Those are companies with sales from as little as $10 million up to $1 billion.
When it comes to supply chain technologies including warehouse and transportation management systems, add another criteria: Enterprises that need to stay on the leading edge of technology to remain competitive such as third party logistics providers.
"The early adopters of hosted TMS and WMS applications will be the companies that don't have much of it now," says Armstrong of Armstrong & Associates. "Since there's no big upfront cost and the transaction charge pays for it over time, it creates an opportunity for companies that don't have that functionality to acquire it affordably."
That isn't to say that renting is cheaper than buying. Like leasing a car, the payments can still be steep. However, the ASP model reduces the up-front cost of getting into a new system and minimizing the maintenance and upgrade costs, again much like a car lease.
As supply chains become more complicated, vendors expect large global corporations that outsource other components of their operations to also use an ASP. "In the upper tiers, we're talking to businesses that want complex applications, but don't want to manage the system," says Peter Dabbiere, general manager, channel development, for Manhattan Associates, a WMS vendor in Atlanta, Ga.
That's because mergers, acquisitions, and alliances are creating an integration nightmare for companies that now need to create a unified network from disparate systems. "We have companies coming to us because they've bought a number of companies recently, all with different systems," says Dee Kellogg, director of ASP, global solutions, for J.D. Edwards, Denver, Colo. "They want to get their enterprise on one system with a common platform. An ASP environment allows you to do that very, very quickly."
CastaLink.com, a provider of hosted supply chain collaboration solutions in Mountainview, Calif., can roll out an end-to-end supply chain implementation in 2-6 wk, depending on the level of integration required.
Finally, some applications are particularly well-suited to an ASP model. Transportation management and global logistics, for instance, have migrated to the Web because freight rates, tariffs, and shipping restrictions change so frequently.
"Transportation management is complex," says Ken Fleming, vice president of product marketing for Kewill Systems, Marlborough, Ma. "FedEx, UPS, and USPS all have issues of compliance labeling, routes, rates, and charges. It can take a complete staff just to manage that complexity. That's why many companies would rather outsource that complexity to a vendor like ourselves that has expertise in that particular business sector."
Integrating ASPs
That isn't to say there are no potential drawbacks to working with an ASP. Integration may become an issue in the future, says ARC Advisory's Adrian Gonzalez. Why? For the same reason integration is a concern today.
Best of breed solutions exist because many integrated suites fall short of the robust needs of particular industries. One vendor may have a dynamite transportation solution, but their warehouse management system falls short of your need. The challenge–and much of the cost for IT departments–is to integrate those solutions into a seamless package.
Something similar may arise in the ASP market. "ASPs offer solutions from a variety of vendors that they integrate in house," says Gonzalez. "But if their ERP or TMS or WMS solution won't work well for my industry, I'll have to accept a compromise, or go with an ERP from one ASP, a WMS from another, and a TMS from a third. Now, I have to integrate all these ASPs."
At the end of the day, flexibility and options may be the reason ASPs grow as a model. "The ASP model won't replace traditional channels of sales," says Dabbiere. "But in the world of information technology that's now evolving, there's room for both models. The ASP is going to be one channel for applications that can be sold in a variety of ways."
When Suddath Logistics Services decided last fall to expand into a fullservice third party logistics provider (3PL), the company knew that information services would be critical to their success. In fact, information services would be the backbone of their ability to provide value-added services such as kitting and light assembly. But Suddath required more than just state-of-the-art software to make that happen. The Jacksonville, Fla., based company also needed speed to market and a path to upgrade in the future.
That's one of the reasons Suddath chose a WMS solution hosted by Provia Software, Grand Rapids, Mich., to enable e-commerce fulfillment, real time visibility, and distribution for the retail and construction industries from ten warehouse locations across the country.
"Offering a premium warehouse management system used to be a competitive advantage," says Jim Spinney, president of the Jacksonville, Fla., based 3PL. "Today, it's a requirement. You're not in the 3PL business unless you can offer inventory management and real-time visibility of product in and out of the facility."
In designing an inventory management network, the company knew two issues were critical. "First, the system had to manage warehousing, fulfillment, value-added services, and provide inventory visibility for multiple customers across our network," says Spinney. "Second, we needed the ability to ramp up across ten locations quickly. Our existing IT staff wasn't prepared to do that in the time frame that was going to be necessary for us to service our customers."
Provia, on the other hand, was prepared to roll out solutions across Suddath's facilities in just 30 days. That was faster than Suddath could order equipment, install its wireless network in each facility, and train their employees.
What's more, the ASP was familiar with 3PLs and had the infrastructure to support the hosted solution. "We spent a lot of time visiting our vendor's site to make sure they were prepared to manage this service for us," says Spinney.
Surprisingly, initial cost was not a deciding factor. In fact, over a 3-5 yr period, the monthly subscriptions fees were slightly more than the cost of licensing the software up front, according to Spinney. The benefits of outsourcing maintenance and upgrades, however, tipped the scale in favor of an ASP solution.
"Today's systems get outdated so quickly that it's virtually impossible to keep up with them," says Spinney. "In the long run, it made more sense to let someone else run the network, rather than use our own staff."
The ASP market, like the rest of the dotcom economy, is still in its early stages. As the model evolves, a shakeout is probably inevitable. How then do you choose an application service provider? Here are a few tips.
Look for a company with a foundation: ASP's are popping up–and disappearing–like spring tulips. When choosing an application service provider, look for a company with stability and funding, including ASP's with a legacy business behind them.
Which way is up? An ASP worth consideration should have a strategic plan to grow and deliver more service and applications in the future.
Does the ASP have expertise in your industry? Some ASP's bring pure IT experience to the table. Others bring industry experience. That's particularly true of point solution providers, like warehouse or transportation management providers, now taking their product to the Web for a new channel of distribution. An ASP with experience in your vertical is likely to have people on staff who not only understand the software, but also understand the underlying business processes of their users. This is one reason many expect a convergence of ASP's and electronic exchanges in the future.
Read the fine print. Comparing ASP contracts can be as confusing as comparing long distance plans, says Adrian Gonzalez, senior analyst, e-business and supply chain at ARC Advisory Group. Some bundle the cost of implementation and customer service in the monthly subscription fee. Others offer a basic package plus a menu of premium services like cable television. Be sure you know exactly what you're getting for your money.
Trust but verify. Before turning a mission critical business process over to a third party, be sure to visit the company's facilities. Find out about their infrastructure, review their backup procedures, and learn about their staffing capabilities to maintain your system and man the help desk.
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