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Learning from the Past

The Rise of Progressive Sourcing

A new wave of research indicates that outsourcing to application service providers (ASPs) is continuing to increase in popularity. One reason: the providers are addressing issues on many of the reservations and perceived drawbacks of doing business with an ASP. Providers are increasingly empowering not only the small to mid-sized businesses (SMBs), but larger enterprises as well, particularly in newer disciplines, according to survey results.

ASPs, outsourcing service providers who offer their products on a subscription basis that their buyers access over the Internet, have largely thrown off the albatross around their necks stemming from failed promises to deliver in the era before the dotcom balloon imploded. The ASP model has survived to prove its merit, particularly in the newer business functions like customer relationship management (CRM). Now, the validated value proposition has entered the mainstream of business planning; ASPs are thriving with anticipated growth.

ASPs for SMBs: Going Beyond Early Adoption

CRM is one of the more mature domains of the ASP, particularly for the SMB market. CRM is an area where many businesses lack internal experience. The off-the-shelf software offerings often are tied into suites that restrict the flexibility of a business to meet its specific needs. By focusing on more recent areas of business needs like CRM, ASPs have developed core competencies in specializations.

While many businesses have already embraced hosted CRM solutions, many more are planning to do so as evidenced in the figure below from the March 2004 report by research and analysis firm Beagle Research, in conjunction with DCI, Hosted CRM's Continuing Evolution.

Managing Principal for Beagle Research Denis Pombriant explains that ASPs provide more choices for clients. "Many end users don't want to be tied in with a single supplier; they want to be able to go out and get what they think is best for their business. Outsourcing providers can work with suppliers and customers to deliver more complete solutions."

Wayne Kernochan is president of research analyst firm Infostructure Associates and was formerly senior vice president at Aberdeen Group. Kernochan explains that ASPs cater to the needs of the SMB. He says the complexity and monolithic nature of enterprise software does not often lend itself to the mid-market. "There is a real question of whether providers to the large enterprises really understand the peculiar needs of the SMB market and can take applications designed for the larger enterprises and change them around for the smaller businesses."

John Madden, Practice Director - Professional Services Strategies for research and analysis group Summit Strategies, has seen an improvement in the offerings in recent years by ASP providers. "A few years ago, the functionality in many cases was not up to what was available from some packaged software apps. However, now, offerings are comparable, or in some cases better, in terms of functionality and serving the needs of SMB clients."

While many businesses have already embraced hosted CRM solutions, many more are planning to do so. SMBs have an increasingly favorable view of ASPS and prefer their model over licensed software, according to the June 2004 report by Summit Strategies, SMB Opinions and Attitudes on Software as Services and Application Hosting Solutions. Half of the respondents plan on increasing expenditures for hosted solutions. (Summit Strategies calls ASP providers software as services (SaS).

Madden further explains word-of-mouth referrals by peers or trusted professionals is fueling the continued SMB growth in outsourcing to ASPs. Much of this is recommendation from customers and local integrators. The advantages go beyond the total cost of ownership (TCO) or ROI, extending to reducing capital expenditures, making IT costs more predictable, and meeting new application requirements that they can't get on their own. "You can measure TCO by time saved in IT staff productivity and in allowing an IT staff to focus on core projects (developing new business processes, etc.)," he says.

Kernochan submits that it is also a matter of core competencies for SMBs in deploying new business solutions. "It really makes a lot sense to outsource key applications given the SMB's strong interest in both cost savings and time to market."

ASP Improvements

Despite overall high satisfaction ratings, previous research had indicated some shortcomings in the ASP offerings, notably in areas of customization, integration, and security fears since data is housed off the premises. ASPs have made considerable progress in addressing these, according to a March 2004 report by Beagle Research, in conjunction with DCI, Hosted CRM's Continuing Evolution.

ASPs are addressing new needs as well as dealing with previous shortcomings. They include:

• Time-to-market needs. Kernochan notes, "The providers who have been able to use Web services can offer good enough solutions with flexibility for the SMB market relatively rapidly. They can upgrade them faster as their customers' needs change."
• Easy integration."Suppliers are stepping up to the plate to make the integration process less complex for their customers and taking responsibility. There is a better understanding and management of expectations on both sides," says Madden.
• Customization. Pombriant additionally submits that accommodation for customization is increasingly built into the design. "Most suppliers have the capabilities to enable custom codes to provide a lot of flexibility to the user without the worry of the effects customization will have on new releases," he says.
• Data security. While news flashes and blasts concerning hackers and worms demolishing sites are monthly headlines, they never involve an ASP hosting a client's data. "You just don't hear about any scandals involving data being lost, infiltrated, or corrupted. In many cases, it is actually advantageous for the provider to manage the data as they are more into security than many typical organizations." says Pombriant.

Outsourcing Turns Around the Traditional Adoption Model

The traditional model for new technology adoption submits that the adoption pattern will trickle downward from the larger enterprises to the smaller businesses. The ASP adoption model has demonstrated a far different pattern.

The SMBs came to embrace the ASP delivery model to meet immediate needs in a cost-effective fashion, particularly in the new disciplines. An additional upside is a buyer's ability to get up to speed with the maximum effectiveness in the shortest period of time with predictable outlays that are not heavily front loaded. Larger enterprises are following suit for the same reason.

Pombriant explains the decision-making process begins when executives discover a shortcoming in meeting business requirements. "The company has a business pain. Then comes the discussion of how to implement the solution and pay for it. Hosting solves the secondary pain."

Today, larger enterprises are exploring the ASP outsourcing option as evidenced in Summit Strategies' May 2004 report, The Survey Says: Enterprises Will Buy Applications Hosting and Software-as-Service Solutions, IF the Price is Right. According to the report, new business application requirements and infrastructure consolidation initiatives are "the most frequent primary trigger events." Madden adds, "Large enterprises that want newer or updated functions in areas such as CRM turn to those providers for the same reasons that SMB customers do: cost (both in purchasing the solution and in how much they can save their organization), rapid time to deployment, and increased functionality."

The figure below from the May 2004 Summit Strategies report reflects the growing adoption of ASPs by larger enterprises with 1,000 employees or more. Half of the survey population was made up of organizations with 10,000 or more employees.

In the June 2004 Beagle Research executive white paper, The New Garage, Pombriant writes, "The success of the hosted CRM industry is proof of the market power of low cost and well-performing applications. Hosting took cost out of enterprise software by significantly reducing the labor associated with acquisition and deployment." Adds Madden, the risk for using a licensed software "is that you have to maintain it and manage it throughout its lifecycle." By using an ASP, "you pay someone else to maintain and monitor the app and you have contracts that guarantee a certain SLA level."

Kernochan submits that it is also a matter of core competencies in deploying new business solutions. "It makes a lot sense to go whole hog in outsourcing as much as possible. The stability and flexibility of the providers has reached the point that it makes a lot of sense, especially in cost and time." Concludes Pombriant: "If anything goes wrong, you have just one throat to choke."

Lessons from the Outsourcing Journal:

• Outsourcing to an ASP is now a mainstream business policy. ASPs are growing in acceptance with 50% of SMBs and 41% of large enterprises projecting an increase in expenditures in the next year and a half.
• ASPs address customer needs for modular applications to meet the individual requirements of the business
• ASPs are meeting the challenge of customer concerns through improvements in customization and integration capabilities while providing a secure hosting environment
• The ASP outsourcing model is defying traditional adoption patterns by meeting business needs in newer disciplines regardless of business size

Publish Date: August 2004

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Copyright © 2004 - Everest Partners, L.P.

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