Developing a Scalable e-Business Strategy with Application Service Providers

To fully appreciate the implications of an e-business strategy for your organization, you must consider first the challenges facing you and your colleagues today and then think of their solutions. One of the most prevalent challenges is fostering an ongoing dialogue with your customers about what they want in future products. Because urgent tasks tend to squeeze out the important, this is often talked about but doesn't actually happen often enough. Bringing your customers into the development process is critical for the development of future services and products that will effectively serve customer needs. Using the Internet for this task is one of the best applications of the Web. Perhaps the most important aspect of using the Web outside your company is communicating with customers. The communication process makes sure the direction of all the systems in the company are contributing to meeting the needs of customers. Studies have shown that companies using technology to stay in touch with their customers are far more effective and ultimately more profitable than others that have not used technology for handling tasks.

Much of the media coverage of the ASP model focuses on the benefits companies are obtaining from bringing collaboration and operating efficiency to client organizations. Within three years or less the ASP model will be seen as a service business instead of a product-oriented one. The combination of creating and bringing collaborative tools to market in conjunction with a service-centric model brings the delivery of ASP models to an entirely new level of professionalism and performance. For ASPs, the delivery and support for e-operations applications are becoming more of a consultative approach to working with you.

This chapter focuses on the needs that are driving companies of all sizes to adopt the ASP model, and the implications of bringing in an ASP to handle mission-critical tasks in the e-operations area.

What's Driving Business-to-Business Growth?

By far, the majority of ASPs today are having the greatest success in selling to companies engaged in business-to-business services, with commerce between businesses being the largest proportion of demand in ASP-enabled commerce. Clearly, all the innovation in the ASP arena is due to the early adopters in the business-to-business aspects of e-business. The continued growth of e-business globally will be primarily driven by business-to-business electronic commerce, as the graph from Forrester Research in Figure 3.1 shows.

Figure 3.1 The business-to-business marketplace is projected to grow exponentially in coming years.

Inevitably, when you look at a graph showing the aggressive growth of this marketplace, you have to ask what underlying factors make the forecast appear realistic and attainable by an industry. Being accurate and credible about the direction of a market is the currency that research companies trade with. Being able to show their forecasts as reliable has implications for each company's reputation when it comes to venture capitalists and the contributory role they can play in getting business plans up and running. The role of market research in the ASP marketplace has been, at its best, the quantification of market opportunities, risks, and growth rate. At it's worst, the market research on the ASP marketplace has made the opportunity appear too confusing for the general investment community to get behind with financial resources and cause growth. International Data Corporation, Forrester Research, Gartner Group, and The Yankee Group all have excellent reputations with investment companies. You can get insights into the ASP marketplace from these companies via their free research offerings available on their Web sites. International Data Corporation has a free research report on the ASP marketplace that is downloadable in exchange for your contact information, for example. The other research companies also offer free market research on the ASP marketplace from time to time. Each of these research companies has a specific strength:

• IDC (http://www.idc.com) is strong at analyzing the overall trends driving the ASP market, with particular emphasis on case studies of mid-tier (over 1,000 employees) and larger organizations adopting the ASP model.

• Gartner (http://www.gartner.com) is the CIO's reference point for the ASP market arenas, and has some of the best information available on advising companies on how to ensure the highest level of security for data.

• Forrester (http://www.forrester.com) has a great view of the key trends affecting the market, and is the strongest in terms of responsiveness and customer service.

• The Yankee Group (http://www.yankeegroup.com) excels at analyzing the interaction of ASP vendors and their offerings for small businesses.

Figure 3.2 shows how The Yankee Group is forecasting the growth of the ASP marketplace in U.S. small business with attention paid to the very small (2–19 employees), small (20–99 employees), and medium-range (100–499 employees) classes of small businesses. In general, many research companies agree that a small business is defined as a company with between 1 and 1,000 employees.

With the best handle on small business adoption, The Yankee Group is adept at handling the intricacies of bringing analysis to the needs that ASPs have in small businesses. In further analyzing the market and defining the relative level of adoption by service area of the ASP model, The Yankee Group has done an excellent job of segmenting uses of Web sites by their role in the definition of e-business. The highest rates of adoption are in e-marketing, as more and more companies turn to a fundamental Web presence to maintain competitiveness in their chosen markets. There is a market dynamic of small businesses that will migrate to e-operations applications quickly, as the level of trust grows for integrating applications throughout an organization. Figure 3.3 shows the relative level of adoption of e-business by application area.

Figure 3.2 The Yankee Group is the leading research company tracking small business adoption of the ASP model in the United States.

Figure 3.3 The Yankee Group's small business research shows that the majority of small businesses in the United States have adopted e-marketing sites, with e-commerce being the second most-used application area.

With the need for communicating the value proposition of products and services, and the fact that there is little downside risk to having brochures online, e-marketing is the most saturated area in e-business. This is also the area in which companies most often change their direction and select one approach over another for sending their message to their customers. For the second major application area, e-commerce, the relative level of adoption is still somewhat low because companies must trust Web sites for generating revenue and for the completion of fully featured catalogs and ordering tools. Taking the concept of the Web into a fully collaborative tool and streamlining processes—in effect becoming a tool for redesigning processes in a company—the continuing development of e-operations services and products will drive the maturation of this marketplace.

Market Dynamics That Drive Growth Assumptions

With the ASP marketplace still maturing at a rapid rate, it's important to realize there are wider market dynamics driving its growth trajectory and the nature of what type of industry it will be in the future. It is common, for example, for the presenter at an ASP Conference to ask all the people to raise their hands who are actively shopping for an ASP solution and have come to the conference to gain insights. In the conferences I attended while writing this book, potential customers routinely were less than 10% of the audience. Fully the majority of audiences at industry events are vendors looking to understand the market dynamics in greater depth or are companies interested in selling their services to the ASP community.

In analyzing the forecast of ASP adoption, keep in mind that many research companies, in creating their market models and garnering the resulting revenue figures for this marketplace, make the assumptions described in the following sections.

Challenge of Awareness

Arguably the single biggest issue for the ASP industry's forecasts is the need for continually developing awareness. There are many companies that offer services that are comparable to the ASP model, yet the companies do not specifically call themselves ASPs. Instead they call themselves ISPs with hosted services. The lack of awareness in this market is comparable to the first days of the Apple Macintosh, where Guy Kawasaki became the consummate evangelist and marketer. Clearly the ASP industry needs to have the focused, passionate efforts that Apple first showed in its Macintosh application software efforts. The ASP industry is in need of evangelists who can increase the awareness of potential customers. As someone who is looking at the ASP model, be sure to check in every once in a while at the sites listed in Chapter 1, "Meeting the Challenge of e-Business with Application Service Providers," to see the key messages of the ASP model and the current issues.

Challenge of Infrastructure

In defining the relative growth of this market, many research companies are focusing on the growth of the underlying Internet infrastructure, with several (including IDC) looking at the wireless Internet access points that are increasing the distribution points of applications being hosted. This is one of several forecast assumptions, which has the highest potential of affecting ASP demand due to its capability to increase total available market size.

Tendency of the ASP Arena to Be Vendor-Driven Today

This marketplace is highly fragmented and, to a large extent, vendor driven. That explains the high concentration of companies attending these conferences and typically the low customer counts. This is a vendor-driven marketplace right now and as such, it gives customers the flexibility of defining their own solutions as the market itself is defining what it will look like. It's a shopper's market as customers are much sought-after and the investment community is continually stressing customer satisfaction through service-level agreements and enhanced satisfaction with delivery ofservices.

Collaboration and e-Operations to Dominate the ASP Industry

Growth will be globally based with collaborative applications driving the majority of the demand. The migration from e-marketing to e-operations applications is going to have a pronounced effect on those firms that are only focused on the e-marketing side of the e-business equation. Many will become system integrators and will migrate their businesses "upstream" away from a purely e-marketing focus. Others will become providers or intranets, reselling e-operations applications as well.

Velocity of Change in the ASP Marketplace Is Faster Than Predicted

The transition of companies from using the Web for providing information to selling products is occurring faster than many analysts projected, with e-operations—using the Web for driving the costs of production and development down—being the dominant trend in coming years. The focus will be on driving the costs out of products and redefining the channels of distribution through more efficient commerce. This is the factor driving the forecasts of e-operations and e-procurement as the highest-growth areas of e-business today. Driving costs out of processes and streamlining them is pervasive across all sizes of business on a global scale. The concept of e-procurement is based on streamlining supply chain purchasing electronically.

Top-Tier Companies Driving Acceptance of the ASP Concept

Credibility of the ASP model is being enhanced by the efforts of AT&T, HP, IBM, Oracle, Microsoft, SAP, Sun, and even hardware companies including Micron, Compaq, and Dell with their hosting initiatives. The accumulated effect of these companies getting behind the ASP model will be seen during the coming years as customer trust is exemplified through high adoption rates of tools that bring together organizations in efforts to drop their costs. When the adoption rates by ASP product area are tallied years from now, the relative effects of Sun, with their Star Office in the personal ASP market arena, for example, will be illustrated by measure of market share. Market share estimates are just becoming available for personal productivity and other areas of the ASP model.

Global Reach of the ASP Model Now Apparent

Increasingly, business models are being focused on international opportunities, requiring 24/7 availability and fault tolerance. Creating a catalog in multiple languages, for example, is easier for a small business to outsource than to take internal resources to complete. The dual needs of being up 24/7 and being localized for the needs of a given country or region of the world are market factors driving the demand of the ASP model on a global level.

Increasing Importance of Quantifying Expectations Through the Definition of Service Level Agreements (SLAs)

Quantification of ASP performance is already a major contributor to the growth of the ASP model because it is creating more trust through the quantification of performance levels. The Service Level Agreements (SLAs) now being introduced into the ASP arena are also taking the mystery and open promises out of the sales equation. The SLA will actually be one of the stronger tools for getting the ASP model accepted by companies hesitant to sign up due to lack of assurances in the past. This quantification of performance will translate into a higher level of trust than would have been possible before, thereby creating increased demand for e-operations tools that are used for driving down costs and increasing efficiency in organizations.

Looking at Needs as Market Drivers

The market research companies tracking the ASP industry are looking at the mix of both the larger technology issues intersecting and influencing the purchasing decisions of organizations. The key needs driving this market are explored in this section. These are the customer trends that ASPs are responding to with their product and service designs. In the end, an ASP is actually a service business—and the needs described in the following sections are the "pain points" they are focused on solving.

Shortage of Trained Staff and Professionals

Not being able to find the right information systems person at the right time in organizations has become an almost universal need that is targeted by many ASPs. With the increasing number of excellent job opportunities in the IT community, there is also the issue of turnover and holding onto the associates already onboard. Being able to extend the breadth of what existing IT staffs handle is possible using the ASP model as an outsourced resource. The ASP model is being built to allow existing IT staffs to manage it with a minimum amount of interruption to existing priorities. Being able to offload the development and maintenance tasks is one of the key benefits of the ASP model when it comes to the shortage of workers today. Consider that there are 10 IT jobs for every 3.3 workers available and you can see the need for having an ASP model that can compensate for the shortage of trained IT staffs and professionals.

Distance Delays in Conducting Business

It's interesting to see that the early adopters of the ASP model defined in detail in the next chapter are primarily choosing ASP-based solutions due to the wide geographic coverage their companies have. With many companies having locations throughout a region or at international locations, having an ASP provide access to members of an organization anytime is a compelling solution.

Companies that have distribution channels are in effect dealing with distance delays in formation delivery as well. The ASP model is used successfully in many companies that rely on distributors to cut down on the time delay of getting information into the hands of salespeople in the distribution channel.

With the distance delays comes the fact that over time documents tend to be inaccurate because inevitably there are multiple versions of documents created. Putting documents up on a server to make them accessible to everyone on the intranet site provides an instantaneous competitive advantage for many companies.

Coordinating communications across a wide distance is one of the essential needs in organizations of all sizes that the ASP model is adept at meeting. Because this communication requirement is so pervasive in many of the faster growing companies, the ability to collaborate on projects and development programs on a global scale is already possible today. This need has pushed the scalability of the ASP model to new levels of responsiveness.

Time Savings in the Services Sector

With the velocity of transactions in many industries accelerating, especially in the PC industry, the need has arisen for real-time pricing, availability quotes, and order status reporting within seconds of the query. Automated banking on payment gateways also requires the ability to complete transactions in seconds. The ability to design order status and customer query systems online for instant access is one of the benefits of the ASP model. Several countries are experimenting with kiosks, which will have high-speed connections to the Internet to provide banking and public transportation scheduling and status information.

Cost Savings in Manufacturing Industries

The essence of an e-business strategy is the potential it provides for driving costs out of a business and streamlining a business model. When e-business strategies were introduced in several industries, the benefits were readily apparent. The rapidly changing scope of the PC industry's channels of distribution is a testament to the power of the Internet to change entire supply chains. Streamlining commerce is quantified through the costs savings achieved. For example, the capability to order parts and even subcontract for assemblies to be produced outside your plants saves you the time of managing both the production of these items and the continual reconfirmation of orders. The potential for cost savings by collaborative information sharing through selling and supply chains is significant. Increasingly, e-business will be known as the cost savings achieved through the streamlining of commerce electronically; the e-marketing aspects of unidirectional communication will become commonplace in the coming years. The real benefit of an e-business strategy will be in driving costs out of processes and enabling more efficient communication throughout organizations.

Velocity of Transactions Drive Inventory Turns

Every growing company needs the ability to drive more transactions through its Web site and ultimately through its organization. Handling these transactions, fulfilling customer orders, and also tracking the customers' purchasing statistics is a big challenge. Companies as diverse as EDS and SAP are taking on this challenge with industrial-strength tools for handling customer information management, sometimes called CRM or customer resource management. Smaller companies that have built strong applications on diverse platforms are assuming the challenge as well. The ASP model is acting today as a unifying thread across the largest solutions in this market and the smallest applications because customers' data is needed on a 24/7 basis. This is sometimes called an "always on" data strategy.

The essence of the e-business strategy you are creating is how you can increase the speed and responsiveness of a given transaction. Using an ASP's solution for driving increased responsiveness to your customer through more efficient processing gives you a strong building block to customer retention and eventual loyalty.

ROI of an Investment in ASPs

The financial returns of investing in the ASP model must be quantified. Metrics are being generated in the industry today to look at the total cost of ownership and the role of service level agreements in generating returns on the investment in an ASP. Throughout this book the ROI (return on investment) is mentioned to bring the quantified benefits of the ASP model into focus.

You should look at an e-business strategy from three vantage points. First, it is a communication channel for getting the word out to customers and partners about your new offerings and the implications for your business. Second, it is the revenue generation expectations of your business relating to the Web. Third, it is cost reduction through efficiencies and the streamlining of commerce using the Web. Taken together, the investment in an ASP to give your company the capability to compete effectively along these three dimensions becomes measurable after the customer base has adopted the e-business strategy you're offering. Over time many companies track their ROI per sales program and track cost reductions typically by the increased number of transactions completed and revenue achieved.