What Drives Application Service Providers?
- Business Models Galore
- ASPs Focusing by Segment
Consider the businesses and services that you interact with on a daily or weekly basis. The fundamental value proposition of these companies is that they are in the business of ultimately saving you costs and time, making your company more efficient as a result. Conversely, how many times have you thought that having an online PR clipping service for your business or having the ability to review financial statements that are accurate and up-to-the-minute anytime and anywhere would be of great value? How many decisions have been delayed due to lack of accurate or even the existence of information?
There is an irony that the Internet is making millions of pages of content available to you and your organization, yet it does not at present provide a suitable means of succinctly analyzing it and presenting the results for your use. The role of analysts and information strategists in your company fulfill this role, yet what about the key aspects of financial and HR functions? Or the need for checking on how a marketing promotion is doing in terms of sales yield? Or the ability to track how a new product introduction is doing in terms of new customers being generated just from that new product, or the ability to track how a given product is performing in a given region?
Underlying the irony that the information explosion actually makes the decision process more and not less difficult, there is also the expectation by many that anything on the Web is actually easier to create and maintain than printed media. While this may be true with e-marketing–based sites, this is certainly not the case with e-operations–based applications that rely on tying together legacy applications in existence before the Internet.
A company looking to use an application service provider first should see the market drivers that are shaping the direction of the ASP market and its participants. It is very true that the most proactive and visionary of customers today will actually help to define the direction and depth of offerings in this industry. ASPs are in many respects working toward a model of efficiency by having little customization in their service and product suites. This is a continual challenge for an ASP because there is the need to customize the application to the client, yet for internal purposes there is also the need to get efficiency out of production and operations by streamlining delivery.
As with any emerging market and corresponding technology driving it, there are challenges of managing expectations both of delivered products and services, and the support associated with them. This article explores how the market dynamics of the ASP arena are shaping product offerings, including the proactive role that customers play in this industry. Of all Internet-based marketplaces, the ASP arena is marked by product strategies developed both with and for customers in real time. The need for being a responsive resource is an underlying assumption and a core value, which is included in the business models explored in this chapter. The core concept of the ASP model is service, and within service there is the opportunity to differentiate customization or personalization, responsiveness, scalability, and upgradability of applications as the needs of a customer grow.
Business Models Galore
The ability to deliver applications via the Internet to virtually any desktop with Internet accessibility is alluring to both software developers and investors alike. Creatively working to integrate the aspects of the Internet with those of advanced application development technologies including XML, Java, and Enterprise Java Beans, ASPs are creating entirely new classes of software almost monthly. Furthermore, the continual focus from IBM on Notes as a development platform brings time-to-market advantages to those companies willing to aggressively pursue product strategies both with internal development staffs and with partnerships. One of the core values that defines a successful business model over another is the ability of the model to scale for partner's inputs and contributions. The most successful business models are capable of scaling to take into account a focused reciprocal approach to bringing new opportunities to each business participating. The continual evolution of Linux, for example, shows a model of association, which drives the sum total of efforts to product a robust operating system. The ability of a business model to create a win/win situation for each partner involved is very powerful. On a consumer level, this model is the basis for Ebay.com, on which there are tens of thousands of partner sellers, which generate traffic in the millions of visits.
What about the ASP business models out there? Several business models are starting to emerge from the ASP market arena. Here is a review of each of the dominant models, which continue to be successful in generating customers and recurring revenue streams.
Build Your Own Sites Online
Often called by ZDNet and others the “click and sell” sites, this is the class of company that provides all the necessary tools for creating an e-marketing and e-commerce site online. The fastest growing of business models, this area has attracted many competitors, with BigStep.com and FreeMercahnt.com being two of the more recognized as market leaders. The business model of these sites focuses on the development of thousands of online customers, charging them nothing for creating their sites and instead charging for completed transactions. The larger click-and-build sites are increasingly looking to partnerships for creating a comprehensive product suite. It is entirely feasible in the near future that a business wanting a simple e-marketing site, a catalog, and even a click-together simplified HR application will be able to do it for free using the tools on these sites. The key aspect of these click-and-sell sites is their ability to generate customers for more expanded applications that have the capability to enable collaboration and cost savings throughout an organization.
What makes the click-and-sell site a leader in the area of business models? It has the following key strengths and also the following challenges. First for the strengths: A click-and-sell site is free, which draws thousands of users to the site for e-marketing and e-commerce tasks. The click-and-sell sites generate revenue by the costs per transactions fulfilled from online catalogs for customers and the advertising revenues generated by showing potential companies the size of the customer installed base. The limitation of this business model is actually the limitation that it places on its customers. Customers cannot, for example, create customized templates; they cannot create a customized look, either. The catalog is useful, yet it does not provide the necessary tools for creating a truly in-depth and industrial-strength trading center. Lastly, the click-and-sell sites require branding on their customers' sites and also have limited search engine optimization capabilities. Furthermore, on the topic of marketing and analytic tools, many of these sites do provide approaches to checking the number of hits, where they came from, and the number of orders placed. However, it is difficult to quantify the number of hits to a specific URL because many of these companies require a URL that has their name in it.
Search Engine Optimization
Many businesses, after getting their sites online, find that no one comes to visit. This is both frustrating and a challenge for companies—hence the pervasive advertising of URLs throughout our daily lives, for everything from commercial jets to crockpots. While advertising is prohibitively expensive, it's important to recognize that there is a service that you can use for getting a Web site listed on search engines. This uses a unique approach to embedding metatags into a Web page so the search engines will find it more often. This approach is called search engine optimization.
In summary, the click-and-sell sites, although free for e-marketing and nominally priced for e-commerce tasks including catalogs, are not the industrial-strength sites needed by many larger organizations. There is only limited capability—and, in many cases of companies in this arena—no capability for importing or exporting data. There is also the limitation of only a few pages of templates to generate a Web site and the added issue of the URL having the name of the click-and-sell company in the site's address. Despite these limitations, this business model continues to grow. Why?
Click-and-sell companies give companies the opportunity to learn about their Web site needs and to develop catalogs in real time, without a staff.
Instead of a long, drawn-out production cycle for creating a catalog, one can be created in a matter of minutes.
A business with many divisions that wants to test the Internet as a communications vehicle can do so in a matter for minutes for no cost.
New product and business ideas can be tested quickly and without cost.
Partnerships from the click-and-sell companies promise to bring e-operations tools into their overall product mixes within the coming years.
E-Business Accountability and Relationship Selling
One of the interesting insights that comes from spending time with businesses is that their perspectives of the Internet as a tool for business vary significantly. Many of the early adopter companies have multiple locations which forces them to share information more efficiently, with the Web being the best vehicle. In addition, early adopter companies are often in the business of providing technology as either a product or service themselves. For the vast majority of businesses, the idea of having orders placed for their products over the Internet and even using applications leased seem futuristic and great in potential. The issue of trust, however, is a crucial one for many businesses. How can I trust that the application will provide the right information at the right time? And what about the orders on my site? How can I make sure that the orders are all correct? What about the HR records that I update over the weekend for a new hire? These questions and more require a singular point of accountability for the businessperson. The point of having a trusted guide, a person to go to who will provide guidance and consultative advice, is invaluable for the businessperson looking at the ASP model. Relationships are what this model is all about, with the revenue stream being driven by both monthly lease fees and upselling to customers as their needs change. This model focuses on how to be a long-term asset to a customer.
Long the domain of EDS, IBM, Oracle, and others, this approach to one-stop personalized selling of e-business solutions is needed for businesses of all sizes. One of the most interesting dynamics of companies using this approach to provide ASP services is that relationships, once created and sustained by solid performance on commitments and ongoing trusted communication, turn into customers who migrate from the most simplistic of Web sites to the most complex. No other business model in the ASP arena can stake the claim to personally take responsibility for growing a customer over time. The e-business expert is the trusted guide and can eventually assist customers, if they choose to take the advice, and continue to drive for cost reduction in companies to create a collaborative Intranet in the process.
With the personalized approach resembling a technology-savvy concierge in a great hotel, the business model of e-business accountability and relationship selling is also one in which the internal operations need to be singularly focused on the needs of the customer. This perspective on the customer, with many technology and pricing decisions surrounding the service aspect to the customer, makes this model one of the more “high-friction” models in terms of having a strong e-business expert as the internal evangelist for the customer. But if a company has an e-business evangelist inside an ASP, looking out for its needs, the execution will be strong and the relationship will grow. This is evidenced by many of the leading software companies embracing the ASP model that see it as a service business, one that requires responsiveness in e-business experts. With service being the differentiator, there is the need for the voices of the customer to permeate a company. One of the real strengths of this model is that the voice of the customer, via e-business experts who rightly evangelize solutions for their customers inside the company, gets heard loudly throughout a company using this business model. In the latter role of product manager, the e-business expert is expected to have an understanding of both technology and the implications on delivery schedules for customers. Who will win with this model? The companies that can develop and recruit e-business experts who can passionately carry the message of their customers back into companies, making the product development staff aware of emerging needs.
What then about the companies who are in the small business segment? There are four million small businesses today in the United States alone, according to The Yankee Group—with a projected 4 percent growth rate, this will turn into approximately five million businesses by 2003. Reaching into this segment does not make sense for the larger companies who have cost infrastructures, which prohibit them from servicing smaller businesses cost-efficiently. The need for a resource for handing off critical tasks is essential for growth of e-business strategies in these companies. In essence, without an e-business expert or consultant, the tasks toward establishing an e-business strategy wouldn't get done. The role of the e-business expert as a trusted guide is critical, especially in smaller companies where the focus needs to be on doing a minimum number of tasks for maximum results.
With the strengths of personal accountability, a focus on the customer for the long-term, and the ability to span applications for e-marketing, e-commerce, and e-operations areas, the relationship selling model is very adaptable to many types of customers. The shortfalls of this model are the need to succinctly explain the value proposition of the relationship-based model and to simplify pricing and options. Overall, this model shows great promise because the relationships with customers are the asset, and product innovation is used to further serve the evolving needs of customers as their businesses change and hopefully grow.
Ebay.com, which started as a Web site used for auctioning off Pez dispensers, is now a fully functioning corporation with a market capitalization of more than $200 billion. Using a community-oriented concept of creating online areas where people with similar interests can bid on items of interest, Ebay.com has risen to be a standard in B2C commerce. What's interesting is that the business model initially focused on taking a percentage of the transaction for a processing fee, and it is now a model that includes revenue streams from advertising, partnerships, and international expansion.
The community business model is one well suited for B2C commerce, where people cruising the Web for pleasure can quickly get a handle on the pricing for items of interest. Furthermore, the community model creates specific market segments within itself, further segmented by purchasing behavior. This provides Ebay.com with additional advertising opportunities.
Clearly, the strengths of this business model include the ability to quickly distance oneself from competitors through a loyal customer base. Furthermore, this type of model works well from the standpoint of tailoring applications to specific audiences or segments. It's entirely feasible that Ebay.com will eventually branch into B2B commerce, even possibly creating a sales exchange in antiques for dealers to actively trade their items. Clearly, this model provides a direct connect into e-procurement and e-operations because these areas of the ASP product suite are focused on collaboratively working with departments within a company to drive down costs.
Another company using the community model is Agillion, which is delivering e-operations applications via the ASP model. This company's community of customers uses the forms-based interfaces for entering customer relationship management-oriented data. It's a low-end approach to bringing CRM to the masses. Agillion is actively working to bring value to its communities through streamlining the user interface and the introduction of data interoperability with Microsoft Outlook, GoldMine, and other contact-management and scheduling software. The role of the community model is one of creating a "buying club" to spread the benefits to all members. It is entirely feasible that Agillion will eventually turn into one of the online accounting companies that already compete for companies looking to outsource accounts payable and receivable.
What, then, are the downsides of this model? First, the product strategies are definitely evolutionary as opposed to revolutionary for this model; the risk of losing customers diminishes with every successful migration from one product or service offering to the next. Second, this model needs to have a strategic plan or vision guiding it; it does not respond well to impulsive and aggressive moves because companies basing their businesses on it require an element of stability. The service is one of 7/24 availability of critical data.
Taking a page from the world's leading distribution companies, there is a dominant class of ASPs who are acting as application aggregators, taking entire series of applications and enabling them over their platform. FutureLink is one such company, which focuses on bringing in applications from many different companies to add value to customers. The distribution model in effect aggregates applications into a cohesive product strategy for customers to choose from. Just like other distribution-oriented models, this one looks at the velocity of transaction rentals and the breadth of products that can cover the chosen markets.
What's crucial about this model is the role that partnerships play. For FutureLink, the role of Compaq and Microsoft is crucial. The continual evolution of the distribution model requires strong ties into infrastructure-building companies—in terms of technology, this is Microsoft. This model also scales well from the standpoint of bringing in applications for leasing.
The drawbacks of this model include the shortcomings of many Internet-based distribution and selling companies. The need for building a robust back office for serving up the applications, and the ability of the back office of a distribution company to scale, are also critical. All the investments in scalability and development of applications, including testing, makes the distribution model rely on the velocity of transactions, with the breadth of application leasing being one of the prime revenue generators in this model.
Promotion and Advertising Model
There are a multitude of companies on the Internet who have as their primary business model the development of a large readership or viewership to drive up advertising prices. One of the more unique companies in this arena is Buy.com, which until recently was selling products below cost and attempting to make up the difference in advertising revenues. This assumes that the products being sold have a relatively flat demand curve that tends to trail off, thereby leading to more visitors once a “cliff” on the price has been reached. This happens on certain products that have limited supply, but with much competition in key areas of computing products, this doesn't tend to work all the time. During its IPO early in 2000, Buy.com first told everyone in interviews that its model would now include for-profit products. This was refreshing to the analysts who track the company.
With the advertising model in full gear at other companies such as Yahoo.com, it's apparent that a market leader for premium pricing leading to other media strategies can leverage the model. Yahoo.com has been focusing on driving content into its site so that it will be the industry-standard portal. With the growth of Yahoo!'s traffic, its market capitalization has grown to $91 billion today.
Software to Service Model
The gauntlet has been thrown down by Larry Ellison of Oracle to other software companies to change their business models from software sales to application leasing. At the same time, Oracle is saying that it will be using its exclusive value-added resellers as an e-business expert to provide ASP services. Yet the direction that Ellison has set is clear: He commented in Internet World in 1999 that 50 percent of his company's revenues would be generated from Web-based sales. This is an aggressive goal and is quickly being pursued with the Oracle Online application suite of Web-enabled applications for large and medium businesses.
What's so intriguing about this model are the implications for companies who have built their sales and support organizations and processes to support sales tasks instead of service ones. Microsoft is in the midst of this transition, as is evidenced by comments from Steve Ballmer during the close of the fourth quarter of 1999. With the Microsoft Office Online pilots underway and the efforts to streamline licensing, Microsoft is working to get its business model turned into a services-based model as quickly as possible. Using its extensive resources for marketing and development, Microsoft can be expected to lease all components of Office Online before the end of 2000.
The strengths of this model include the ability to create recurring revenue streams, leveraging the Internet to deliver the value. This is also a business model that focuses on the development of longer-term relationships than has been possible in the mass sales approach. The third aspect of this model that is going to be interesting to monitor in the coming years is the implications for OEM partners of these companies. With the direct model essentially kicking into full gear to the point of turning these companies into service businesses, will the direct model in effect give the end customer a complete decision of which operating system to use on which computer? The dynamics of OEM pricing and the very nature of the relationship will change between Microsoft and its OEM partners. There will be a migration of ancillary business models of companies also serving Microsoft.
The weakness of this model is that it does not require the size and scope of an organization needed for traditional application publishing and sales. The re-engineering of companies such as Microsoft and Oracle is expected to be gradual yet significant. Coupled with the Department of Justice ruling on Microsoft and its migration to a service-based business model, the ruling to potentially split up Microsoft could be the best solution for how to streamline internal processes to re-engineer the company internally. What the Department of Justice can do through its judicial ruling is what the market would have potentially done within three years as well. Clearly, the transformation of Microsoft and other of the largest software companies is at hand.
VAR to ASP Model
Starting from the same foundation as the e-business accountability and relationship selling models, the VAR to ASP model also relies heavily on relationships with customers. Many VARs first established their relationships with leading Fortune 2,000 companies by selling them networks, software, PCs, and servers over the last 15 to 20 years. The effects of the Web as a change agent on industries are felt very strongly in the PC and information systems VAR arena today. While companies including Dell and Gateway have acted to change distribution, the VARs are now in a position of having to retain the most valuable asset that they have: their customer relationships. To that end, VARs are becoming application service providers through partnerships with Oracle, Great Plains Software, SAP, and many others. The VAR today is taking on the role of a sales channel for the higher-end ASP applications, which require both project management and a strong voice inside their companies on behalf of the customer.
The strengths of this model include its ability to serve larger corporations through pre-existing relationships with companies that they have known for years. The other benefit of this model is that many VARs have experience with training, support, and the development of product expertise internally, making them self-sufficient. The downside of this model is that it really doesn't give the VAR complete control of its own destiny unless the strategy is to learn from the larger players and then embark as an individual ASP. Many VARs, in fact, are doing just that. This model is focused on high service and low margin because the applications are resold, netting a sell-through margin to the VAR.