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Customer Perspective: Who's Buying?

So far we have seen the types of provisioning and applications typically offered in the netsourcing space. But who is buying? Most studies to date show that the netsourcing market has developed primarily around small to mid-sized enterprises (SMEs). Our international survey, for example, found that nearly 60% of our respondents generated revenues under $20 million per year (see Appendix A for details). SMEs are attracted to netsourcing because they can get big company solutions at small company prices. For example, a netsourcing provider might be a better alternative than the high up-front cost of a package software license. Although packages are a cheaper alternative to in-house developed solutions, it is still the case that many SMEs feel unable to cover the packaged solution costs. Second, a netsourcing provider can assist with IT skill shortages, especially in the development and software maintenance areas. SMEs may well be unable to attract, let alone retain and afford such IT staff. Third, packaged applications from e-mail to ERP and CRM require an established IT infrastructure and connectivity to ensure optimal performance. SMEs find it difficult to retrieve the necessary human and financial resources to support and continually develop such IT infrastructures. In particular, startup SMEs (e.g., dot coms) are attracted to the first generation of netsourcing, characterized by a one-to-many business model, because they have no entrenched infrastructure or business practices, making canned solutions easier to implement. Being new themselves, startup SMEs may also have more faith in the robustness of startup netsourcing suppliers. When you add in that SMEs are increasingly under pressure to become externally connected as extended enterprises, the advantage of an ASP-provided business Internet infrastructure becomes strikingly clear. (Of course, these and similar opportunities need to be weighed carefully against the potential drawbacks of a netsourcing solution.)

Netsourcing can survive in the long run, even if it remains an SME phenomenon because this market is potentially very large. Indeed, in the United States there are some 8 million businesses with fewer than 100 employees, while globally small businesses exceeded 40 million in number. Forrester Research has predicted that in 2004 over 90% of the ASP market revenues will be attributable to SMEs.

During 2000–2001 it was still the case that netsourcing generally did not appeal to large-company customers. Forrester Research found nearly three-fourths of large companies not outsourcing applications. A mix of the following reasons, in order of greatest citation, was given:

  • Software already in-house. Basically, the customers have already made the investment.

  • Not cost-effective. Customers have looked at the economics and found that they could still do it more cheaply.

  • Expertise in-house. Customers could afford to retain their own IT staff.

  • Want to retain control. Netsourcing was assessed as being risky given the importance of the applications.

  • Applications are business specific. Customers perceive a lack of possible customization of netsourced applications.

Having talked with big companies and the suppliers targeting the big company market, our own view is that the large-organization market will pick up substantially over the next few years. Indeed, our international survey of netsourcing customers has already noted the presence of large customers in the ASP space. Over 30% of our respondents generate yearly revenues in excess of $500 million (see Appendix A). A study conducted in 2000 by the Phillips Group found that 19% of companies with 500 to 100,000 employees currently use an ASP. But more important, 65% of these companies said they plan to use an ASP for internal applications within the next five years, and 72% intend to use an ASP for e-commerce.11

Thus large companies are often the slowest to adopt innovations such as netsourcing, but eventually, they do adopt. For example, if we look back to the early 1990s, nearly all large companies initially rejected client–server applications because of their in-house mainframe capabilities. Eventually, the new applications that large customers wanted were written on client–server equipment, and the economics of delivery were often superior. In the end, nearly all Fortune 500 companies adopted client–server technology, even though many legacy systems still operate on mainframes. Thus although large companies may say that they will never adopt netsourcing, the more likely route will be a mixed-sourcing portfolio of in-house, outsourced, and netsourced. Some large companies (e.g., Monsanto) are already experimentally netsourcing for less critical tasks, such as image management. The trade press is also uncovering more Fortune 50 companies signing netsourcing contracts, such as DaimlerChrysler and Nestl .12 Other large companies will find that service providers can offer customized solutions because the size of their business can justify the supplier's investment in customization.

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