Time to Toss It?

By SmallBusinessComputing Staff | Posted July 01, 2000
by Douglas Gantenbein

Like a lot of small business owners, Richard Small knows the key to keeping his Portland, Oregon-area print shop thriving is to keep his customers happy. "You have to find ways to make yourself more attentive toward the customer," Small says. "It used to be that competition meant other businesses in a 10-mile radius. But now, with Federal Express and UPS, the competition is worldwide." But managing a small company's customer base can be tricky. With 40 to 120 orders per day and nine salespeople, "it's impossible to ensure that each customer gets the same salesperson every time," Small says. That can mean confusion over orders, or a customer who doesn't feel he or she is getting the best treatment.

The answer would seem to be a computerized, in-house order-taking system. But custom-built systems that are designed with the print industry in mind can cost up to $60,000, plus continuing expenses for maintenance, upgrades, and training. That's a financial hurdle that Small hasn't been willing to leap.

But now he may not have to. Soon, he says, he likely will be purchasing the software solutions he needs from a company called Apps4biz.com, which is developing software specifically designed to handle the order peculiarities and nomenclature of the printing industry. Small won't buy the software in a shrink-wrapped box and install it on an office PC network. Instead, he will use the Web to access the Apps4biz.com site. Once there, he or his salespeople will log on using a password and have at their fingertips the company's entire order records. Small won't have maintenance or upgrade headaches ­ Apps4biz.com will take care of that ­ and he will pay only for the system time he uses, a small fraction of what buying his own system would cost.

Apps4biz.com is part of the fastest-growing segment in the software industry, called ASPs, or application service providers. These are a Web-powered update on the old outsourcing model, in which a business hires someone else to handle such tasks as accounting or computer maintenance. But ASPs take that outsourcing model, combine it with the anytime, anyplace world of the Web, then deliver high-end products to businesses by allowing them to share the costs for the main network and the software with scores or hundreds of other ASP customers. "With ASPs, companies will buy software like they buy gas or electricity or get a dial tone," says Brian Walker, a president and chief executive of ExchangePoint, an ASP vendor of accounting, sales, and human resources applications for consulting and law firms.

The ASP market has exploded in the past year, with hundreds of companies now claiming to be application service providers. They're after a market that analysts peg at perhaps $23 billion by 2003. For small businesses, too, the potential is huge, offering the chance to get their hands on hot-rod business software they'd never be able to afford otherwise. And some industry observers say that the increased performance offered by ASPs will force small businesses to adopt ASPs or risk losing out to competitors who do. "With the advent of ASPs, you have to decide if you're 'in' or you're 'out,' " says Richard Luettgen, managing director of software strategy for Technology & Business Integrators, a technology consulting firm. Companies whose in-house order systems typically allow three or four days to pass between an order or delivery, for instance, will soon be competing with ASP-powered companies whose sophisticated, ASP-provided order-management software cut that cycle to one day. "At that point," says Luettgen, "you're not competitive any more."

Despite all the hype about the Web, for most small business owners this is unknown territory. Small business owners who attended recent focus groups held by ASP provider Smart Online were asked to explain what ASP meant, and the result was blank stares. And even small business owners who are familiar with the term may be at a loss to sort through the scores of companies claiming to be ASPs, or to figure out just how an ASP fits into their business plan.

Dial-An-App
The cell phone model is the one most commonly cited to explain ASPs. Phone users purchase the access device ­ the telephone itself, choose from an array of features offered by the telephone company, and pay either a monthly fee or pay per transaction, or both.

But the telephone company handles all the heavy lifting, such as maintaining the technology, upgrading the software that handles switching, and adding new technology. This enables a small business' cell phone service to operate just as well and as powerfully as a large company's. ASPs work the same way: The customer purchases or leases the access device ­ a PC and a Web connection ­ then buys or rents time on the ASP's network as needed. As with the telephone company and its invisible work maintaining the system, the ASP worries about upgrading software, adding more servers, and handling technical questions. ASPs turn software from a product into a service.

Caveats and Cavils
While the ASP model holds plenty of promise, there are some justifiable concerns. For one thing, many ASPs are marketing what is essentially desktop-based software that has been tweaked to work with a browser. But for the best performance, an ASP application should be exclusively browser-based. That is beginning to happen, but it likely will be another year or so before a wide range of ASP-specific software is available. Another down side: To work well, many ASP applications require the user to have a high-speed connection. While DSL is becoming more ubiquitous, many businesses that might like to use an ASP may find themselves frustrated with pokey connections.

Then there's the problem of whether new ASPs are going to be around for long. There's been a scramble for customers as more providers crowd the market, and there's bound to be a shakeout. That will be bad for many ASPs ­ and for their customers. Only those that are reliable, secure, and easy to work with will survive ­ and those are the only ones you should use.

The Good Stuff
For the small business, however, the potential advantages of this approach are multiple. ASPs, by distributing over many customers the cost of purchasing software from its originators or developing their own software, can make high-powered software available at prices a small business could never otherwise afford. And the ASP model also promises to lift a significant burden from small-business operators: purchasing and managing their own information system. "IT or systems issues are not a small business' core competency," says Jonathan Lee, founder of Corio, a pioneering ASP vendor of enterprise-class software. "Often the cost [to manage the technology in house] can't be justified because of the expense of recruiting and retaining IT folks, yet they have the requirement ­ and it's a critical requirement." There's also the problem of attracting even good-quality IT help in the insanely overheated dot-com marketplace.

With or without an IT staff, many businesses can't keep up with the flow of upgrades and updates from a software vendor. Upgrades sell for a small fraction of the new software package, but that means a salesperson isn't as apt to hustle an upgrade to an existing customer. Even annual upgrades that include new utilities or features may be unavailable to a user for months at a time. But ASPs, if need be, can update software daily.

Cost-cutting is another potential benefit. The Gartner Group, a technology-analysis firm, estimates that it costs about $750 per year to keep each employee up and running on a local-area network. Depending on the service level required, an ASP offering the same or better functions as an in-house system may cut those costs by 80 percent. But even in cases where it doesn't ­ and Tim Schuetz, an IBM AS/400 marketing executive, says that it's a mistake to look at ASPs solely as a cost-cutting device ­ an ASP frees up other company resources. An ASP "is a more efficient and effective approach," says Schuetz. "You get so much more for your dollar."

Perhaps the most compelling argument, however, is that a small business no longer needs to wait to become big before it has access to the same tools that a large business has. "Rather than starting with ACT or even a spreadsheet to manage sales tracking, you can start right off the bat with a high-end customer-relations package, then let your business grow with it. You can play in the big leagues right at the start," says Mike Mitsock, vice president for the ASP unit of Progress Software, which helps independent software vendors make the switch to an ASP model.

Sorting Through the Noise
A year ago, nobody had heard of ASPs. Now they won't shut up. "It's a confusing market," says Amy Levy, an analyst with Summit Strategies in Boston who has followed the ASP industry's growth. "The fact that everybody and their brother is calling themselves an ASP isn't making things any easier."

So how is a small business owner to figure out what's useful?

It helps to break the market into pieces. At the top end are ASP vendors such as Corio, Usinternetworking, and Breakaway Solutions. These ASPs typically take high-end customer relationship management or enterprise resource planning software packages from companies such as PeopleSoft or Siebel Systems Inc., and re-package them for use by mid-market businesses. The cost savings of this approach are enormous, but they still cost about $150-$900 per user.

For many small businesses, the most attractive ASPs will be those that solve everyday business headaches quickly and inexpensively. This may mean something as simple as purchasing postage ­ postal vendors such as Stamps.com and Estamps.com are fundamentally ASPs: They provide a Web-based, pay-as-you-go service. Business purchasing also is going the ASP route. Works.com, for instance, is a business-equipment e-tailer with a twist: It's targeting the small-business market and putting the mass purchasing power of Fortune 1000 companies in the hands of the little guy. But Works.com goes a step further to automate company purchasing, and that's what makes it an ASP. A customer can set up an account, filter purchase requests, catch unauthorized purchases, and track purchasing records. It becomes a purchasing department for a company too small to afford one.

A third category of ASP vendor is trying to focus on vertical markets. The specialized software offered by Apps4biz.com, a Massachusetts-based company that is writing industry-specific software, for instance, has attracted Richard Small's printing company. Its first offerings, released earlier this year, were aimed at the printing and plastics industries. But it hopes to add another 15 industry-tailored packages, based on Microsoft products such as Project and Excel, in the near future. With just a browser and a password, an Apps4biz.com customer can generate order quotes, place an order, schedule production and shipping, handle billing, and manage the books, all in the terminology of that particular industry.

Case In Point
Perhaps the greatest asset ASPs offer is their ability to simply create a network for a company too small or far-flung to ever consider such a tool. Take the Florentine restaurants, a chain of 10 Italian restaurants established in the Silicon Valley area and branching out in northern California. Until recently, each restaurant kept financial records on its own PC, turning in Excel spreadsheets on a floppy disk each month. So it was difficult to track day-to-day results chain-wide. It also was a challenge to get Florentine chefs ­ who are given a fair amount of leeway to develop their own recipes ­ to share information. "If a chef ran a special and it did well, we want to share it," says Loretta Callahan, Florentine's information manager. "But if a chef lost a recipe, we'd have to fax it to him, and he'd use it once or twice, and then spill sauce on it and not be able to use it again."

Recently, however, Florentine began linking its restaurants with Passport, an ASP-based groupware program offered by Bluetrain.com. With Passport, each restaurant's PC can be linked via DSL connections onto a Web server, where chefs exchange recipes, managers post daily financials, and the restaurant staff checks work schedules. "It's really helping us share information," Callahan says. "Now, if a chef has a special that does well, all he has to do is type it up and post it on the site. Or a chef can go to our site and look for recipes for which he has the ingredients." Bluetrain also handles Florentine's e-mail ­ allowing a florentine.net domain name instead of that of an ISP ­ and hosts a restaurant Web site. "It makes us look like we have a lot of money," Callahan says.

Keep in mind, however, that an ASP is another tool a small business can use, it is not a panacea. "You can't outsource everything," says Steven Dryden, vice president of marketing for Agilera.com, an ASP vendor specializing in enterprise applications. "You can't assume you won't need any in-house information technology expertise, just like you don't want the bank to handle all your money without anybody understanding what's going on. Treat the ASP as a resource, as a tool."

As a tool, an ASP can be a powerful one. In fact, tapping into an ASP may very well change the way a business runs by giving it the business and productivity tools it never had before. With the right ASP, says Technology & Business Integrators' Luettgen, a small business can gain access to supplier networks, simplify and improve customer service, and manage inventory in a way that was not possible before. The result: Greater productivity and a chance to do more than simply keep up with the daily operations of a small business. It's made a believer of Richard Small, at least. "We have to find a way to make ourselves more valuable to the customer," he says. "With the ASP model, for the first time I see some bona fide tools I can use and afford."

HOW TO CHOOSE AN ASP
Now that you think this ASP stuff is old hat, all that's left is to choose one. But how the heck to start? It comes down to figuring out your needs and shopping carefully.

For starters, say ASP observers, it's wise to try some simple ASP-type systems to get a feel for how they work. In other words, don't toss that off-the-shelf software just yet.

Buy some postage on line, set up an account with a business-products vendor, or try some group-collaboration sites such as Hotoffice.com ­ which has a free site for those who don't mind wading through some ads. These allow a small business owner to test the concept without committing any mission-critical parts of the business to an untried vendor.

Then it's a matter of figuring out what will solve a business' most urgent needs. "We recommend that you write down on a piece of paper what you need in your office, what you need for e-commerce, and what you need for the back office, such as accounting and e-mail," says Michael Gale, the chief Web officer for Micron, which hosts a number of ASPs geared toward small businesses.

Some IT tasks ­ setting up Microsoft Office, for instance ­ are simple to do and probably not worth enlisting the help of an ASP. Other jobs, such as running complex group-collaboration software or accounting packages or hosting an e-commerce site, likely will prove to work more efficiently given to an ASP.

Another factor is how deeply committed a small business may be to a particular way of doing things. Most ASPs must of necessity take a one-size-fits-all approach, meaning you'll need to bend to their way of doing things. That may be a problem for some businesses, although Corio's Lee thinks most companies don't need highly customized applications, despite what their owners might think. "Most of the time, different companies' requirements are not that unique," he says. "At the end of the day, my back pain is the same as your back pain."

Also, keep in mind that while the ASP concept is new, the software tools they offer ­ by and large ­ are not. Some ASP vendors, in fact, may have been around for several years as an outsourcing provider. That's to the customer's advantage, and shows the company has a track record and has experience with the software packages it offers.

Finally, take a look at security and stability. Ask hard questions of an ASP vendor about their security levels and downtime percentages. Some ASPs ­ many, in fact ­ don't even do their own hosting, so the prudent customer will tunnel down to find the ASP's actual host and check its security and maintenance procedures. Get references, and talk to ASP customers about their own experiences.

Get in writing what the ASP offers: Be sure your ASP offers a service-level agreement that spells out such issues as reliability (seriously, what happens to your data if a meteorite hits the server?) customer support, and training.

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