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ASP: Old wine - new name - Views on News from Equitymaster
 
 
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  • Nov 13, 2000

    ASP: Old wine - new name

    Introduction
    Application Service Providers is the in thing today. But it’s been around for ages, named bureau system. But what is disturbing is that bureau services were very specialized in nature but the ASPs are hard-core generalists. And that is definitely not good.

    But first what’s is an ASP?
    Management philosophies have changed over the decades. Few decades ago diversification was in and everybody wanted to get into everything. Then came the “core competency wave”. Focused approach was the order of the day. Organisations have started getting out of their vast portfolios and concentrating on a few businesses where their strengths lie.

    But with the information revolution the internal information needs of an organisation began to grow. The obvious answer was information technology but then it required a lot of technical know-how to implement and manage the systems. These kind of skills were not available within the organisation.

    Hiring people and training them became imperative but it too had its flipside. These people would leave for better opportunities as soon as they had a certain level of understanding i.e. when the individual’s payback period for organization starts.

    Another solution that became an imperative was to outsource the services to people who had know-how in the area called Application Service Providers. These are the people who would have the machine (servers), the software and the people required. All that is required at your end is to send the data over some network (public or private) to them. They would process the data for you and give you the required information.

    The advantages are numerous. You do not or needs less of an expensive IT setup. Perhaps the biggest advantage would be that your information needs could be met using a high-end software which you could never dream of purchasing.

    The Market Size
    According to IDC, the world-wide spending for outsourcing services was $89 billion in 1997 and should reach $142 billion by 2002, a 10% compounded annual growth rate. Forrester Research estimates more aggressive growth for ASP with the market reaching $21 billion by 2001. So going by estimates there is a huge market here and the ASP business definitely makes sense.

    The Indian Scenario
    The ASP industry is in its infancy in India but a lot of companies are more than willing to play. Eastern Software Systems with their product Makess were one of the first to offer ERP over the Internet in 1999. In May 2000 NASSCOM has set up a special interest group on ASP to enhance and encourage the ASP market in the country. Around 40 organisations of all sizes are members of this forum. Services offered range from E-Infrastructure to ERP.

    Issues
    There are primarily two issues facing this industry in India.

    • Infrastructure: The value of 1 megabyte (MB) link in India is about $ 35,000 per month and $ 4,000 in the US
    • Data Security: How comfortable are organisations going to be with people outside the organisation having access to data in the two most critical areas, accounts and customer related information.

    Value Proposition
    The two emerging markets are the ASP themselves and those providing solutions to the ASPs. In the first market big names like Wipro, TCS are poised to make an entry. In the later we have companies like VisualSoft and Birla Consultancy & Software Services. And of course there are a whole lot of smaller companies.

    Maintaining and providing IT infrastructure to organisations is not very high up the software value chain - it can’t be. The basic nature of the whole service is routine. But we cannot ignore the huge market. Then the question is, with all these people getting in who will survive. Well, firstly very large organisation like Wipro and TCS are almost there before the race has begun. For the simple fact that they will be providing their own software solutions. These companies have vast experience in infrastructure management and those who will use their in house solution do have an edge over others.

    But for medium sized and small organizations, its going to be tough fight considering the outgoings for these companies in setting up the infrastructure, procuring the solution and then reaching out to the customers. And this market is going to be dominated by volumes, which again means a huge infrastructure.

    An interesting entry into the area would be Digital, which has vast experience in the area at least for hardware. Another set of organizations that will survive will be those who provide specialized or proprietary services. And those companies that were typically into facilities management. The generalist will not survive- this is not the age of generalists anyway.

     

     

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