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ASP: Itís all about size - Views on News from Equitymaster
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  • Dec 21, 2000

    ASP: Itís all about size

    This is the age of outsourcing and itís not any different with IT requirements. Enter the ASPs (application service providers) who will rent out IT services. In India, the focus this time is small and medium enterprises (SMEs) that have still not joined the IT bandwagon primarily due to the lack of awareness and costs involved. According to IDC (International Data Corporation ), 64% of the small enterprises were unaware of the concept of ASPs while the figure was 59% for the medium sized organizations.

    While global surveys reveal that five markets which are most commonly hosted are Customer Relationship Management (CRM), Enterprise Resource Planning (ERP), Supply Chain Planning (SCP), Transportation Management Systems (TMS), and Warehouse Management Systems (WMS). The Indian focus as of now is more on domain hosting.

    What to expect from an ASP
    Use of a†packaged software application
    Required computing hardware
    Secure network connectivity
    Responsibility for ongoing operations
    Scalability and upgradability of the solution
    And all the above at a flat monthly service fee
    Professional implementation services

    But the market potential for this business is quite confusing. On one hand, IDC has projected a grim scenario for the ASP market. The global markets (says IDC) would be restricted to Rs 360 bn in 2004, which is hardly anything compared to projections for other segments. On the other hand, Frost and Sullivan figures estimate the global ASP market to touch Rs 977 bn by 2004. The ERP software market, which is considered past its prime, is estimated to have almost the same size as of the ASP market.

    Business Area Markets
    Rs (bn)
    Datawarehousing and Datamining 6,650 2003
    ERP 883 2003
    ASP 977 2004
      360 2004
    Source : Survey.com, Global Information, Inc., IDC

    The Indian scene is as confusing. Frost & Sullivan, estimate the ASP revenues to be Rs 135 m in FY01 and this figure is expected to rise to Rs 2 bn in 2004 (a CAGR of 146%). According to IDC, last year the combined revenues of the ASP market was about Rs 5 m and it expects this figure to touch Rs 1 bn by 2004.

    Even if we take the more optimistic Sullivan estimates, the Indian ASP market will be just Rs 2 bn by 2004. With around 35 players already vying for a piece of the pie will result in a fragmented market. Added to that, a study by Stratecast Partners (San Jose, California) has revealed that more than 35% of companies surveyed, would never use an ASP. Fear of giving a third party control over enterprise application was the major concern, which was voiced by 41% of the companies in the sample. 78% of the companies that did not outsource applications felt there was a lack of availability in terms of applications that meet their needs. According to the survey e-commerce and payroll are among the most widely outsourced applications. Even amongst current users, security, along with application performance, were the biggest concerns.

    But the optimists have their own arguments in favour of the ASP potential. The reasoning is that firms which are cash strapped would prefer to rent out IT services than set up their own infrastructure. Another factor that will drive companies to adopt the ASP model will be the shortage of IT professionals globally. With improving broadband, bandwidth availability is expected to improve dramatically. This will make ASP outsourcing more financially and operationally viable.

    The Benefits
    Faster time to market
    Lower total cost of ownership
    No hidden design, development & redevelopment costs
    Reduced risk of failure
    Opportunity to stay focused on core business and competencies

    The big names in the Indian ASP business include Satyam Infoway, I-Flex, Global Telesystems, Intelligroup, Consign Technologies, Eastern software systems and Citrix. Wipro is a player that has all the credentials required to be a market winner in this segment. It has a lot of experience in infrastructure support and management but far more importantly it has size.

    Considering the number of players vying for the small market size this is going to be one tough fight. The service providers will not only have to work on creating awareness in the Indian markets but also convince Indian companies to share their data with service providers. This will be a task that will require a lot of effort and patience. The deciding factors will be pricing, strategic alliances and service level agreement (SLA). SLA defines the parameters of services including critical ones like Web service uptime. This will differentiate boys from men. It will ultimately boil down to an added service a company can offer to improve markets for its already existing products like ERP or other application software.



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