In order to discuss how the emergence of applications service providers (ASPs) and rented software companies leverage the IT capabilities of a company, (specifically a small or medium one) I’ve divided the following essay in to three main sections. In the first section, I intend to clarify the real dimension of the ASP market, comparing the expected with the actual growth and analyzing the different reasons for SMEs to slowly adopt the software rental scheme. In the second part, I focus extensively on the benefits obtained by SMEs from the vendor and customer perspective. I also examine some case studies from the practitioner literature and critically contrast these with some findings from the academic literature. In the final part of the essay, I examine the limitations and draw-backs of the ASP model.
To accurately summarize the upturns and downturns of the ASP market it is key to start with describing its evolution and comparing the actual facts and figures with previous and expected growth estimations. According to Jason Maynard, analyst at Credit Suisse, SaaS “the market is growing by about 50% a year, compared with single-digit growth for traditional software” , this figure is significant enough to infer that traditional software is facing big challenges due to the emergence of the “new” ASP business model. Nevertheless considering previous ASP’s market growth forecasts, one has to assume a more critical position. Why must this be done? Mainly because it is hard to find consensus about the figures and secondly because growth expectations have been overwhelmingly higher than actual market figures.
In 2002, ASP spending was forecasted to grow to US$ 8 billion by 2004 (US$ 14 billion according to the Yankee group) (Heart and Pliskin 2002). Paradoxically, after the diminishing and apparent extinction of the ASP model by 2003 (Currie 2003), Forrester was announcing in 2005 the return of ASP (Huber 2005). Contradicting even the most conservative growth forecasts, by 2005 the ASP market had a reduced volume of $3.35 billion ; by 2006 market size was only US $6.3 billion (Evans-Correia 2007), less than half of what was expected by the Yankee group for 2004.
Currently, ASP growth and adoption in the UK is still difficult to assert: according to Evans “5.1% of small firms and 15.2% of medium-sized firms are planning to move for-ward with a SaaS”, but at the same time “[SMEs] have not been adopting SaaS as quickly as originally anticipated” (Evans-Correia 2007). In the US, 55% of SMEs are running SaaS applications (Morris 2007) and, in terms of the worldwide software market, IDC expects 30% to be in the hands of ASP providers (Evans-Correia 2007). Not only SMEs are aiming to run ASP, big companies are also looking to use ASP. According to Jeff (Morris 2007), by 2008, 61% of US big companies are planning to run ASP. Three years from now, by 2010, the worldwide market is expected to be around US$ 12 billion and in 2011 it is expected to grow to US $ 19.3 billion (Evans-Correia 2007).
These figures, facts and forecasts are helpful to understand that rented software is not a mature and straightforward market (at least on the consumer side). Therefore, the key challenges and problems related to the consumer companies’ behavior must be identified in order to discuss the real competitive advantages that a rented software model could provide to a SME. Among theses challenges, Huber states that high costs and the narrow bandwidth of the communication infrastructure offered by the early 2000s was an obstacle for widespread adoption of ASP scheme by SMEs (Huber 2005). Currently this limitation seems to have been overcome., According to Lockett (Lockett, Brown et al. 2006) by 2006 access to ICT was no longer a barrier and 84% of SMEs already had connectivity. Nevertheless, Lockett also states that many SMEs still have not acquired any kind of hosted services and identifies three possible reasons for this:
i) Lack of awareness of the clients of different ASP offerings
ii) Providers focused only on the most cost effective solutions
iii) Customer perception that applications offered are too complex or unnecessary.
According to Locket “accounts of SME experiences of using hosted services are largely anecdotal and often found within the practitioner literature” (Lockett, Brown et al. 2006). Making a deeper historical analysis of rented software industry, Heart (Heart and Pliskin 2002) describes what can be called “historical waves” in SMEs’ demand for rented software. During the 80s, small companies were not able to afford the hardware and software that big companies were using back in those days. As a result of this challenge, in order to gain access to these resources, SMEs found an alternative renting information systems from service bureaus. Later, in the 90s, when hardware and software became affordable SMEs decided to source their IS infrastructure internally, causing the service bureaus to disappear. By the late 90s, due to the increasing complexity of IS installations, support and maintenance, SMEs decided to go back to the e-rental scheme. Heart’s findings are provide a good overview of a how the rented software market has been historically related to the needs of the small and medium size companies and on also how waves of growth and decline are characteristic in this market.
On the supplier side is important to highlight that there seems to be a transition from an immature market back in the early 2000s, (a market in which managers were jumping into the chaotic market of rented software to take advantage of the novelty and confusion (Eisenhardt and Sull 2001)), to a more mature market, in which the applications offered live up to customer’s expectations. As an example, five years ago a payments processing SME called The Members Group looked into a SaaS project management solution, but they were disappointed with the functionality offered. Five years after that, they found a completely different scenario: the provider was offering the functionality they were expecting and the user interface had improved significantly (Schwartz 2007).
Despite the difficulty to empirically derive the degree of adoption amongst small and medium enterprises of the ASP approach that has been already stated, the advantage provided by ASPs to SMEs identified in vendor literature are ASPs leverage SME’s capabilities by rapidly providing IS infrastructure and personnel providing the necessary resources to compete in the global economy (Heart and Pliskin 2002), (thus, ASP is not only about infrastructure but also about rapidly acquiring knowledge in situations where a company is lacking or not wanting to have internal IS development capabilities (Lockett, Brown et al. 2006). In contrast to big companies that have invested vastly in IS capabilities (and therefore are not in a hurry to get rid of their current infrastructure ), in principle SMEs should be encouraged to pay for software on demand, as Evans-Correia states “the idea of getting high-end business software via the Internet — pay as you go via a credit card, seems a natural fit for the SME” (Evans-Correia 2007).
In the particular case of CRM (Customer Relationship Management), providers have identified a set of benefits for companies planning to adopt the scheme. These include:
- Reduction of time to implementation and a reduction of operating costs;
- Greater flexibility and ease of use derived from the ability to use customized APIs, thus letting the customer be in charge of the personalization of the application at all levels (not only at the UI but also integrating the application with legacy systems). In addition, according to ASP providers, the quality of the software is better in contrast to in-house customizations and, at the same time, the upgrades’ effect on the applications are highly predictable.
- Vendors also highlight the fact that by using an ASP solution a company can achieve greater compliance with regulations such as SOX and decrease risk while getting higher returns (since the provider is responsible for rolling out new versions of the software, making backups, maintaining the software and hardware infrastructure and keeping it working smoothly ).
This list is not a comprehensive enumeration of the benefits provided by ASPs but it is comprehensive enough to assert that the benefits are mainly related to the fact that maintaining an internal IS infrastructure is a burden that not many companies, small, medium and big are willing to have. Nevertheless these benefits have been established by software providers and thus can be biased by marketing and commercial interests. Conversely, recent studies have also analyzed what customers expect from ASP companies.
In the next section I focus on discussing the actual benefits sought by SMEs and how these benefits are expected to give competitive advantage in comparison to large corporations.
According to Locket’s research (Lockett, Brown et al. 2006), the benefits of using hosted applications (such as flexibility, convenience, access and focusing on core competence) appear minor when compared to cost reduction, therefore, it seems that instead of looking for competitive advantage (apart from cost reduction) through differentiation or niche markets positioning, SMEs are influenced mainly by cost when using ASPs. This is reflected in the types of applications that are outsourced via external hosted applications, such as accounting, expense management and human resources (which do not determine competitiveness) .
Conversely, SMEs have found that the ASP scheme offers capabilities that in some cases let them compete together in equal conditions with big corporations. Thanks to the use of ASP, a small seller of corporate gift baskets called Manhattan Fruitier was able to cope with the issues of a big company. They were operating by pen and paper for two years and then switched rapidly to computers thanks to the use of an SaaS solution (Morris 2007).
But not only small companies have found that software rental can be a good way of reducing costs: Salesforce, an SaaS CRM company provides rented services for companies such as Cisco, Sprint and Merrill Lynch . According to Morris “companies with lean internal IT resources—no matter what their size—will be attracted to SaaS” (Morris 2007).
Not only companies with lean IT resources are encouraged to use ASPs. For example, Esker Software, a document automation and processing company based in the US, was running Siebel CRM on premises and was planning to upgrade it with a cost of US $255,000 for 165 users. After initial hesitancy, the company decided to run an on-demand SalesForce.com CRM implementation, now they pay much less than US $22,500 per month (Garretson 2005).
What ASP creates in the IT-based competition arena is two folded. First it creates a new paradigm where budget is not the only thing that matters. This directly impacts the way in which companies govern their IT function, because what actually has the capability to provide competitive advantage in the long run is customized software tailored for the specific business characteristics of an organization . The second consequence is overtly discussed in enterprise systems implementation research and literature: firms have realized that ASP solutions do not provide actual differentiation unless they re engineer their business processes to enhance efficiency (Currie 2003).
How ASPs provide competitive advantage also stems from the functional focus of the ASP. In that regard, ASPs can be classified as horizontal or vertical. Horizontal ASPs offer generic services across different industries and seem to be the most used model (Lockett, Brown et al. 2006). In contrast, vertical ASPs have shown considerable success focusing on a particular niche by improving the capabilities of a particular industry within the SME market.
Two examples of e-rental companies (Heart and Pliskin 2002) in Israel show that vertical ASPs can be an alternative to leverage the use of ICTs in a particular industry, (namely hospitality services, like hotels, and restaurants). Back in 2000 NetPOS, an Israeli company that supplies POS solutions for restaurants, identified some issues regarding their Net-POS’ on-premise solution:
- Clients had to employ IT professionals in charge of maintenance and updates
- Some restaurants were having problems with the physical space needed to install server and network infrastructures
- Customers were acquiring expensive service agreements to reduce system down time. To tackle this, Net-POS successfully deployed an e-rental solution in which the customer only had to acquire the terminals and use Net-POS’ remote thin client instead of having to deal with complex infrastructure and personnel requirements.
In the second case, Silverbyte, a solution provider of management software for hotel and cruise industries, began to offer the ASP scheme back in 1998 by chance while dealing with one of their client’s requests. Their client was facing problems with the 24×7 service level expectations and the client’s manager asked Silverbyte to take over servers’ maintenance. As a consequence of this, Silverbyte began offering two different types of solutions: 1) The Corporate ASP designed for the traditional clients that want to have the applications on-premise and 2) an e-rental platform in which a thin client is installed in the customer’s premises and within hours the application is up and running, thus avoiding hassles such as installing server and network infrastructure.
What Heart stresses about these two cases is the way in which the ASP solution emerged from a preexistent software provider which identified particular opportunities in a niche market that shares some characteristics with SMEs (Heart and Pliskin 2002). Heart emphasizes the fact that, like SMEs, small independent hotels, mid-sized hotel chains and restaurants face the risks of lagging behind and not implementing and integrating e-business solutions to their core business.
Finally, I want to focus on contrasting the apparent benefits of ASP adoption among SMEs with the limitations and shortfalls of the model. First of all SMEs are concerned about the functionality provided (Evans-Correia 2007) mostly because the applications are vanilla implementations with no options for customization (Heart and Pliskin 2002). This is sometimes not appropriate for companies that are expecting some degree of personalization. The justification for this lack of customization is that ASPs provide single shared services for multiple customers (also called multitenancy) in order to yield the expected benefits of economies of scale and seamless upgrades (Orr 2006). SMEs also have limited approaches to the adoption of new technologies directly linked to company growth, according to Lockett (Lockett, Brown et al. 2006). Small and medium companies with no growth plans tend to be moderately enthusiastic about the adoption of new technologies (mostly when these are complex). SME managers have a simplistic view of e-business and consider that low-complexity applications such as e-mail and web hosting are the only two ways of doing e-business through ASPs ( thus neglecting what Poon calls the Internet-to-Internal systems integration, in which “longer term benefits can only be realized with well-planned integration of business functions and IT in an interorganizational or sector-wide manner”) (Poon and Swatman 1997).
SMEs also have limitations in comparison to large enterprises regarding experience in contracting ASP services. Currie (Currie 2003) states that SMEs lack rigorous methodologies to assess risk and select ASP offerings. This lack of formality is replaced by tacit knowledge and gut-feeling, causing many small companies who signed service contracts with hosted software providers to have problems when they notice that service level agreements and functionality do not comply with their expectations. Together with an initial lack of vendor’s know-how about their own business and the benefits and risks implicit in the model, lack of formality present in SMEs has hindered the initial growth expectations of the ASP approach. Furthermore, small and medium companies have manifested concerns about service level agreement’s uncertainty and lack of security (Heart and Pliskin 2002). Managers believe that renting part of the IT resource outside the company means loosing control thus causing uncertainty over expected service levels and company’s confidential information. However, according to Locket (Lockett, Brown et al. 2006), user’s levels of trust with the service seem to have increased nowadays. Managers’ transition from scepticism to realism is better depicted in the Manhatan Fruitier owner’s words: “he felt more comfortable when he had his own servers, even though he recognizes that they were not as secure [as with the rented service] and that it would have taken at least a day for him to reconstitute the data in the case of the power outage” (Morris 2007). Instead of being riskier, if service level and confidentiality agreements are handled and negotiated adequately, ASP providers are more reliable in terms of security and backups (Lockett, Brown et al. 2006) than an SME with constrained re-sources and reduced knowledge about contingency planning.
Regarding suppliers, since many ASPs are start-ups, reaching a critical mass of customers is a key success factor (Heart and Pliskin 2002). This introduces additional risks for customers since many service providers sacrifice performance and service quality in order to be sustainable. Additionally there are cases in which vendors overstate the skills of the IT personnel and the simplicity of implementing the ASP solution (Currie 2003). West sates that ASP vendors initially focus on business issues and lessen the importance of technology, nonetheless technical issues arise when the customer wants to integrate the hosted solution with the internal applications and “at this point the IT department usually becomes involved in assessing and managing how this will occur” (West 2006).
The rented software industry market, including ASP, SaaS and e-rental models, has been increasing in the last years but not at the pace it was forecasted to grow in the late 90s and early 2000s. Nevertheless, reduced connectivity and high cost of connectivity seem to be no longer a limitation for SMEs to acquire these services. While other factors related to the maturity on the customer side still weaken a steady adoption of rented software solutions among SMEs, the supplier side has demonstrated throughout the years an increase in level of maturity and functionality in the applications offered.
Regarding the benefits, it can be inferred that client side immaturity is linked with the fact that many companies, mainly small and medium sized ones, focus on cutting costs by having lean IT in-house capabilities. Moreover, SMEs tend to use ASPs to outsource applications that do not determine competitiveness. To get the most out of IT rented services, small companies must acquire the level of maturity to firstly re engineer the business processes enhancing efficiency and smoothly integrating with external service providers and recognize that custom made applications, which reflect the unique knowledge and process capabilities of the organization, are the ones that provide actual competitive advantage. Moreover, ASP must not be considered a silver bullet that solves every single IT requirement in the organization. SMEs have to consider the fact that options for personalization and customization are very limited, since many providers, to achieve economies of scale, opt for offering multitenancy solutions.
Finally, there is a tendency for big companies to acquire rented software as well. This implies that the rules of IT based competition are increasingly focused on the particular internal capabilities of a company no matter the budget assigned to the IT department.
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