Before minicomputers and packaged software came on the scene, small- and mid-size PHCP wholesalers could not afford to be computerized, but they could get their data processed. They subscribed to "service bureaus," where data was "key punched" and processed, and reports generated and mailed to the subscribers.
Low-cost minicomputers and packaged software drove the service bureaus out of business, but the Internet has brought them back. The companies set up to host Web sites and e-mail have hardware and software that are shared by many businesses. Realizing they could provide other kinds of processing, they obtained generalized business software and marketed themselves under the term "ASP."
How does it work?Like the service bureaus of old, ASPs aim at small- to medium-size businesses that find the costs of having their own systems to be prohibitively expensive. The financial problem for smaller wholesalers is that modern software and the professional help needed to install it have an absolute minimum cost, regardless of a wholesaler's size. Hardware adds to the price tag, as does the need for an employee to support the hardware and data communications. Of course, leases are available but often require a hefty down payment and have a duration of five years or less.
The cost of using an ASP can be less than owning or leasing because the ASP business model assumes that many wholesalers will share the same main computer and software and subscribe for more than five years. This sharing enables an ASP to spread its cost over a wider, longer-term base and so lower the charges to subscribers.
Technically, the business model of an ASP involves the purchase of an unlimited-user license from the author of the business software, with the right to relicense to an unlimited number of companies. An ASP also buys or leases the main computer it uses. When a user-company (subscriber) signs up, the ASP purchases or leases data communications equipment for the user-company and arranges for data communications circuits. The subscriber buys its own personal computers or leases them from its ASP. User training is sometimes provided by the ASP, as is post-setup support.
An ASP charges each subscriber a monthly fixed fee and/or a fee based on the "resources" used. The fixed fee is based on the number of users, branches and different software modules used. Resource charges depend on the amount of data stored and the number of transactions in a month. When enough user-companies subscribe, the monthly gross revenue of an ASP would exceed its costs (which tend to be mainly fixed), so the ASP would be profitable.
Some concernsAlthough the savings from using an ASP can be substantial, this is a new concept, so there are some things to be aware of before unplugging your computer.
If an ASP does all of a wholesaler's data processing, that wholesaler would be totally dependent on that ASP. If that ASP suddenly went out of business, how would the subscribing wholesaler get data processing done?
Those monthly fees can increase quickly if branches are added or users are added or the volume of business grows. Fees also increase when a subscriber starts using a module that was not included at the start of the arrangement.
Many ASPs do not own the business software they make available, but license it from the software's author. That license can be terminated by the author under certain circumstances, which would leave subscribers with zilch. Short of termination, the contract between an ASP and the author of the software it uses could allow the author to make such changes as increasing the licensing fees and/or limiting a subscriber's use of the software.
ASPs don't like to make modifications; their licenses often require that all user companies use the software as is. And subscribers can't make modifications because they don't possess the "source code" which is required for changing software.
Part of the cost reduction claimed by ASP advertising is to be achieved by replacing expensive leased telephone circuits with the use of the Internet, which is cheap - when it works right. But the Net, even with a DSL or cable modem, is not totally reliable, so few end user companies want to rely on it for connection to anything, let alone their only source of data processing.
Investigating ASPsUse these 10 steps when investigating an ASP for your firm.
1. Research availability. Search the Internet using the term "Application Service Provider" and determine who provides the functions needed by your company.
2. Involve top management. If the effort to investigate and use an ASP is to be successful, top management must provide the leadership.
3. Organize an interbranch/department team. Form a team and involve them from the beginning - defining needs, examining ASP offerings, etc. One member must be capable of spending much of his time investigating ASPs and converting to an ASP system.
4. Define your long-term needs. Without a list of needs, it will be impossible to evaluate the "fit" of an ASP's software package. The list should include "advanced" features to give you a competitive edge, such as bar-code reading, electronic data interchange and e-commerce.
5. Get a written bid. No demo can ever substitute for a vendor categorically stating in writing whether its software has the features on your list of needs. Of course, the vendor's bid should also address all initial and ongoing costs, fixed and variable.
6. Visit users. After reviewing each written bid, visit one or two users of each ASP in question. And then have each vendor demo the system and discuss the answers in their bid that need clarification. Ask different employees, especially those likely to resist change, to try using each system and report back on its ease of use and features.
7. Select the most cost-effective ASP. It is not true that the greater the price, the better the arrangement; nor is a low-priced arrangement necessarily bad. Judge ASP capabilities and software fit apart from the cost.
8. Change ASP contracts. Never sign an ASP's contract as is. No ASP contract (known as a Service Level Agreement) protects you against substantial problems because the contracts contain vague "best efforts" terms. Create an addendum with specific performance guarantees that avoid problems and lead to a quick resolution of those that occur.
9. Verify converted data. Files converted from the old system and files built from scratch will have errors in them. Be prepared to test for conversion accuracy via control totals in each file and by verifying that the results agree with those from the old system or those calculated by hand.
10. Train everyone extensively. This is a place where many wholesalers cut corners and then regret it. The best software in the world is no more effective than the people using it.
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