Insight: ASPs - Plugging into ASPs.

The challenges of running an SME are clear. Some four out of five of all new businesses fail in their first three years and the number one reason for this harsh statistic is cashflow failure.

It is not surprising, therefore, that SMEs are often accused of not delivering on their potential. Fear of tampering with the delicate financial balance in their companies has left SME directors static and afraid to grasp new opportunities.

This attitude has to change if the UK is to achieve the entrepreneurial culture it desires and there are now real opportunities for SMEs to change elements of their traditional financial model. And those that grasp it, those with the confidence to change, can gain real financial stability and competitive edge in the marketplace.

Take technology infrastructure, for example, one of the biggest business inhibitors to SME markets and most painful financial headaches.

For SMEs, IT infrastructure is a continual challenge. The cost of investing, supporting and managing IT internally is a burden – especially finding the capital to expand. The most recent example was the Y2K problem where companies globally had to either invest in new hardware or improve infrastructure to ensure ‘Y2K compatibility’.

The task cost billions, with companies spending up to three times their annual IT budget and there were few benefits unless they took the opportunity to completely upgrade.

This type of investment and continual IT development is a cost that can be an unpredictable burden to many SMEs.

But, imagine if your IT infrastructure was taken care of for you. Imagine if you always had the latest software applications, you could extend your IT infrastructure to match growth so you knew exactly how much your IT would cost each year. At the same time all the responsibility for maintaining your IT infrastructure was ceded to someone else.

How? Through an ASP solution – software applications delivered to your desktop over the net and paid for by a monthly fee per user.

ASP is seen by many as merely a ‘buzz’ word. However, those already looking at the benefits of an ASP solution realise the major financial advantages it can bring to a company.

Predictability of costs

As the technology pace of change continues to gather speed, it is notoriously difficult for IT managers to predict their IT spend with any accuracy over a 12 to 24 month time frame.

Therefore, out of budget costs occur when servers become overloaded, firewalls need updating or PCs become slow because of new and unexpected application demands.

Using an ASP service, for the first time, provides complete clarity for the IT budget. Billing is on a per user, per month basis so there are no hidden costs. Planning for growth becomes more simple – identify the number of extra users, their required applications and calculate the new charge per user, per month.

Capital retention

SME businesses need access to capital to invest in their core goods and services. Any capital investment in IT can hamper their ability to be successful, as any investment outside of competitive advantage projects is a non-optimal use of capital.

It is hard for a fast growing company to know how just much it should be spending on technology. Over-investment means tying up much needed capital in equipment that is not being used and may represent a significant opportunity cost to the business.

Under-investment, on the other hand, leads to poor performance levels and the probability of having to make additional and unbudgeted IT investments in 12 to 18 months time.

By utilising an ASP, SMEs can pay for IT services as they use them. This negates the need for heavy capital layout allowing SME businesses to achieve more with available cash without the concern of under investing.

Depreciation

IT infrastructure has always been a very difficult asset to manage. FDs are under increasing pressure to reduce amortisation periods for equipment such as new technology.

PCs now require upgrades every 18 months as opposed to the traditional three-year write-off period. In reality many businesses already have unrealistically long amortisation periods for their IT equipment which represents an exposure to a potential profit and loss sheet hit.

However, with an ASP solution, many of these problems are overcome. SME businesses can rent rather than buy. Avoiding the depreciation problem and receiving a reduction in the total cost of ownership of between 25% and 40% on their total technology spend.

As well as these benefits, ASP adopters receive access to the most sophisticated applications, the best of breed security and back-up from the ASP’s technical data centres and specialist IT support which an average SME would never traditionally be able to afford. From a financial perspective, the ASP scenario adds right up.

– Charles Sharland is CEO of Vistorm

For more about Vistorm go to www.esoft-global.com

ASP SUCCESS ‘STILL YEARS AWAY’

Questions are being raised about ASP solutions. Application service provision has been over-hyped and could take a further two years to take off, according to internet and telecoms analyst Schema, writes Ian Lynch.

During the dotcom boom early last year, analysts predicted the ASP market would be worth up to a staggering $82bn (#57bn) by 2005, according to Analysys.

However, Schema now argues these predictions were based on an optimistic market definition and misunderstandings of how the value chain around the provision of applications over the internet would develop. ‘The market has not developed as quickly as predicted,’ says Lisa Danielsson, a consultant at Schema.

‘Investors have become more cautious, and the ASP model has been found to be more complex to run and generate revenue from than most had anticipated. Whilst in theory the ASP model makes good sense, in practice there are currently a large number of significant barriers that need to be removed before the market can take off properly,’ she adds.

According to Schema, prospective customers don’t see the ASP business model as relevant to their own situation, while those that do have further concerns.

Prospective customers may be reluctant to outsource applications they see as crucial to their business, especially to a start-up which may go bust within a year, Schema says.

But the company believes that, despite the unexpected complexity of the model, it will eventually take off because of some overall market trends.

These include a shortage of IT service skills at a time when more e-business processes are being developed, ever-decreasing software release cycles, increased acceptance of outsourcing and user desires for simplicity and cost cutting.

‘The ASP market in Europe will ultimately be large but major market growth is at least a year away, more likely two,’ says Danielsson.

– Ian Lynch writes for vnunet.com.