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Biblio Tech Online Services Marketing Report

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  • 1. Confidential Page 1 21/03/2001 BiblioTechOnline Services Marketing Report BY BiblioTech Confidential Prepared By Jonathan Lishawa Director of Business Development BiblioTech Ltd. Unit 3, The Piper Centre, 50 Carnwath Rd London SW6 3EG 21 th Febuary 2001
  • 2. Confidential Page 2 21/03/2001TABLE OF CONTENTS BIBLIO TECH ASP PROFIT ZONES .......................................................................................3 N EW HORIZONS .......................................................................................................................6 ASP MARKET ...........................................................................................................................7 MARKET INDICATORS.............................................................................................................8 BUSINESS DESIGN ARCHETYPES ...........................................................................................9 FIGURE 1 ASP B USINESS DESIGNS ....................................................................................9 FIGURE 2 B USINESS DESIGN ARCHETYPES ..................................................................... 10 S TRATEGIC CONTROL......................................................................................................... 11 FIGURE 3 S TRATEGIC CONTROL....................................................................................... 11 MARKET DIRECTION........................................................................................................... 13 MARKET IMPLICATIONS ..................................................................................................... 14 BIBLIO TECH DIRECTION.................................................................................................... 16 BIBLIO TECH CHALLENGE.................................................................................................. 17
  • 3. Confidential Page 3 21/03/2001ACKNOWLEDGEMENTS Contributing to this article was Jonathan Lishawa.
  • 4. Confidential Page 4 21/03/2001OVERVIEW This document provides market research on the Application Service Provider model BiblioTech aims to migrate to. It’s intended to be used by BiblioTech’s business development team and senior management.
  • 5. Confidential Page 5 21/03/2001BIBLIOTECH ASP PROFIT ZONESThe ASP marketplace is in the midst of explosive growth. But many companieshave entered the arena with little thought to strategy and business design,putting them already at a disadvantage. Research has uncovered at least ninebusiness design archetypes for ASPs, each with a unique and promisingapproach to creating sustained value. The purpose of this document is to presentBiblioTech with appropriate approaches to entering the ASP market place.
  • 6. Confidential Page 6 21/03/2001 NEW HORIZONS In the wake of the business-to-consumer dot-com boom, executives and investors in communications, software, and computing are fixing their gaze on the distributed IT services: Application Service Providers (ASPs). 1 Analysts predict explosive growth, with the most aggressive forecasters envisioning the global market rising from $2.7 billion in 1999 to $22.7 billion by 2003. However, there has been little attention paid to strategy and business design in this new market place. As currently applied, the ASP term is to imprecise, bringing together an assortment of very diverse businesses, ranging from powerful incumbents too small start-ups. The organisations competing for a share of the emerging market are traditional telecommunications operators, competitive local-exchange carriers, Web-hosting businesses offering applications infrastructure, start-ups featuring purpose-built remotely hosted software, traditional software houses redesigning their offerings for remote hosting, and systems integrators or application management companies extending their services to the remote, networked environment. Within this varied group of providers there is an equally diverse array of business designs, each based on a different view of market opportunities. These business designs so far speak more to an incumbent’s technological roots than to any intrinsic understanding of customer priorities, a dangerous mistake. When this misconception is realised that the highest share of value will migrate to those firms that understand that it is the customer value proposition, not the underlying technology, which determines success or failure. A set of fundamental but largely unexamined business questions will define ASP success: 1. Who and where are the customers? 2. What are the emerging customer priorities, and which value proposition best addresses those needs? 3. Which business designs have the greatest potential for strategic control and, therefore, sustained profitability? 4. What are the implications for the current array of players in the ASP space? Research suggests that a set of sharply differentiated business designs with the potential to achieve sustained profit growth already exist.1 IDC Report: Top Application Management Companies: Sleeping Giants of the ASP Market?
  • 7. Confidential Page 7 21/03/2001ASP MARKETBehind the ASP marketplace is a broad movement of software applications fromindividual desktop PCs or company mainframes to large servers connected to theInternet, an Intranet, or an Extranet. In this new, network-centric model,employees, customers, suppliers, and business partners will access variousapplications across a wide range of computing platforms, including PCs, cellularphones, and wireless PDAs.Network-centric computing is here to stay, and is changing the economics andoperating assumptions of the software, communications, and computingindustries. The key question is how to sustain profits in this new environment.Start-ups and incumbents alike view application service provision as fertile, butdangerous, territory. Many telecom operators, for example, view ASP offeringsas an efficient way to promote valuable services while decreasing theirdependence on commodity connectivity.System integrators also see a natural extension of their applicationsimplementation, maintenance, and outsourcing businesses in the ASP space.Raising questions about how they will enter and what this means for the ASPmarket. The likes of Accenture, CSC and IBM have tremendous resources, yearsof experience, and strong brand recognition and assets that many t lecom eoperators and ASP start-ups lack. These system integrators are seriouscompetitors but along with the telecom operators might not prove flexibleenough to adapt to the unique needs of the ASP model and ultimately customerexpectations, while being expensive.Software developers, see a way to regain control of customer relationships andto substitute stable yearly revenues for volatile transactions and entrepreneursand venture capitalists see a vast opportunity for economic insurgency, using theWeb to redefine how software is bought and used.
  • 8. Confidential Page 8 21/03/2001MARKET INDICATORSInnovative start-up firms such as Corio and Exodus have been able to grab theattention of customers, investors, and incumbent players.But certain incumbent firms, notably system integrators and traditionaltechnology outsourcers, find themselves well positioned to move into the ASPspace. Given their knowledge of applications and their traditional role of shapinghow technology is deployed in the corporate and office environment, systemintegrators can hold the key to customers selection of applications, solutions, andinfrastructure. This gatekeeper position is forcing telecom operators toincreasingly consider system integrators as the customer, relinquishing control ofthe end-buyer through strategic partnerships. Moreover, remote hosting andmanagement of hosted applications have increased network complexity, makingit hard to separate the application-selection process from the overall systemdesign. This strengthens the role of system integrators when it comes to choosingsoftware applications that support core business processes.In contrast, telecom operators and software makers appear very vulnerable tobeing relegated to a commodity-provider role. Responding to this threat willrequire a radical rethinking of their traditional business model. Communicationsinfrastructure should be seen in the context of supporting higher value services,in particular applications provisioning. Similarly, software developers appearvulnerable. The dominance of Microsoft, SAP, Siebel, and a handful of othergiants masks the presence of hundreds of smaller vendors who exert little controlover the end-customer relationship. These vendors will be under increasedmargin pressure as their historical channels of distribution consolidate or aresubstituted by much larger organizations commanding much higher strategiccontrol of the customer relationship.In response, firms that want to compete are complementing existing skills withacquisitions or alliances to integrate new capabilities traditionally consideredthe domain of other businesses—witness Deutsche Telekom’s acquisition ofDebis Systemhaus, NextLink’s play for Concentric, NTT’s acquisition of Verio,Cap Gemini’s acquisition of E&Y and Qwest’s partnerships with KPMG andIBM Global Services. These moves help position the incumbents to compete, butthey are only a start.
  • 9. Confidential Page 9 21/03/2001BUSINESS DESIGN ARCHETYPESThe shift to a network-centric computing model further blurs the distinctionbetween software and services. There are at least nine distinct business designarchetypes within the ASP marketplace. Each represents a unique, highlyselective mix of the activities that, taken together, make up this new marketplace(see Figure 1).While traditional strategy approaches focus narrowly on one or two product-centric strategy elements, the discipline of business design thinking stresses theimportance of making decisions across five broad and interrelated dimensions:1. customer selection and value proposition2. value capture (or profit model)3. scope of activities,4. strategic control5. the organizational structure that delivers utility to customers and creates shareholder value.Understanding each of these business-design archetypes, identifying how theircomponent parts fit together to drive profitability, sustainability and shareholdervalue is critical to unlocking the value-creation potential of the ASPmarketplace.FIGURE 1 ASP B USINESS DESIGNSImage source: Mercer Management ConsultingIt is useful to map business designs along two dimensions, one being the scopeof activity and the other being the complexity of the solutions offered. Thebusiness design archetypes include:1. Traditional, infrastructure-owning applications resellers such as US Internetworking and Interliant2. Non-infrastructure resellers such as Corio and Applicast3. Web-based independent software providers such as Sales.com and Portera4. Integrated-suite providers such as Oracle Business Online5. Portals such as FT and FreeServe6. E-process outsourcers such as EmployEase and CyberSource
  • 10. Confidential Page 10 21/03/20017. Application-management providers such as IBM Global Services and Cap Gemini8. Web hosting companies such as Exodus and RedBus9. Application-infrastructure providers such as COLT and Energis.Assessment of customer selection, scope of activities and value capture furtherillustrates their distinctive characteristics (see Figure 2).FIGURE 2 B USINESS DESIGN ARCHETYPES Image source: Mercer Management ConsultingWhile the early analysis in the ASP industry has focused on the shift in pricingfrom a one-time license to a rental model. More important ASP benefits include:1. New application functionality: This is the most important driver of value creation. A network-centric model enables functionality, such as intra- and inter-comp any collaboration, that is impossible within traditional IT frameworks. The announced launches of more than a thousand business-to- business exchanges, for example, would not be possible without Internet software from companies such as Xelus, i2, Ariba, BEA , and Commerce One.2. More effective utilization of IT resources: In the United States, an estimated 2.4 million IT jobs will open up by 2002, and according to European Commission data, demand for IT jobs in Europe is expected to rise from about 10 million jobs today to 13 million in 2003. However the rise in demand is not being matched by supply, with the shortfall of IT jobs expected to rise to 1.7 million by 2003 in Europe alone.
  • 11. Confidential Page 11 21/03/20013. Aggregating and remotely managing applications for dozens of companies: Enables service levels to improve and significant economies of scale to be achieved.4. Broader access: The need to have more people access more information from disparate platforms is also driving the new model. New Internet and wireless standards such as XML and WAP will enable companies to provide such access.5. Faster implementation and lower cost: With speed-to-market pressures intensifying, the 18-to-24-month implementation cycles for enterprise applications have become obsolete. Implementation times can be greatly reduced through standardization.6. Predictable costs: A flat monthly fee model, which makes costs more predictable, is a more compelling value proposition than the “rental versus buy” argument.7. Scalability and reliability: E-business-architected applications have proven to be much more scalable than traditional models. Moreover, applications designed for a server (generally using UNIX or NT) are much more reliable than desktop systems.STRATEGIC CONTROLMore than 800 ASPs are in operation worldwide, and it is expected that severalthousand more will develop over the next few years. Clearly, not all of thesecompanies will win or even attain viability. Inevitably, as with the dot.comindustry, much enthusiasm, capital, and effort will be wasted on poor businessdesigns.What will separate winners and losers in the ASP space is strategic control. Theability to protect profit streams from being eroded by competitors and largemulti-national customers is a sound measure of the magnitude and sustainabilityof an ASP’s business design.While the business design archetypes discussed here demonstrate varyingdegrees of strategic control potential (see Figure 3), any company competing inthis space must be able to exert significant leverage over at least one strategiccontrol point in order to achieve long-term success and superior profitability. FIGURE 3 S TRATEGIC CONTROL
  • 12. Confidential Page 12 21/03/2001 Image source: Mercer Management ConsultingIndeed, two of the most potent strategic control points within the ASP market arefast becoming standards: owning a software asset or creating a strong customerrelationship with significant switching costs. These strategic control points areonly attainable within one or two of the design archetypes.By contrast, there is little promise in the reseller model currently embraced bythe perceived industry leaders including USinternetworking and Interliant. Thedegree of strategic control exercised by these businesses is only moderatelybetter than that of traditional systems integrators. While the global systems -integration market is huge, the switching costs are extremely low, as evidencedby the more than 100,000 companies in technology services worldwide, nonewith a market share exceeding 6 percent. Far more promising are archetypes thatcontain software asset ownership or develop customer stickiness throughvertical portals or business-process outsourcing.
  • 13. Confidential Page 13 21/03/2001MARKET DIRECTIONWhile no one can predict the Internet and network-centric computing, a fewdevelopments seem likely.First, is significant consolidation, mirroring the growth and eventualconsolidation of the Internet service provider (ISP) market, which began withthousands of small players serving local markets and rapidly consolidated intofewer, larger players offering a deeper mix of services. This concentration ofASP businesses could evolve in several directions:1. Emergence of vertical portal ASPs. So far, the classic ASP businesses have not tried to exploit the collaboration and community-building power of the Internet. Many industries including financial services, professional services, media and entertainment, and health care may provide the opportunity for ASP firms to combine industry specific content and applications to create compelling vertical portal ASPs. This trend may accelerate as the business plans for most of the industry-specific B2B exchanges and community portals look to incorporate ASP-like functionality in their Web sites.2. Rise of horizontal category killers. An alternate path may be the emergence of companies that dominate particular solution areas, such as billing, e-mail, human resources administration, or sales force automation. Firms that aggressively assemble the best capabilities and functionality may be able to develop category-killer scale and brand, enabling them to cornerstone into a wide range of industries.3. Aggregation and packaging. Recently, firms such as Applicast and Jamcracker have been aggregating and packaging ASP offerings in order to offer best-in-breed suites of services to customers and reduce the number of operational and technologic provider interfaces that customers need to manage.The second major development is a “break” in business design betweenapplications management and infrastructure management. The stakes are risingin the Web-hosting/applications infrastructure provider (AIP) space. At thispoint, a world-class provider must have, or plan to build data centres globallywith fully redundant communications and utility systems and leading-edgesecurity solutions. These rising barriers to entry will force virtually all ASParchetypes to abandon the capital intensive, data-centre business; instead, manywill choose to partner with AIPs/telcos allowing them to focus on coreapplication-management activities.Additionally, the complexity of managing applications is too high a hurdle forWeb hosters/AIPs to overcome.As Ellen Hancock, CEO of Exodus, was recently quoted as saying:“We are not going to know applications. We’re not in that business. We justsupport the ASP . . . We have no notion of competing with Oracle on e -commerce. We do not intend to ever understand HR apps. That’s a wholedifferent skill base, and we don’t have it.”This will likely breed another form of competition: the rise of intelligentnetwork management services from AIPs and Web hosters. As basic Webhosting becomes commoditized, AIPs will look to add consulting andintelligence services into their infrastructure, allowing them to earn a premiumon their services
  • 14. Confidential Page 14 21/03/2001Finally, while the light for ASP solutions currently consists of applicationsaccessed from the desktop PC, as broadband wireless technologies evolve, therewill be a rise in the mobile ASP service. The ASP market is poised to explodewith the rise of PDAs, pagers, and cell phones, providing wireless, broadbandaccess to the Internet and the applications that ride on it. This development, inturn, will require a new surge in infrastructure development, from devices andoperating systems to transmission networks.MARKET IMPLICATIONSThe convergence of the software, hardware, and communications industries isdriving the proliferation of ASPs. Incumbents in each of these arenas have atleast some of the capabilities required to capture value in this rapidly growingmarket.Software companies choosing to become an ASP require a fundamentallydifferent business model along with major investments in new software-codedevelopment. Software incumbents must think through the implications ofbuilding or renting new infrastructure, taking on the layers of applicationcustomisation that are currently performed by customers, value-added resellers,and system integrators, and delivering the service-level agreements required foroutsourcing deals.They must also think through the economics of rental pricing and the loss ofmaintenance and upgrade revenue streams, as well as the potential impact ofsharing value with a hosting or AIP partner. If a software firm decides to licenseproducts to a vertical or horizontal ASP specialist, its challenge will be tomaintain some level of customer relationship, lest the firm become a OEM.Communications companies will leap at the chance to become a host or an AIP,in the belief that they cannot afford to let this opportunity pass by. Thecompetitive environment is growing more and more complex, the result of themerger of the office environment (LAN) with the wider area network (WAN)and public networks, enabled by the Internet and the proliferation of remote-access devices and the emergence of remote hosting. Telecommunicationsoperators are being forced to build network and systems -integration capabilitiesthat overlap those of traditional systems integrators.Systems integrators have critical application, integration and managementskills and in many cases the customer relationships to address these newchallenges, but their project-based business designs translate poorly to anoutsourcing-like ASP model. They have been able to avoid taking overresponsibility for managing infrastructure. In both of these areas, however, thecompetitive dynamics with the emergence of ASPs may force their hands.Systems integrators are on a collision course with software and communicationsfirms for control of the customer relationship. On the one hand, customers areasking technology service firms to take responsibility for selecting remoteapplications infrastructure, allowing the systems integrators to potentiallycommoditize software and infrastructure providers. On the other hand, thegrowing dominance of open standards will undermine the gatekeeper power ofsystems integrators. In addition, remotely hosted environments, systemssolutions have more to do with networking architecture and middleware thanthey would in a desktop PC or captive mainframe environment. Systemsintegrators generally do not possess the required capabilities.Leading telecommunications operators either already have or are busilyassembling the relevant capabilities on the back of their ASP and remote-hosting
  • 15. Confidential Page 15 21/03/2001services. Systems integrators have to decide how to stay ahead and remain firstin line for advising the customer.The value creation potential of the ASP revolution is real, but so are the risks. Asincumbent players adapt to compete with the new insurgents, a new set ofbusiness designs have emerged. Companies already in or contemplating enteringthis market must develop a clear and internally consistent point of viewregarding the customers they want to target (community); identify a sustainablesource of strategic control to leverage ( pplications); and learn to quickly arefocus their business designs and retool their capabilities (dynamic).Companies that rush to become ASPs at any cost, focusing on technology andinternal capabilities rather than addressing their customer’s critical priorities willgo bust.
  • 16. Confidential Page 16 21/03/2001BIBLIOTECH DIRECTIONThe research shows that substantial revenues are to be made by ApplicationService Providers that identify a strategy and business design that distinguishesthem from the competition and therefore the overall goal must be for BiblioTechto create sustained market value from the strategy and business design it adopts.There are varied business models that exist in the ASP marketplace. BiblioTechhas already developed two, schoolmaster.net and Postmaster.schoolmaster.net is a service portal with associated applications targeted to avertical audience, the education community. schoolmaster.net offers students,teacher and parents communication tools and content within a secure web-basededucational environment.This business design positions BiblioTech as a Vertical ASP. However mostVertical ASP do not own any applications or infrastructure and primarily serveas a system integrator, bringing together all the elements to deliver an end-to-endsolution to customers.The fact that BiblioTech has developed the enterprise environment ( ServicePortal) and communication applications contained therein, builds market valueby lowering service cost for customers. Market value is also increased asschoolmaster.net proves that the applications developed and Service Portalstrategy executed for this particular vertical market was valid.Postmaster is a free multilingual web-based email system, which was judged‘simply the best’ in a November 1999 survey of nearly 300 such services byinternet.com.This business design positions BiblioTech as an ISV, providing web-basedservice directly to the public. With over 175,000 registered users to date and novisible marketing campaign Postmaster has a clear and demonstrable marketvalue.BiblioTech can therefore expect with confidence any ASP solutions basedaround the Postmaster service to be competitive.
  • 17. Confidential Page 17 21/03/2001BIBLIOTECH CHALLENGEThe challenge lies in how BiblioTech develops subsequent Service Portals inother vertical markets or in the manner it provides outside organisations withproprietary technology and services to create their own.BiblioTech can expect to market the services and applications it develops inconfidence. However the competition with other larger ISV’s, and ASP’s mightreduce profit margins as like is pitted with like. BiblioTech needs to distinguishit’s self from the competition through technology not cost.There exists a space in the ASP marketplace for BiblioTech to markettechnology that provides the mechanism through which applications andunderlying infrastructure communicate. This mechanism or layer would providefundamental core functionality to all applications. New and legacy applicationswould require an interface module allowing them to address core functionality.This design eliminates the need to re-engineer the entire product offering eachtime new applications are required while also providing a flexible integrationpath for legacy systems.Core functionality is, Language, Administration/CRM, Security/PKI,Customisation/Content Management and Billing/Statistics.1. Language is fundamental to application and customers allowing for dynamic site translation. (partner – BiblioTech)2. Administration is fundamental to application use and customers management. (partner – BiblioTech)3. Security is fundamental to applications use ensuring secure identity, data confidentiality and data integrity between the customer and application/environment. (partner – BALTIMORE)4. Customisation is fundamental to applications for re-branding and site continuity. (partner – BiblioTech)5. Billing/Statistics is fundamental to application use providing BiblioTech and it’s customers with payment mechanism. (partner – Teleknowledge)The interface module should be built in a high level profiling language allowingfor rapid application and legacy system integration. As well as allowing for rapidapplication integration this application layer will provide BiblioTech and other3rd party solution providers, Telco’s and AM’s the ability to integrate theirexisting infrastructure; Billing, CRM etc…BiblioTech should look to partner with existing Service Portals (FT) andNetwork Service Providers/Telco’s (COLT, Energis & BT) to gain access tocustomers. BiblioTech will look to generate revenue by developing anddelivering advanced services to both the Service Portal and NetworkService/Telco Providers. This will allow BiblioTech to maximise its customerbase while limiting the support, CRM and marketing overheads direct sellingwould incur.BiblioTech can market directly through the Service Portals it creates, solutionsto SME and small business customers. These Service Portals will take the formof generic application offerings, allowing customers access to a set of core webbased communication tools while offering value added service.BiblioTech will offer different service level agreements for the Service Portals itmarkets directly, such as Real Time priority for latency issues, Mission Critical
  • 18. Confidential Page 18 21/03/2001priority for security, encryption and ERP services and Best Effort priority fordata backup / email.IDC expects the entire AO market to reach $26.7 billion by 2004, of which $7.8billion is attributable to ASPs.To capture some of this market BiblioTech must be aware of the followingelements:1. Application-centricity. The core value of the BiblioTech service is the provision of access to and management of an application that is commercially available.2. External management. The application service is managed from a central location (or from distributed locations owned by or under contract with BiblioTech) rather than at each customer’s site.3. One-to-many service. BiblioTech partner’s with application manufacturers and other IT vendors to package standardized offerings (enabling minimal or zero customization) to which companies will subscribe over a specific contract period.4. Contract delivery. In the customer’s eyes, BiblioTech is responsible for delivering on the contract — in short, seeing that the application service is rd provided as promised by BiblioTech, its resellers, partners or 3 party application provider.5. Software or license ownership. BiblioTech either owns the software or has contractual agreements with software vendors to license access to the software.6. Centrally managed. Application services are managed from central locations rather than at each customer’s site. Customers access applications remotely.7. Standardized deployment of applications. BiblioTech is able to deploy application environments quickly because they provide minimal customization around the application.8. Multiyear contracts. BiblioTech will require customers to sign multiyear contracts for services.BiblioTech’s profitability also hinges on scalability and standardization of itsbusiness design. From the applications being deployed to the pricing to theSLAs, customers will always want it “their way” as much as possible.BiblioTech must find a balance between meeting customer’s needs andstandardizing the processes and offerings for its Service Portals. Experience willenable BiblioTech to develop templates and methodologies — some of whichAM’s and Telco’s can leverage from existing business, some of which areadaptable from the one-to-one practice, and still others that must be developedfrom scratch.