ASPs and Inventory Planning: Tools That Work Hand-in-Hand

(Originally published in the January 2002 issue of AFSMI's Sbusiness.)

By Bryan Scott

What Is an ASP?
There are many ways to define what an Application Service Provider (ASP) is, and almost as many ways to name them. We define an ASP as "a company that provides the data center hardware, management, maintenance and support of software applications". However, we also characterize the most valuable ASPs as those that can support their own specific business-critical applications, such as Inventory Planning, on an ASP basis. In essence, the ASP is merely the delivery system for the required application, while the true value of the ASP is ultimately measured in terms of the specific application(s) it supports. An illustration of a basic ASP relationship is provided in Figure 1.

Figure 1

At Baxter, we take this concept of ASP one step further by defining it essentially in terms of Web-Based Application Hosting. We believe that there are many services sector businesses that have internal service parts planning organizations that are deeply in need of inventory planning software solutions to help them meet increasingly demanding customer service requirements. However, many of these organizations are often consumed with other business-critical projects and simply do not have the available resources required to support an additional implementation project. Even if they do, the costs associated with supporting such a project may be much higher than expected.

However, the use of an ASP allows these types of businesses to focus exclusively on their prioritized business-critical activities, thereby eliminating the burden of taking on another time- and resource- consuming activity. An ASP can then provide online use of the desired software, server hardware, software maintenance and upgrades, production support, system administration, database administration, and training - everything that the business requires - accessible instantly over the Web, but without many of the requisite implementation, management and maintenance tasks typically required in supporting a third party application.

Why Have ASPs Become So Popular?
According to Cherry Tree, there are a significant number of drivers, or factors, that are impacting the growing acceptance of the ASP model. These include both technical and business drivers, as follows:

Technical Drivers
  • Shortage of skilled IT labor
  • Utilization of emerging technologies and "best of breed" applications
  • Accelerated application
  • Rapidly changing and increasing complexity of technology
  • Obtain technical expertise
  • Transfer of application ownership risk
If an enterprise simply cannot find the appropriately skilled IT labor, it cannot design, implement and manage its applications internally. Further, even if it can, there is no assurance that the outcome of its long and expensive endeavors will ultimately be worth the time and expense - or even approach the performance of the "best of breed" implementations. For many enterprises, it makes absolute sense to outsource to a qualified and trusted ASP that can provide and support the desired "best of breed" application - instead of attempting to implement everything in-house, generally at greater cost, time and potential risk.

Sometimes, the deciding factor in whether or not to utilize the services of an ASP relies more on the basis of whether the ASP truly has the "killer app" (e.g., inventory planning) that will make it easier for the enterprise, or whether it merely represents just another way or providing the "same old, same old" with respect to applications support (e.g., a "generic" third-party ASP essentially hosting somebody else's "off-the-shelf" software).

Business Drivers
Cherry Tree also lists a set of specific business drivers that may represent the deciding factors for the most "bottom line"-oriented businesses. These include:
  • Minimize total cost of ownership (TCO)
  • Predictability of cash flows
  • Focus on core competencies and strategic objectives
  • Minimal impact on internal IT staff
  • Improve coordination efforts on a global basis
We believe that these may actually be the easiest drivers to support, as many of our clients have realized inventory savings of 40% to 50% - or more - by utilizing our services as an ASP for their business-critical applications. They have found that by using an ASP that integrates key business planning features into its offerings, the predictability of cash flows becomes a simple procedure. These benefits, in and of themselves, allow most ASP clients to focus exclusively on their respective core competencies, resulting in greater overall efficiency and improved management coordination - across the application, and across the entire enterprise.

How Well Have ASPs Been Accepted in the General IT Marketplace?
According to the results of a CIO Magazine/ASP Industry Consortium (ASPIC) joint special survey conducted in 2000, roughly 91% of users were at least "somewhat satisfied" with their current ASP, including half (50%) that were either "very" or "extremely" satisfied (Figure 2). Other key findings revealed from the 2000 survey results include:
  • More than a third of the survey respondents indicated that they were currently using an ASP; with another third investigating/planning to use an ASP in the succeeding 12 months (resulting in an approximate two-thirds market usage as of year-end 2001).
  • More than 50% of respondents in every major business sector were either using, exploring or planning to use an ASP in the next 13 to 24 months.
  • Company size apparently does not matter with certain applications (such as inventory planning).
  • Roughly three-quarters (75%) of those surveyed indicated they were at least "somewhat comfortable" in utilizing an ASP, including 30% that indicate they are "extremely comfortable".

Figure 2

What Are the Principal Differentiators Among ASPs?
Cherry Tree identifies eight representative types of ASPs supporting clients today, each with their own respective capabilities (or limitations) with regard to providing an individual enterprise with a "total" solution (Figure 3):

Figure 3

The two principal types of ASPs currently being used in the services sector are:
  • Domain Expertise ASPs
  • Vertically Focused ASPs
The Domain Expertise ASP is one that specializes in a single functional area, such as inventory planning (e.g., Baxter Planning Systems) or human resources, etc. They typically either own the software they sell, or have developed proprietary integration methodologies for a highly specialized application domain they have specifically selected. By being expert in a particular domain, they typically have few credible competitors, and provide a highly focused solution.

Vertically Focused ASPs, or Vertical Service Providers (VSPs), offer industry-specific applications (e.g., financial services, healthcare, telecommunications, professional services, etc.). VSPs generally provide fully-developed, vertically-oriented, templated methodologies that can easily deploy across multiple clients within the same industry. They know the industry they serve, and can generally tackle even the most complex issues facing their clients in the vertical industry segment.

Other types of ASPs include:
  • Infrastructure ASPs - provide infrastructure management and outsourcing services to other ASPs (often referred to as Managed Service Providers, or MSPs).
  • Vertical Exchange ASPs - focus on their ability to control the majority of the transactions within a specific industry (generally in segments where manufacturers and distributors are not particularly strong).
  • "Riding the Hot App" ASPs - short-lived ASPs that support whatever application is particularly "hot" at the moment.
  • Full Service Provider ASPs - provide a complete "end-to-end solution" typically encompassing IT consulting, application development, systems integration, and application hosting (generally larger consulting firms and project-based service providers).
  • Security Infrastructure ASPs - focused primarily on the security aspects of the application (operate primarily in the government or related industry segments).
  • Aggregator ASPs - support their clients by consolidating the services offered by multiple ASPs into a single menu of "best-of-breed" applications, and serving as a single point of contact.
While in certain circumstances, any of these eight main types of ASPs may serve a particular focus, we believe that it is essentially among the first two types (i.e., Domain Expertise ASPs and Vertically Focused ASPs) where clients will ultimately gain the greatest value-add. Particularly by having "best of breed" expertise in the relevant domain (e.g., inventory planning), as it applies to a specific vertical industry segment (e.g., services), the ASP will be best positioned - and prepared - to support its clients in the segment with their specific application requirements. For example, in the case of Baxter Planning, our expertise is strongest in both the planning functional areas, and in the services vertical industry segment. Any other types of expertise would be secondary to these two main areas for most of our clients.

What Are the Major Benefits of Using an ASP?
CIO Magazine sums up the major benefits of utilizing the services of an ASP by stating that, "the ASP model allows businesses to enjoy much higher levels of technology refresh without continual investments in new technology. New features and services become easier to roll out. Without having to independently evaluate, test, debug and develop expertise in a new technology area, trial and adoption is significantly simplified."

Among the key benefits that can be provided through the use of an ASP, according to CIO, are:
  • Fast launch for new e-commerce, supply chain and CRM applications
  • Less money spent on buying, maintaining and upgrading software and hardware to run commodity applications
  • Client software limited to a Web browser or something that acts just like one
  • Easy upscaling and downscaling
  • Lower IS staff needs
  • Improvements in IS's ability to respond to demands from the lines of the business
  • Predictable costs
According to William K. Pollock, President of Strategies For GrowthSM, a Pennsylvania-based services consulting firm, "The success of the ASP model implementation relies on the ability of the client and its ASP to 'partner' in all responsibilities to ensure that the foundation is first laid for the total solution to be deployed and, second, that each party executes its pre-designated responsibilities effectively so there are no areas of the implementation and subsequent management of the operation left unaccountable."

Cherry Tree lists the most important benefits that can be gained through the use of ASPs and business process outsourcing vendors in terms of three sets of market "drivers" (i.e., "value-added", outsourcing and macroeconomics), as illustrated in Figure 4.

Figure 4

By and large, this list is representative of the consensus of ASP users in terms of weighing the anticipated benefits against any potential risks that may be associated with the use of ASPs and/or business process outsourcing vendors.

Do ASP Providers also offer Inventory Planning Services?
The inventory planning organization within a company is often short on both time and resources, resulting in more time spent expediting than planning. Beyond that, some companies may not have a planning organization at all. These represent excellent opportunities for benefiting through the use of an ASP that can serve either as an extension of the client organization, or as the client's exclusive planning staff.

However, not all ASPs have the expertise, proven track record and highly trained resources to ensure a successful outsourcing relationship. Strategies For GrowthSM's Pollock also believes that, "Only by finding, selecting and implementing an ASP that has the required application expertise and management skills can client companies become totally free to focus on their respective core competencies and business operations. In these cases, the outsourced application provider must be sufficiently knowledgeable with the customer's business, and the support it provides must be tailored to meet the exact needs of each individual client."

Inventory Planning is a specialized subset of Business Process Outsourcing (BPO) that can only be offered by a provider with expertise and infrastructure in this area to support its software offerings with the necessary professional services and support. While some ASPs, particularly of the third-party variety, may not even be able to support such application-specific software, Inventory Planning represents a core competency of Baxter Planning Systems.

Where Do We Go from Here?
Gartner, Inc. suggests that "the current ASP model is not appropriate for all application software products or all potential customers. The ASP market has yet to display much vertical characterization. The bulk of applications currently being sold via an ASP model are, by their very nature, non-vertical applications (for example, human resources, messaging or groupware)." However, the firm goes on to say that "it is becoming clear that the real value of ASP offerings for organizations is not in the delivery (via the web) but in the services themselves." As such, we believe that the Baxter ASP model for Inventory Planning is an attractive example, in that it embraces both the domain expertise and vertical industry focus that allows it to transcend the limited appeal of the more "commodity-like" ASP offerings that presently "litter" the market.

We believe that as long as companies with service parts inventory have the challenge of reducing inventory while increasing customer service levels, in the face of increasingly limited resources and downsized budgets, there will be pressure on solution providers to rise to the occasion by offering new, innovative and more cost-effective ways to provide the required solutions. Thus, in the coming year, in order to become a credible solution provider, software vendors will need to provide additional services around their proprietary software that address the reality of limited resources and budget.

We also believe that this is where the true value of the Application Services Provider (ASP) and Business Process Outsourcing (BPO) providers will be - particularly in the area of Inventory Planning in the services vertical segment. We further believe that these two support services go "hand-in-hand" with respect to providing the total solution that enterprises in this segment demand.

Baxter ASP Users Are Reaping Significant Benefits

Baxter Planning Systems notes several client case studies that illustrate the benefits of using an ASP - especially one that is both domain expertise (i.e., inventory planning) and vertical industry-focused (i.e., services segment).

Agilent Technologies
According to Mark Anderson, Strategic Supply Chain Manager, Agilent Technologies, "Agilent has realized the benefits of not only utilizing this state-of-the-art software to plan its support business, but we have also shifted some of our Planning functions over to Baxter. We have outsourced some of our mature product/part business to Baxter allowing our planners to focus on new products and end-of-life issues. As our partner, Baxter has demonstrated real value not only in the development of sophisticated planning tools, but also in their ability to understand our business and relieve us of some direct costs with their planning resources."

Enterasys
Enterasys Networks is a new type of company that combines a single market focus with a strong technology heritage to provide communications infrastructures for enterprise-class customers. Enterasys' networking hardware and software offerings deliver the innovative security, availability and mobility solutions required by Global 2000 organizations coupled with the industry's strongest service and support. Ted Heywood, Enterasys' Director of Global Service Logistics, said "The flexibility and professionalism of Baxter's people allowed us to not only bring their capabilities on line quickly but also develop solutions to some nagging problems that had been difficult to solve in other ways. Using their capabilities we have been able to assure the proper location of our global depots, reduce our inventories and improve our on time customer deliveries. They are a valued partner and have allowed us to do a better job for our customers and Enterasys."

Lucent Technologies
Lucent, a leader in broadband and mobile Internet communication systems, utilizes the Prophet by BaxterTM software suite. The use of the software has resulted in a reduction in service parts inventories by over 50%, and a dramatic increase in the company's customer service levels, in some cases to over 99%. Even before reaching full operational capability, Lucent's Service Logistics division believes it will be able to achieve 98% of its same- and next-day response commitments. According to Lucent Service Logistics Business Development Manager, Dana Primiano, "The application will significantly increase the company's service levels for delivering customer spares while reducing our investment in inventories."

Bryan Scott is vice president sales & marketing for Baxter Planning Systems, Austin, Texas. He may be reached at (512) 323-5959, ext. 206, or via e-mail at bscott@bybaxter.com. For more detailed information on this same topic, please contact AFSMI directly for a copy of Baxter's white paper entitled, "Application Software Provider (ASP) and Business Process Outsourcing (BPO): Planning and Implementation Tools That Work Hand-in-Hand."


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