Listen carefully, and you will notice that very few ASPs are using the word rental. This is in stark contrast to the very early days of the industry, when people talked about software rental and application rental as a glib, shorthand way of defining what ASPs do. Now the word has been excised from the vocabulary. Larry Ellison, CEO of Oracle, was one of the first big names to espouse the ASP model - even before people started using the ASP acronym. But you won't find him talking about Oracle's ASP arm renting software. A couple of weeks ago, I asked him why not.
"Are we going to rent our software for a month [at a time]? The idea's nonsense," he replied.
He went on to explain that Oracle applications take months of work to configure for each individual customer's needs, so it wouldn't be economic for anyone to rent them on a short-term basis. There are other reasons that he didn't mention, such as licensing and sales models. They are all sound reasons. Renting out traditional, client-server, enterprise applications just isn't practical.
That's why the contracts that customers typically sign with enterprise ASPs are more like leases than rental agreements. In fact, I've spoken to several who proudly describe what they do as 'financial engineering'. The customer is still effectively buying the software. They're just paying for it a different way, spread out over a three-year or five-year term.
I like to call this way of doing business 'subscription outsourcing'. It really isn't very far removed from good, old-fashioned outsourcing. The main distinction in the ASP approach is that there's a pre-set, monthly price, which goes up and down in proportion to the number of users signed up each month.
There's a lot to be said in favour of this approach. ASPs are making outsourcing much more palatable, and they're bringing top-tier enterprise applications within the purchasing reach of a whole new band of potential customers. It looks as though they can reduce cost of ownership by somewhere between twenty and fifty percent. But it's only a tiny first step on the path towards what I would regard as the true ASP model.
There's one simple, overriding reason why Oracle, SAP, Peoplesoft opt for leasing, along with many other software vendors who have followed them onto the ASP path. It's because they don't have to change anything to be able to do it. They don't have to rewrite their licences. They don't have to tamper with their sales incentive schemes. They don't have to reengineer their software. A quick spot of fancy financial engineering, a contract with a friendly data centre provider, a brief flurry of press releases, and hey presto. Now they have an ASP strategy.
It's a lot more hard work for a software vendor to adopt a rental model. Rental requires a shared-server infrastructure, pay-as-you-go licensing, and a short, simple, highly-automated configuration process. Traditional client-server software doesn't do any of these things. The only examples available from ASPs today are new-wave applications such as electronic purchasing and unified messaging, or entry-level versions of established categories such as sales force automation and accounting.
The good news for customers is that making all of the changes required for rental slices cost of ownership, not by percentage points, but by orders of magnitude. In my view, electronic purchasing is the best, killer-app example of this. It'll cost you over a million dollars to implement your own system. Alternatively, you can rent it for a few dollars a month per user. You'll save that much the first time each user raises a purchase order electronically. So as soon as they raise their second p/o, you cross over the break-even point and cost of ownership turns positive.
Gradually, these rental applications will eat into the client-server software empires of the likes of Oracle, SAP and the rest. Automated configuration will get better and faster, allowing customisation on the fly, using company-specific policy and profile information stored on directory servers. Within a few years - somewhere between eight and fifteen, I'd guess - even core enterprise applications will be rented on demand from the most cost-effective source by intelligent, automated software agents.
It's going to be very difficult for established vendors to adjust fast enough to participate in this all-new, ASP-driven world, but the one sure way to miss out is by denying it's going to happen. While leasing is a good tactical move for the next year or two, the only long-term survival strategy is to commit to a rental model. Customers should look out for vendors who are heading towards rental, and steer clear of those whose ASP vision only extends to leasing. Being locked in a five-year contract at today's prices might not look like a very smart decision in a couple of years' time.
This article was first published November 1999 on IT-Director.Com.
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