Application service providers – hailed as the next big thing in 1990s – failed to live up to their press. Now, however, small and medium-sized organisations are realising the benefits ASPs canoffer. Parveen Bansal reports.
The mid-1990s saw much fanfare on the take-up of the application service provider (ASP) model. Similar to IT outsourcing, the role of the application service provider is to host, manage and deliver application services to organisations from a data centre, across a private or public network (the internet) on a rental basis. The concept is not new – organisations offering a similar service used to be called “service bureaus” (for example, ADP Wilco).
All kinds of applications, from Microsoft Office suite to supply chain management, were expected to be delivered using this model as organisations rushed to give up their application management and maintenance headaches.
The truth is that the expected widespread take-up of ASPs was much over-hyped and in reality, concerns over the reliability and security of the internet have proved a brake on growth. In 2001, research company Gartner forecast that the worldwide market for the ASP industry would be worth more than $25.4bn by 2004. More recently however, research company IDC suggested a global market of only $7.8bn this year.
A few years on from the over-inflated expectations of the dotcom era, we are seeing a growing popularity of the ASP model for delivery of more specific applications in the manner of utilities.
Teacher’s Provident, the UK’s fifth largest friendly society, implemented Icon ASP from Linedata Services to manage the life, pension and unit trust funds under its control.
John Hughes, general manager at Teachers Provident, says: “We were looking for a back-office system that had to meet a host of requirements, including automation of trade confirmations, electronic downloads of valuation data and the ability to be used in future on a third-party basis. Icon ASP was the best solution that fitted the bill and was implemented in a very short time-frame, which ensured our member’s investments were not affected.”
Icon ASP from Linedata Services is an option offering the Icon systems with outsourced IT hardware and IT administration. This ASP allows investment managers to focus on their core business, while enabling them to retain control and manage the day-to-day business operations.
“IT departments in small and medium-sized organisations have not been able to grow to support the technical advancements required within the industry,” says Paul Roberts, COO at Linedata Services UK. “Our ASP solutions are aimed at helping organisations looking to change their inflexible legacy systems without the high cost and risk associated with a ‘big bang’ replacement, and with the security of disaster recovery services. Medium to small organisations have a much bigger challenge to change their technology. They are finding themselves between a rock and a hard place, which can greatly inhibit their ambitions.”
Many organisations face the challenge of how to move from their 10-year (or older) back-office systems. The way forward, according to Mr Roberts, is to use an ASP, as it “allows business to focus on core activities”. The ASP model is more flexible than IT outsourcing as it removes the need for on-site software upgrades – an activity that takes up a large proportion of IT budgets and time.
Not one-size-fits-all
The old idea of service bureaus, where service was offered on a one-size-fits-all basis, is no longer sufficient to meet customers’ demands and in fact is a major concern to organisations considering ASPs.
Mark Bellington, head of customer services and consultancy at Linedata Services UK, says of its product: “It is not a one-size-fits-all. The ability to configure our ASP solutions makes it more flexible than the old bureau services.” Customers can configure the solutions to how they want to use them, building on a comprehensive core template.
“Unlike outsourcing, using an ASP allows organisations to maintain control while also benefiting from customised solutions,” says Mr Bellington. The ASP service also requires no upfront costs of change, and it is easier to move the application management back in-house. “If outsourcing is about giving up control, ASP is about retaining control. It is in between the all or nothing approach,” says Mr Bellington.
Linedata delivers the application services via a private network. “Our customers are still not comfortable using the public internet, they are still concerned about security and reliability,” Mr Roberts says. To deliver their services effectively and reliably, Linedata has a disaster recovery site, several managed centres and a resilient network of leased lines to their customers. “For customers it’s like electricity,” says Kevin Sloane, Linedata’s commercial manager.
Reech Capital, a fully-owned subsidiary of Sungard Trading and Risk Systems, is another company that is capitalising on the growing popularity of utility-like ASPs. Christophe Reech, the company’s founder and CEO, says: “The hype of the ASP model was really a problem of managing expectations.”
Mr Reech, who has worked on the derivatives desks of many of banking’s main players, set out to make high-quality quantitative expertise and sophisticated tools for pricing and risk both available and affordable for smaller institutions. His objective was to break down the correlation between the size of an institution and the quality of its analytics.
One of the services developed and delivered by the ASP model is Reech FastVal, a cross-asset flexible portfolio valuation service. This utilises Reech’s proprietary models and independent market data, collated and constructed from several reliable data sources. Reech FastVal enables derivatives users to compute the fair value of portfolios containing virtually any financial product, from vanilla cash products to complex exotics and hybrid structures. Reech FastVal can handle a broad range of asset classes, including interest rate, credit, foreign exchange, equity and inflation-linked products.
Users access Reech FastVal via an internet browser – keeping entry and support costs to a minimum while maximising speed of implementation. Delivered via the ASP model, usage of FastVal requires no additional hardware and no protracted software implementations, with immediate access to Reech’s processing capacity and extensive database of both market and engineered data.
With several clients of varying size from the buy and sell-side, Mr Reech says that for this solution, as with any other ASP service, ability to achieve scale was crucial. “We were one of the earliest adopters of the grid on Linux, so as to enable massive complex calculations in parallel.”
Other solutions offered by Reech Capital, such as eVaR+ (the online risk management engine), are also delivered as an ASP service. Reech eVaR+ uses market standard methodologies for computing Value at Risk and credit exposure: analytical calculations, historical simulations and Monte Carlo simulations. Additionally, Reech eVaR+ provides market risk, counterparty risk, liquidity risk and settlement risk. The service supports all asset classes and can be used for both linear and non-linear portfolios.
Mr Reech says offering a solution via ASP is not just about the software you offer, but also the service surrounding it. A key to success is not to assume you know how – with what frequency, what volume and how much complexity – the clients will use the application service offered. “So we had to build a system to handle a wide range of coverage, as wide as possible,” he says.
Pure ASP alternative
As organisations become more comfortable with using ASPs for niche market applications, and the market matures, there will likely be a more widespread take-up of ASPs. Todd Eyler, analyst at Financial Insights, research and consulting firm, says: “As key problem areas such as security and transaction integrity are better addressed, we expect pure ASPs will become a better alternative to building applications internally for large firms.”
An increased focus on reducing operational risk may be a key driver for the take-up of ASPs, since having a single vendor to monitor and hold accountable for all aspects of a key application’s performance is highly attractive to banks.
