Kanwal Rekhi and ASP
November 10, 2003
MUNJAL Shah, Kanwal Rekhi and Ram Varadarajan are party to perhaps one of the greatest rescue attempts in software history. They are trying to revive the brain-dead application service provider (ASP) business model. And theirs is no Sisyphean attempt.ASPs were the toast of the industry in 1997-99, when they promised to lower the cost of software usage by billing customers on a pay-per-use basis. As the hype around the Internet dissipated, so did the ASP business models. Today, the ASP market is worth $2 billion as against an earlier projected $22 billion. But two new trends can help it make a comeback. One, increased usage of the Net by small businesses (See 'Small business on the Net'). Two, the ASPs' use of India as a development and marketing base for a feasible business model.It would appear that small businesses should be the obvious targets of software firms looking for the next big market. They are not. "This is largely because software has become so expensive to develop. If you do it the way it has been done, you can't price it low," says Kanwal Rekhi, CEO, Ensim Corporation.He should know. His company and a few others like Andale and Arcot Systems are trying to make software accessible for small retailers by using India as a cost-effective product development centre and, in Andale's case, even a telesales centre. That is how all these companies have been able to adopt a subscription model and reach out to small businesses. "Small businesses are in a very competitive market. With the slim margins that they have, they just can't afford to spend large amounts on IT hardware and software," says Ray Conley, principal of Oak Hill Venture Partners and member of the Andale board. If Ensim, Andale and Arcot succeed, they will open up a subterranean market of almost 7 million small businesses that could buy software aggregating $2 billion. In the process, the three companies will revive the ASP model that all analysts thought was mostly hype.
Any of these companies will tell you that selling software to small businesses is not like selling to the big guys. "The software has to be very easy to use. Your grandma, poised on the verge of a purchase, is not going to look through the help documents to tackle a problem," says Ram Varadarajan, CEO, Arcot Systems. The other problem is being able to sell to and provide after-sales support to these small businesses. "The amount you collect from them is so small that you just cannot afford to have them call you in the US. The number of people I will have to employ to answer their calls will wipe off my profit," says Munjal Shah, CEO, Andale. The last bit of the problem is that this market is dynamic and needs quick feature upgrades. "The quantum of software design and programming skills you need to deploy is much more easily available in India and at much cheaper prices," says Steve Zauber, vice-president (marketing), Ensim.The interesting bit is that the three companies are targeting different needs of the US small businesses. Ensim helps them Web-enable their operations easily. Andale develops software that helps them automate their order management and sales analysis processes. Arcot helps them authenticate transactions on the Net and cut financial risk of fraudulent transactions.
Shah's problem was finding a cost-effective way of marketing to and supporting sellers on eBay
Take Ensim. Its product suite can lower the cost of accessing the Net and is the first step towards becoming a Web-based business. Instead of taking $250 plans from large Web-hosting firms, Ensim lets small merchants pay $10-15 a month to host their sites on the Web. "The subscription plans provide the flexibility. If the business isn't working out, he can just go off the Net with minimum loss on the hosting expenses," says Rekhi. He believes this is the second and much more pervasive phase of the Net. Once the smaller retailers are present on the Net, they will touch many more consumers who may have never done any business on the Internet.Rekhi says that Ensim's business model is alive because of India. He says: "Our burn-rate was high. And though we were well funded - $64 million - our business model wasn't making sense. Our revenues were too low." With the customer paying just $15 a month instead of $180 in one go (as is the case when one normally sells software), what gets hit is the cash flow. "The product development costs kept mounting but the cash inflow was too little. I realised that it would take us at least three years and thousands of customers before we could even reach operating break-even. "That's when we moved out a lot of work to India," says Rekhi. Ensim now has two-thirds of its work force in India.For Munjal Shah of Andale, the issue was figuring out a cost-effective way of marketing to and supporting its customers. Most of them are small operations that sell on eBay, a vibrant marketplace (See 'The eBay Equation'). There are more than 235 million items on sale from more than 5 million merchants. Every month 40,000 new sellers join eBay. "eBay really is more like a stockmarket than a product market. You can see what is working and what isn't. Change the prices on items that are slow-moving. Find out what others are selling and if you do not have that item, order it from your suppliers," says Shah. Andale - Spanish for hurry up - sells software to sellers on eBay to do exactly this. "I have never met any of my customers in person - there are more than 17,000 of them and they are too busy selling. But you need to give customer service at low cost and also sell to such people. Most of them make $5,000-10,000 a year. They won't spend more than $500 a year on IT," says Shah. The only way Andale could have serviced the customers is through its telesales and support staff in Bangalore. "We started with 18 guys a year ago and we have 100 now. Since we don't meet our customers anyway, it doesn't matter to them where we are calling from. This way, even if the customer pays us only $10 a month, we can still manage to give him new product features and after-sales support," says Shah.
For small merchants, getting on to the Net, selling smart is followed by a bigger problem of authentication fraud. Unlike in shops, on the Internet it is the merchant who has to bear the cost if a customer declines a transaction. "This usually happens when stolen credit card numbers are used for Net transactions," says Varadarajan. In the real world, the merchant can compare your face with the picture on the card and match signatures to rid himself of doubt. That is not possible on the Net as of now. A host of techniques like Public Key Identification have been tried, but have not become popular with end consumers. Arcot has developed a piece of code that resides on the bank's server. Each bank also mails a Net ID code along with the T-PIN or the ATM PIN number. Now Arcot's ingenuity has been in using the end user's browser to open a small window to ask for the Net ID already mailed to him by the bank when the customer is ready to make a payment. The software then picks that ID off the browser, takes it to the bank to get it verified while the merchant waits for authentication, and then relays an 'OK' to the merchant if the entered ID is correct. "All this happens in 40-55 seconds. The merchant does not need to know the ID code and is also sure that the customer cannot deny the transaction," says Varadarajan. Its Bangalore centre has been responsible for developing a large part of its suite of four products. "We were able to reduce development costs significantly," says Jim Reno, vice-president (product development). As Arcot rolls out its solutions to more banks and small merchant businesses, they will be less hesitant in transacting over the Internet.All the three approaches offer benefit, though Andale's business model perhaps has the biggest advantages. But of course there is a difference: Andale doesn't need to see its customers, Ensim and Arcot, who sell to people who enable small business to get online - web-hosting companies and banks - need to see theirs. But even if one were to just do product engineering smartly, lower cost structures would allow small US start-ups to compete better, at lower price points and address large markets.
MUNJAL Shah, Kanwal Rekhi and Ram Varadarajan are party to perhaps one of the greatest rescue attempts in software history. They are trying to revive the brain-dead application service provider (ASP) business model. And theirs is no Sisyphean attempt.ASPs were the toast of the industry in 1997-99, when they promised to lower the cost of software usage by billing customers on a pay-per-use basis. As the hype around the Internet dissipated, so did the ASP business models. Today, the ASP market is worth $2 billion as against an earlier projected $22 billion. But two new trends can help it make a comeback. One, increased usage of the Net by small businesses (See 'Small business on the Net'). Two, the ASPs' use of India as a development and marketing base for a feasible business model.It would appear that small businesses should be the obvious targets of software firms looking for the next big market. They are not. "This is largely because software has become so expensive to develop. If you do it the way it has been done, you can't price it low," says Kanwal Rekhi, CEO, Ensim Corporation.He should know. His company and a few others like Andale and Arcot Systems are trying to make software accessible for small retailers by using India as a cost-effective product development centre and, in Andale's case, even a telesales centre. That is how all these companies have been able to adopt a subscription model and reach out to small businesses. "Small businesses are in a very competitive market. With the slim margins that they have, they just can't afford to spend large amounts on IT hardware and software," says Ray Conley, principal of Oak Hill Venture Partners and member of the Andale board. If Ensim, Andale and Arcot succeed, they will open up a subterranean market of almost 7 million small businesses that could buy software aggregating $2 billion. In the process, the three companies will revive the ASP model that all analysts thought was mostly hype.
Any of these companies will tell you that selling software to small businesses is not like selling to the big guys. "The software has to be very easy to use. Your grandma, poised on the verge of a purchase, is not going to look through the help documents to tackle a problem," says Ram Varadarajan, CEO, Arcot Systems. The other problem is being able to sell to and provide after-sales support to these small businesses. "The amount you collect from them is so small that you just cannot afford to have them call you in the US. The number of people I will have to employ to answer their calls will wipe off my profit," says Munjal Shah, CEO, Andale. The last bit of the problem is that this market is dynamic and needs quick feature upgrades. "The quantum of software design and programming skills you need to deploy is much more easily available in India and at much cheaper prices," says Steve Zauber, vice-president (marketing), Ensim.The interesting bit is that the three companies are targeting different needs of the US small businesses. Ensim helps them Web-enable their operations easily. Andale develops software that helps them automate their order management and sales analysis processes. Arcot helps them authenticate transactions on the Net and cut financial risk of fraudulent transactions.
Shah's problem was finding a cost-effective way of marketing to and supporting sellers on eBay
Take Ensim. Its product suite can lower the cost of accessing the Net and is the first step towards becoming a Web-based business. Instead of taking $250 plans from large Web-hosting firms, Ensim lets small merchants pay $10-15 a month to host their sites on the Web. "The subscription plans provide the flexibility. If the business isn't working out, he can just go off the Net with minimum loss on the hosting expenses," says Rekhi. He believes this is the second and much more pervasive phase of the Net. Once the smaller retailers are present on the Net, they will touch many more consumers who may have never done any business on the Internet.Rekhi says that Ensim's business model is alive because of India. He says: "Our burn-rate was high. And though we were well funded - $64 million - our business model wasn't making sense. Our revenues were too low." With the customer paying just $15 a month instead of $180 in one go (as is the case when one normally sells software), what gets hit is the cash flow. "The product development costs kept mounting but the cash inflow was too little. I realised that it would take us at least three years and thousands of customers before we could even reach operating break-even. "That's when we moved out a lot of work to India," says Rekhi. Ensim now has two-thirds of its work force in India.For Munjal Shah of Andale, the issue was figuring out a cost-effective way of marketing to and supporting its customers. Most of them are small operations that sell on eBay, a vibrant marketplace (See 'The eBay Equation'). There are more than 235 million items on sale from more than 5 million merchants. Every month 40,000 new sellers join eBay. "eBay really is more like a stockmarket than a product market. You can see what is working and what isn't. Change the prices on items that are slow-moving. Find out what others are selling and if you do not have that item, order it from your suppliers," says Shah. Andale - Spanish for hurry up - sells software to sellers on eBay to do exactly this. "I have never met any of my customers in person - there are more than 17,000 of them and they are too busy selling. But you need to give customer service at low cost and also sell to such people. Most of them make $5,000-10,000 a year. They won't spend more than $500 a year on IT," says Shah. The only way Andale could have serviced the customers is through its telesales and support staff in Bangalore. "We started with 18 guys a year ago and we have 100 now. Since we don't meet our customers anyway, it doesn't matter to them where we are calling from. This way, even if the customer pays us only $10 a month, we can still manage to give him new product features and after-sales support," says Shah.
For small merchants, getting on to the Net, selling smart is followed by a bigger problem of authentication fraud. Unlike in shops, on the Internet it is the merchant who has to bear the cost if a customer declines a transaction. "This usually happens when stolen credit card numbers are used for Net transactions," says Varadarajan. In the real world, the merchant can compare your face with the picture on the card and match signatures to rid himself of doubt. That is not possible on the Net as of now. A host of techniques like Public Key Identification have been tried, but have not become popular with end consumers. Arcot has developed a piece of code that resides on the bank's server. Each bank also mails a Net ID code along with the T-PIN or the ATM PIN number. Now Arcot's ingenuity has been in using the end user's browser to open a small window to ask for the Net ID already mailed to him by the bank when the customer is ready to make a payment. The software then picks that ID off the browser, takes it to the bank to get it verified while the merchant waits for authentication, and then relays an 'OK' to the merchant if the entered ID is correct. "All this happens in 40-55 seconds. The merchant does not need to know the ID code and is also sure that the customer cannot deny the transaction," says Varadarajan. Its Bangalore centre has been responsible for developing a large part of its suite of four products. "We were able to reduce development costs significantly," says Jim Reno, vice-president (product development). As Arcot rolls out its solutions to more banks and small merchant businesses, they will be less hesitant in transacting over the Internet.All the three approaches offer benefit, though Andale's business model perhaps has the biggest advantages. But of course there is a difference: Andale doesn't need to see its customers, Ensim and Arcot, who sell to people who enable small business to get online - web-hosting companies and banks - need to see theirs. But even if one were to just do product engineering smartly, lower cost structures would allow small US start-ups to compete better, at lower price points and address large markets.
posted by Anand KRishnan at 7:32 AM
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