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SWOT: On the Icarus trail: Can XSPs learn to fly?

SWOT: On the Icarus trail: Can XSPs learn to fly?

It's something the industry probably doesn't want to hear: the ‘xSP' service delivery model has been dismissed by a handful of analysts (and services companies themselves) as a sexy buzzword, devised by the Yanks to create excitement around the services market and to imply infinite opportunities for any company with a worthwhile technology service.

META Group Australia program director for server infrastructure strategies, Kevin McIsaac, says the xSP term is problematic. "‘xSP' is a vague buzzword - a handy label, no doubt, that an analyst coined to create hype. But it doesn't tell you much."

Kent Duston, chief executive of ASP-enabler Cavillon Systems, is even more blunt: "There was a lot of ranting and raving about [xSPs] before tech wreck last year, but it's just companies doing traditional marketing, looking to be more dynamic and catering for a changing market."

Defining the reality

According to META Group, the xSP is a fine-grained version of outsourcing and a broad market category everyone could get into. But IDC claims an organisation sits under the xSP umbrella if it fits into a service provider category: ASP (application), ISP (Internet), NSP (network), MSP (managed), DSP (developer), SSP (storage), VSP (vertical for specific industries), PSP (process support) or CSP (content), to name a few.

IDC says true xSPs manage services externally over a network, have a one-to-many service model and charge standardised fees. On the flipside, traditional service providers such as business process outsourcers (BPO) do not deliver over a network, and thus come from old-generation services.

What sets xSPs apart, says IDC, is the fundamental value of the service offering, and therefore, a certain set of competencies.

Australia has more than 100 xSPs, McIsaac says, and he classifies ASP players such as Solution 6, Cavillon Systems, Tequinox or any ISP as an xSP. However, he says companies are reluctant to identify themselves as xSPs. "It's like saying, ‘I'm in IT.' So what? It still doesn't tell you enough."

Nevertheless, IDC claims the Asia-Pacific xSP market is fertile, tipping regional spending on outsourcing services to reach $US11 billion ($A21.2 billion) by 2004. Worldwide, IDC predicts the market will expand to become a $US400 billion industry by 2004, up from $115 billion last year.

Chief executive of the ASP Interpath, Mark Franklin, agrees that Australia's services market is maturing, representing a confluence of business and IT. "[xSPs] may have been hype over the past few years . . . but the second generation - be they ASPs, BSPs, VSPs - will bloom with each of their differentiated, value-added services," he says.

However, Franklin warns a cloud of uncertainty hangs over the market. He says the services market is riddled with horror stories of under-performing suppliers stemming from the past.

For META Group Australia's program director for adaptive infrastructure strategies, Marc Bouchard, this means that xSPs cannot always be trusted. "Where I caution folks is that the higher you go up the [services] stack, the harder it is to get the service right. I'd tell ASPs not to use an infrastructure provider or ISP because they know very little about how to run applications," he explains.

Who benefits?

Confusion aside, Bouchard says the horizontal SME market will benefit from xSPs because it lacks the basic infrastructure needed to set up their own Web sites or manage applications in-house.

In Duston's view, xSPs will allow medium-sized businesses in particular to create virtual companies, which could become the trend in business process outsourcing. "Companies are telling me they really need a good CFO but since they're such a small organisation, their CFO would get bored and leave. So they realise that because they're on an ASP, they can merge their accounting and marketing through outsourcing."

He adds that customers don't want to "buy" an ASP but leave the task with the reseller. "Only resellers should deal with the ASP because they have the skill set to manage the infrastructure for a customer," Duston says.

According to Citrix's Asia-Pacific business development director of i-business, Phil Osbourne, mid-level organisations are the biggest goldmine for xSPs. "It's those customers who have sophisticated IT infrastructure and have only two mission-critical applications to run who hold the most opportunity," he says.

Moreover, with more than 90 per cent of regional businesses falling into the SME group, it is these potential customers who IDC says will reap the most from xSP's tier-one technology and expertise.

Specifically, Osborne believes that vertical markets such as the retail and manufacturing sectors will drive demand for xSPs due to their requirements for niche B2B applications.

On the supply side, xSPs will open significant branding and product opportunities to a range of vendors, particularly to communications and networking companies, as well as to ISVs as either ASPs or xSP suppliers or systems developers. However, analysts warn that in each supplier segment there is a big potential to clash with existing channel players already in the xSP marketplace.

Success and the single xSP

The key to success as an xSP, according to IDC, lies in consolidating service delivery capabilities, leveraging economies of scale and any reusable service components. And for that model to work, IDC emphasises it is critical that xSPs exploit partners or partner-managed facilities to deliver xSP services on a multi-client (rather than customised) basis.

Cavillon System's Duston regards a comprehensive skill set as the linchpin of a competitive xSP player. Of all the xSPs, he believes ASPs in particular will fail if they do not offer a clear set of expertise - something he says is fundamental to any full-service provider.

And the skills shortage is very real here, he says. "Unlike the US, Australia doesn't seem to recycle people in the xSP industry. The challenge for us has been finding people who can do half a dozen things, not just one. You can't just hire a new graduate either, and throw them into a services business - they need a range of skills you don't find just off the street."

He recommends that companies have solid expertise in systems integration, networking and security, opportunity management and an understanding of the business implications of their service before entertaining any xSP ambitions.

Duston has seen companies create a false sense of confidence by taking what he calls a "build it and they will come" approach. Unless you can build with reasonable scale quickly and profitably, he says, you don't stand a chance. "In Australia we're good at developing technology and selling its benefits, but we're bad at ensuring it's managed well."

Citrix's Osbourne says it's essential for small resellers eyeing the xSP space to secure backing from big enablers like Telstra or Com Tech before playing in the SP environment. Similarly, McIsaac judges ASPs in particular to be in their infancy, and consequently, left with a very low-margin business with little buy-in: they need the reinforcement of partners as referees.

Interpath's Franklin believes the xSPs who do it right will be those who "keep IT simple" and allow the client to focus on its core business. Duston agrees, saying that SPs have focused too much on technology and not enough on the client's business objectives. "At the end of the day, the customer doesn't care about the technology - they're over it. They need to rent the business outcome."

McIsaac has the most confidence in MSPs, extolling the exceptional quality of their offerings, such as capacity planning and remote desktop management.

"What if?" and the future

So what about a recession? "A recession here could be the biggest opportunity for the [xSP] channel," Duston says. "Everyone's capital spending shrinks [in a recession], but customers will still fight for e-business or CRM dollars. So they'll turn to renting it because they need it. That is where the drive for the xSP market will come from."

"Systems integrators and computer resellers could be the biggest benefactors when you think of the fact there's about 2000 customers in the top end of town and some 500,000 small businesses who just don't have the infrastructure to support their own applications."

Osbourne and McIsaac predict companies will soon drop the xSP place-holder and evolve into total service SPs. "The user doesn't really care who is in an SP consortium," Osborne says.

According to IDC, xSPs have cheaper and more flexible sales cycles than traditional companies whose services are complex and high-cost, making xSPs the greatest competitive threat to traditional outsourcing. But at the same time, other analysts warn that traditional outsourcers are more than capable of countering the xSP threat by seizing on a few opportunities of their own.

The counter-attack will begin when established services firms either become xSPs themselves, create hybrid models or take on xSP elements, or acquire business entities branding them distinctly as xSPs. And traditional organisations, given their IT resources and expertise, could be poised to make any of those moves - en mass.


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