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BrainTrust Query: Is the ASP Model for IT Services Inevitable?

January 18, 2007Written by Guest contributor

By Bill Bittner, President, BWH Consulting

As I sat in the NRF's CIO Innovator's Panel discussion at the Big Show in New York City, I was struck by the dichotomy. Two long-term IT users from the supermarket channel (Price Chopper and Raley's) were teamed with a specialty retailer (Charlotte Russe) that focuses on young women's clothing. The discussion was driven by an AMR survey which asked 127 retailers to categorize their IT expenses. The study tried to normalize the results by using clear definitions of what costs should be included in each line item and adjusting the numbers where necessary to make responses comparable.

As the discussion went on, the disparities between the channels became more distinct. When the supermarket execs, Dick Bauer, CIO of Price Chopper and Eric Wilson, CIO of Raley's, discussed the challenges of maintaining their infrastructure and the significant portion of their budget it represented, the specialty retailer, Ed Wong, EVP of Charlotte Russe, did not really find it a problem because they outsourced the whole effort. As the supermarket retailers discussed the challenges in finding good development talent, the specialty retailer said they did not really have a lot of developers because they bought packages, avoided modifications and used third party vendors on a project basis to integrate them.

I know it is a little like comparing an elephant to a mouse. They're both mammals, but that's about where the similarities end. Supermarkets and specialty retailers are at both ends of the retail spectrum, but maybe there is something to be learned from both their approaches to IT.

The old argument for avoiding the application service provider (ASP) model has been that business managers are afraid to give up control of their data to an outside data bank. This argument simply no longer makes sense. New managers use online services to do all their personal banking. They use SalesForce.Com to manage one of their most valuable assets (contacts and leads). The next generation of managers have their whole personal lives exposed to the world on MySpace.com or Facebook.com. These people are not going to be afraid to have their business data stored somewhere outside the four walls of their business.

One of the challenges for the supermarket CIOs was finding good developers. Whenever I hear anyone say they can't find people to do a job, my first reaction is that they are not paying enough. This got me thinking about how I would feel graduating with a computer science degree today. These graduates are faced with a very challenging decision -- whether they want to go to work with a network based solution provider like Google, with their email, spreadsheet, and word processing applications all available through a browser, or go to work for the IT department of a retail business. Let me see -- Google, with stock options potentially worth millions, dog care in the office, free gourmet cafeteria, etc. -- or Retailer X, where the net profit margin is two percent and IT is regarded as an expense department within a company whose business culture is entirely different. It is kind of like asking a mechanical engineer to work in the motor pool. (But then we have already outsourced the motor pool, so it is like asking them to become a mechanic.)

Discussion Question: As the technical barriers continue to crumble and society becomes more comfortable with putting their data on outside data banks, does the application service provide (ASP) model become inevitable?

I think the writing is on the wall for the in-house IT department. As technical improvements in the network continue to increase reliability and speed, there is no need for local data storage. As "Digital Rights Management" techniques continue to improve for protecting movies and music served online, those same techniques will be applied to protect proprietary business data. Finally, the ability for network based solution providers to offer such huge rewards for working with them means they will continue to be able to steal talent from the non-network based businesses.

IT services are likely to become an oligopoly, with a few big providers offering their services online and local technicians doing the implementations and maintenance for business consumers. This will take quite a while as new technology and user training must permeate the business landscape. The transition will be challenging for the retail CIOs who have to keep the old stuff running while they watch the role of their department change from designers to implementers. It is particularly challenging when you consider that "getting rid of their department" may be the best thing they can do for their organization. They are going to have to deal with the personal and personnel issues associated with their drastically changing role.

The other challenge will be for society, as a whole lot of computer science engineers become redundant.

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