Here is the old HWP/Quest PR piece ..............
How will Hewlett-Packard and Qwest Communication's announcement to provide ASP services around SAP's enterprise applications impact the emerging ASP market?
Hewlett-Packard and Qwest's announcement to deliver SAP applications will help move the ASP market forward. The alignment of these global leaders in the applications and systems space with Qwest, an innovative network provider, lends further credibility to the ASP model. While challenges remain in establishing a track record of reliability and in signing on appropriate applications integration capabilities, IDC anticipates that this announcement will help drive ASP awareness and acceptance.
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Table of Contents
Announcement Highlights
IDC Opinion
Conclusion
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Announcement Highlights
On May 11, 1999, Hewlett-Packard, SAP and Qwest Communications, announced a strategic relationship to provide ASP services to businesses around the world. In a deal that was put together in less than 60 days, Qwest, SAP, and HP announced an alliance in which Qwest will deliver SAP R/3 applications to customers through the Internet. This is the first in a series of planned announcements by Qwest to offer a variety of enterprise applications and services from its "CyberCenters", the data centers that Qwest is building throughout the U.S. designed specifically for 24X7 applications services. Qwest says it will announce similar agreements with other enterprise application and customer relationship management vendors (e.g. its May 18th announncement with Siebel Systems) in the coming months. Qwest also plans to announce relationships with systems integration providers in conjunction with this initial ASP agreement.
Under the terms of the arrangement, HP will provide Qwest with up to $500 million in the hardware, software and services that are needed to build and manage Qwest's web hosting and ASP infrastructure. Components of the deal include servers (both Unix and NT), storage, OpenView management software, and Web QoS security software, systems integration personnel who will integrate the HP software and systems into the data centers, and mission critical support services with guaranteed levels of availability and response times. Additionally, HP will begin reselling the Qwest SAP ASP service. In return, HP will receive a percentage of the revenues that Qwest generates from its ASP contracts. The duration of the Qwest and HP agreement is five years, with an option to continue at the end of the agreement. Both parties have the ability to dissolve the agreement if terms are not being met. The relationship is non-exclusive, and Qwest says it will not be concerned if HP does other deals similar to this one.
HP believes it is able to provide Qwest with significant experience in managing network environments and sizing servers for SAP. Qwest says it chose to partner with HP because HP's focus on E-services has demonstrated HP's ability to understand what it takes to change an industry. Qwest was also impressed with HP's ability to align resources, from R&D to products to risk-sharing financial mechanisms, behind its E-services strategy.
SAP remains consistent with its earlier agreement with EDS. It will sell the software license contract directly to the customer. Hence, for this rentable ASP service, the end customer still has to deal with two contracts?one with SAP and one for the combined HP and Qwest services. This partnership does not encompass the related implementation and consulting activities associated with the SAP implementation. Customers can choose their implementation partner. However, this is another separate contract they will have to manage.
SAP, Qwest, and HP sales channels will sell the ASP service. HP direct sales and channel partners will be compensated the same for selling the ASP service as they would for selling an HP system to the customer directly. HP's sales force and partners have the option to receive their commission up front as they would normally receive a commission at the time of sale. Alternatively, they have the option to take a risk and to receive their commission as a part of the revenue sharing annuity that HP will receive.
IDC Opinion
Hewlett-Packard' s ASP Strategy
HP's recent announcement of its involvement with Qwest is part of the E-services strategy that the company has been rolling out over the past several months. HP's vision of ASP extends beyond applications and into a model that includes the rental of MIPS on demand or storage on demand. As the market evolves, IDC expects HP to play a significant role in the ASP market, not only as a partner to ASPs, but also as an ASP itself.
HP as an ASP supplier
In its relationship with Qwest, HP is introducing a new model for supplier relationships with ASPs. As the ASP market begins to take hold, suppliers varying from device manufacturers to storage vendors to server vendors are examining this market and figuring out how they can supply their products to the rapidly growing ASP community. HP is breaking new ground by establishing a risk-sharing model with respect to the ASPs. While the model is consistent with HP's new E-services strategy, it does raises questions about the unpredictability of demand for ASP services. Because the ASP market is emerging, there is no historical data on which to base revenue forecasts.
While HP did not disclose the particulars of the percentage that it will receive from Qwest, it did provide some general guidelines about the number of users that Qwest must sign up in order for HP to begin to capture revenue. According to HP, it expects to generate revenue under the agreement when its systems are at 30% utilization (i.e. 30 users for a 100 user system). When its systems are about at 50% utilization, HP begins to recapture its margins. At about 65-70% utilization, HP begins to generate a premium. What is essentially at risk under this model is HP's margins.
HP as an ASP
As an ASP, HP will be able to ensure that its name remains in the forefront of the ASP market. One of the potential downsides of the ASP model is that vendors such as ISVs and server providers, who once were in front selling to the end-user organization, may take a back seat as they become only one part of a larger service offering.
HP has some experience in delivering an ASP service. Under its OpenSkies business, HP is running an airline reservation application on HP servers in an HP facility. The service provides travel agents with ticketing capabilities that are charged on a per transaction basis. IDC expects to see HP offering more services along the lines of OpenSkies and extending into areas where it could leverage its current expertise (e.g. ERP implementation). HP's experience with OpenSkies and the Qwest deal will help to provide the company experience in operating an ASP business. HP will be able to leverage this experience as it moves into being an ASP.
A challenge that HP will face in playing as both a supplier and an ASP will be in carving out a territory for it to operate within that will not conflict with its partners and in managing relationships with partners with which it is also competing. Key to success will be HP communicating up front to its partners where it intends to play in the ASP market.
Qwest's ASP Strategy
Operating under a vision that ASP market leaders will be determined and locked into place within the next 12-24 months, Qwest is aggressively ramping up its business model which includes building out data centers on a global basis and selecting partners. In support of this vision, Qwest states that it is receiving numerous inquiries from organizations interested in outsourcing their enterprise applications. In addition, while Qwest's announcement is designed to target mid-market business accounts of between $200 million and $1 billion in annual revenues, it has been receiving interest from a number of large organizations as well.
Qwest is pursuing a low cost, high volume strategy. It is seeking a cost leadership position in the area of the network, the technology, and the application. Qwest is able to leverage its Macro Capacity Fiber Network and high capacity, secure connections to its CyberCenters as a foundation from which to build reliable ASP services. It has also recognized that it lacks specific expertise in the applications, computing, integration, and support arenas and is partnering intelligently to bring those capabilities into the fold.
Key to Qwest's rapid growth will be strategic partnering. One of the reasons Qwest chose to work with HP is because it felt that HP was willing to help it change the cost dynamics of the ASP model in order to help it to achieve leadership. The relationship with HP is unique in the ASP market in that it involves risk sharing. Key to the success of this risk-sharing model is ensuring that all of the incentives are appropriately aligned so that each partner will act in the ways intended
SAP's ASP Strategy
While SAP has had outsourcing agreements around the world, this is SAP's second notable ASP announcement. Earlier this year it announced a relationship with EDS to deliver its applications through an ASP model. (see Another ASP Emerges: EDS and SAP Unveil Application Outsourcing Alliance, IDC #W18466). The major difference in its strategy with Hewlett-Packard and Qwest is the target market. SAP limits its agreements with both EDS and Qwest to companies under one billion dollars in revenue. However, with EDS, SAP is targeting companies under $200 million in revenue (i.e. the same market its Certified Business Partners (CBS) focus on). With Qwest, it is targeting companies in the $200-$500 million range.
We applaud SAP's effort to minimize channel conflict during the launch phases of its agreements. However, the lines of distinction are already beginning to dissipate. SAP has reportedly approved some EDS deals not only above the $200 million market but above the more strict $1 billion market where EDS is clearly strong.
Meanwhile, Qwest's desire is to serve companies in the $200 million to one billion range. As with EDS, SAP will review deals for approval on a case by case. Since the ASP model is driven toward shorter sales cycles and faster implementation times, as the volume of activity increases, the case-by-case review process will not suffice for any of the parties invovled. The developing ASP market is ridden with channel challenges. SAP will have good company trying to figure out the right formula for the ASP channel as well as other channel and direct sales force considerations.
SAP claims that the pricing of its licenses in conjunction with its EDS and Qwest/HP partnerships is comparable. IDC has heard reports that the R/3 license will be priced in the $150-$250 range though this has not yet been confirmed by SAP.
What is also comparable is the way in which SAP sells its licenses. SAP still requires the customer to contract with SAP directly for the software license even though it will rent services from SAP partners. This is a departure from other ASP strategies deployed by SAP competitors. We believe over time SAP will come under pressure from the market to let the ASPs resell the license. For now SAP continues to "shy away" from letting others sell its licenses. Notably there are already signs that SAP will have to come around to the ASP goal of one solution, one contract, one contact. In a separate announcement today (May 18, 1999) Interpath announced a relationship with Sun and SAP, in which Interpath will be selling the SAP license so the customer will only have to sign one contract.
SAP, is not alone in figuring out its ASP strategy as it goes. IDC is seeing many vendors trying different approaches to packaging and pricing. Few vendors, especially the applications vendors, want to give up account control. By licensing the software directly, SAP continues to have a hand in the customer account. However, to achieve the volume model that Qwest and other ASPs want to achieve, SAP and other applications vendors need to allow the flexibility to make it simple for the ASP and for the customer.
Conclusion
The announcement by this trio is a coupe for ASP market. Not only does each vendor bring an important competency to the ASP venture, but it highlights the respective commitment that each vendor has this new application delivery model. As with most ASP partnerships this partnership is not exclusive. This is a rapidly developing market with much uncertainty. Flexibility to find the right solution, packaging and partner combination is critical. To date, the hype surrounding the ASP model has outstripped the actual growth of the market?customers are signing on, but the market remains very small. Qwest's aggressive strategy brings the key strengths of HP and SAP in reliable computing and applications together with its own robust broadband networking capabilities to create a strong platform for ASP services. With potential customers waiting in the wings, Qwest is likely to stake out its position early in the developing ASP market and to spur on its competitors. This combined with each vendor's individual committed to growing the ASP market will serve to establish the ASP model more firmly as a viable alternative to internal IT strategies and to increase the actual adoption of ASP services by customers.
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Copyright 1999 International Data Corporation. Reproduction is forbidden unless authorized.
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