Kathryn Morton had a nice little business that was actually doing well on line. With a staff of 10 in Newmarket, Ont., her Avonlea Traditions Inc. wholesaled collectibles with Canadian themes, particularly those relating to the L.M. Montgomery novel and T.V. miniseries Anne of Green Gables.
Morton sold a few items through a modest mail-order operation. Then she opened an online store to replace those sales, "just sort of a supplement to our existing wholesale business," she says. Rather than build her own Web operation from the virtual ground up, she contracted with iCat, a host provider that gave her a "store" in an online mall. It not only replaced the old mail-order sales, but it increased them.
But last fall, a team of executives in Silicon Valley decided to shut Morton down. ICat was closing up shop and her store shut down with it. Nobody gave her time to react -- she had to hear about it by e-mail.
The irony is that Avonlea Traditions was no failing dot-com, no Internet-bubble confection. She didn't have offices in San Jose, Seattle, or any other tech boomtown. It was a regular-folk, wholesale business that made a careful foray on line and got badly burned. "We've been without an online store for a month and it could be another month before we get it up," Morton says.
She's working to get another e-commerce site going, but the timing is not good. She had recently settled a court decision that ordered her to pay more than $1 million in licensing fees to the family that owns the rights to Anne of Green Gables. "But we're fortunate," she insists. "If we were a company that was totally dependent on our online store, I'd be choked right now."
Morton is just one of many traditional small businesses whose online business disappeared in the dot-com bubble. More than a year before the Web host shut down, Intel bought iCat as part of its plan to diversify into providing online services. But late last year, Intel cut out that side of its business -- affecting more than 1,500 smaller shops. The iCat mall (still accessible at mall.icat.com) looks like a small town after an earthquake. Store after store contains nothing but the words: "This store is temporarily closed. Please try again in a few hours."
Application service providers like iCat were launched with the aim of capturing some of the billions spent by small businesses. They sold business owners on abandoning desktop software to "rent" online applications on a monthly or per-use basis. Many handed over important business functions. But some were bitten when the dot-coms crashed and are now twice shy about trusting tech companies with critical functions.
Yet the small-business market is still a potential money-maker, and some of the biggest names in the tech industry are ready to try again to win the hearts, minds, and wallets of entrepreneurs. This time around, they're doing it a little differently.
When scientists first announced the unexpected discovery of the muon, a strange subatomic particle, theoretician Isidor Rabi wondered, "Who ordered that?" For anyone wondering the same thing about Web-based applications, the answer is, the big tech companies did.
Providers such as IBM and Intuit, parent to the Quicken line of products, are hoping that if they put such functions on line, they can convince small businesses to try the Web one more time (not that all that many did when the ASPs first rose up; by some estimates, 80 percent of small businesses still have yet to get on the Web). "We've never figured out a good way to sell complicated products to small businesses in a cost-effective way," says Chris Walter, IBM's director of marketing for medium-sized businesses.
"Small business people are pretty isolated," says John McKiernan, director of the Boston College small business development center. "They're working long hours. They're very busy." In other words, they are ideal customers for timesaving technology, but incredibly difficult to market to. "A lot of the first players looked at [ASPs] and said 'this is our route to small business customers,'" says Bill Bliss, director of hosted application marketing for IBM's Lotus Development Corp. "That hasn't been the case."
Suddenly, small business could do just about everything on line, from hosting Web sites to accessing complex financial applications. They could take advantage of enterprise-level systems they never could afford to run in-house and automate complex processes such as human resources and customer relations.
Hardware and software companies cobbled together "business centers" on their Web sites by partnering with one or more of the start ups. Makers of accounting software like Intuit and Sage piloted online versions of their desktop applications, and Microsoft and others set up small-business portals to package multiple applications. "ASPs, quite frankly, are the relic of us all running to the Web as a way of delivering products and services," says Mike Weir, general manager for Hewlett-Packard's small business division. Businesses who signed up as customers were along for the ride.
In 1999, Tom McKenna, director of client relations with LiquiDebt, a 16-person receivable management and commercial collection agency with offices in Chicago and Fort Wayne, Ind., signed up for a free corporate intranet provided by HotOffice.com (another Intel-backed company). When HotOffice began to struggle financially, McKenna tolerated the addition of ads rather than accepting a switch to a for-pay model. "We really weren't using it often enough to justify that expense," he explains.
By the time he received an e-mail notifying him that HotOffice was pulling the plug, LiquiDebt had decided to shift its activity from the outside service to an internally hosted intranet designed by a local developer. Still, McKenna remains a fan of Web-based applications, and feels more sorry for HotOffice than angry at it. "You hate to see companies that have a good idea bite the dust," he says.
The Services Economy
The push toward Internet-based applications is not limited to the small-business market. Many see it as part of a fundamental change in the way software is bought and delivered across the board. Microsoft's new company-wide ".Net" strategy aims to make Internet-based computing common for everyone from individual users to large corporations. The company's small business portal, bCentral, offers its own internally developed applications along with those from third-party partners that use Microsoft technology. "We sometimes say we're a poster child for .Net," says Erin Hiraoka, director of marketing for bCentral.
Hewlett-Packard has dubbed its overall strategy "utility computing." It and other hardware companies now push "subscription computing" packages that promise remote IT support along with desktop PCs for a single monthly fee. And although Intuit doesn't seem to have a catchphrase handy, it has rolled out a Web-based database application, added online billing and other capabilities to Quickbooks, and acquired EmployeeMatters, a company that provides Web-based benefits, HR, and payroll applications.
Scott Cook, Intuit's co-founder and chairman, sees a lot of promise in Web-based applications. He likens it to the PC-based software revolution that made his and Bill Gates' companies household names. "I believe it will be as significant as desktop software applications were to the PC era," he says.
For the tech companies, such a revolution couldn't come at a better time. Computers are now so fast and software so productive that there isn't much difference between products, and businesses rarely need to buy new equipment. What they do need is support and services for the gear they've already got -- whether that means help setting up a network, virus-scanning for their PCs, or advice on new purchases. "We're getting beyond just delivering hardware," says HP's Weir. "If you look within the small-business segment, customers buy about $120 billion worth of IT equipment and services. The fastest growing part of that is services."
"This is not really about software, it's about services," says Navin Chaddha, chairman and CEO of Rivio, a company (formerly called Biztro) that provides co-branded back-office applications such as human resources and payroll through large banks and telcos, as well as bCentral. Microsoft's Hiraoka is even clearer: ".net is about software as a service."
For large corporations, companies like IBM provide IT services through teams of consultants that counsel executives on their IT decisions, recommend their best products, and implement them. But even Big Blue and Microsoft couldn't afford to do the same for every single small business. With the arrival of the Internet, however, "They can do the next best thing. They don't have to use a direct sales force if they can do it over the Web," says Dhruv Grewal, a professor who holds the Toyota Chair of Electronic Business and Marketing at Babson College in Wellesley, Mass. "They can virtually eliminate all the installation and training. This could significantly increase their profitability."
Who Needs an ASP
The ASPs of the 1990s also wanted to sell lots of services to small businesses, but missed their mark. Instead, according to Lotus' Bliss, many found greater interest at the enterprise level. The basic arguments for adopting Web-based applications make more sense for larger businesses than smaller ones, according to Boston College's McKiernan. For instance, a marginal savings in cost-per-user doesn't mean much to a 40-employee business. "Large companies are playing with larger numbers," he says, "so little improvements can generate a lot of payoff."
The "outsource-your-infrastructure" argument also presumed that a business had an infrastructure to outsource. "If you're only loading software on a few computers, you might not want an ASP," Grewal says. In addition, some ASPs offered to automate processes such as human resources or customer relations, which most small businesses had never even considered outsourcing before. "You have to really get the sense of what it's going to do for you," Grewal says. "If you're working with some new piece of software and you're not sure how it's going to integrate or what it's going to do for you, you might be more hesitant."
Many companies simply don't have the time or inclination to learn a new application, says Leslie Mirabeau, director of the small business development center at the University of Pennsylvania's Wharton School of Business. "Technological change is a lot harder in small businesses," he says. "A small-business owner has to learn the technology himself, and then you have his staff." CEOs, who are closer to the front lines than executives at larger companies, may take a pass on potential cost savings if they suspect the technology will be difficult to implement.
Is a Name Enough?
LiquiDebt's Tom McKenna is about as close to a technological true believer as small-business folk come, but he admits that even a tech-savvy CEO may have trouble winning his staff over to a new system. "You've got to have people in your company that are technologically minded," he said. "If you use this type of service religiously, you will be more productive. But getting there is harder than you'd think." He says that when he installed HotOffice, he found that most employees never used its bells and whistles. When LiquiDebt later built its own intranet, he made sure the developers kept it simple.
These provide a sense of stability in a period of technological change.The HPs and Microsofts of the world believe they can succeed where ASPs failed because a lot of small businesses already buy the hardware and desktop software they produce. There is some familiarity with the products, some brand awareness, and maybe even some trust from this varied, skeptical group. "We don't think you should go out and talk to small businesses about how you can transform them," says bCentral's Hiraoka. "A lot of them don't want to be transformed."
A few years ago, the ASPs figured small businesses would be hungry to get on the Internet and would flock to any company that could claim to be a dot-com. That's why the companies renewing the attack to win over small businesses are those with brand names or partnerships with known companies. "With start-ups, people may have been concerned about whether they could be trusted with their data and whether they'd be around tomorrow," says Lisa Gevelber, director of marketing for Quickbooks for the Web. "People who adopt our service understand the importance of a trusted brand name."
Intuit's Cook believes that the resistance will vanish as did the initial consumer worries about e-commerce. "I think it's exactly identical to the resistance people had in 1995 to putting their credit card on the Web," he says. "Now people are very willing to use them on the Net."
McKenna says that his experience has not dampened his enthusiasm for Web-based applications, but he is more likely to sign up with service from companies with well-established brand names. "Intuit, they're not going anywhere," he says. "I mean, they could falter and go to hell, but they have a lot less chance of doing that than HotOffice did."
LiquiDebt currently uses Quickbooks for its internal accounting but has been looking into renting a higher-end application rather than buying it.
Boston College's McKiernan, however, says no brand name will be enough to convince business owners to sign up for a Web-based version of an application they don't think they need. "The simple fact that Intuit has a product will not make them want to use it," he says. "But if someone who they have some trust in offers them a solution and they're ready for it, then they might do it."
The Next Wave
To ease businesses' transitions to the Web -- and to woo them, when they are ready -- companies like Microsoft and Intuit plan to deliver a wide variety of services that integrate smoothly with one another and share information well. This makes sense, according to Grewal. "It doesn't help if I have to deal with five providers," he says. "If there's one firm who can give me the seven or eight applications I need, that might be appealing."
A brand-name company that offers one essential service might be able to convince businesses to put other applications on line as well. "We're developing a pipe," says HP's Weir. "There are a variety of different kinds of water we can put down that pipe." HP's pipe is the rented PC itself and the basic set of Internet-delivered support services. For Intuit, on the other hand, the accounting program would act as the conduit into other areas of a business' operations. The company is even looking for ways to integrate Internet services with their desktop applications -- to "supercharge them," as Cook puts it.
This latest rollout of Internet services signals a whole new round in the ongoing battle for the small-business market. "Integration" makes software more convenient, but also tends to tie companies into a single vendor. That means entrusting not just a single application, but the entire business, to an outside vendor.
"There is a more continuous relationship when you move to a Web-based solution," Cook says. "The company is involved every minute, every day. When there's a glitch you know it." This relationship begins to seem much less like one between a vendor and customer and much more like a business partnership.
"They want to go from software to a service, and the way that works is that they've got to make themselves more and more part of your company," explains Boston College's McKiernan. "If they're trying to sell the service, they need to create that dependency. That's where their next 'billable hour' is coming from after all."
Morton, for one, has learned a few things from her 'partnership' with Intel. "People ask me, 'Were you angry at them for pulling it?'" she says. "I was upset, but in today's technology world things move so fast it didn't really surprise me. A company as big as Intel can make these sudden strategic corporate decisions that affect someone like me. They hold your business in their hands."
Now that technology companies have finally begun to look at the small-business market in this new way, small businesses need to regard them differently, too.
Will That Be Paper or Silicon?
What sort of Web-based applications are likely to catch on? According to Scott Cook of Intuit, those that are truly revolutionary. "The big idea here, in my view, is that Web-based applications solve a problem that you can't solve in any other way," Cook says. "It's not a big idea if it just does the same thing as everything else."
Some applications, such as e-commerce shopping carts and electronic billing systems, lend themselves well to a Web-based model, and providers have vastly lowered the cost of getting started in e-commerce. Hardware companies like HP are hoping that basic IT utilities, such as virus scanning and automatic backups, will also be no-brainers. And applications that require collaboration or are frequently accessed remotely, according to Bill Bliss of Lotus, hold the potential to cause a similar shift, and allow small businesses to automate processes they never could before.
Cook says he believes that eventually, as businesses and their accountants become comfortable doing business through the Web, they will feel comfortable abandoning desktop applications and moving entirely to the Web. That's far from a sure bet. "From our research and our existing partners, we believe that a lot of the applications that have been available on the desktop are going to stay," says Rivio's Navin Chaddha.
Intuit is hedging its bets by finding ways to integrate the desktop versions of their software with newer online services. "This is a hybrid approach," Cook says. Microsoft hopes to pursue a similar strategy. "We have some fairly limited integration between office family applications and bCentral right now," says bCentral's Erin Hiraoka. "It's a logical decision for customers because many of them live in office applications every day."
It's also logical for software companies, since it lets them sell online services to businesses that don't want to take their entire operation on line. Avonlea Traditions Inc. owner Kathryn Morton, for one, says she would never hand over her financial information to a third party. "I just wouldn't let myself be subjected to that," she says. "They move to number one on your list of creditors. If there's any dispute between you and the business, they can shut you down." For now, she'll keep buying her software in boxes.
Right now, not even the tech giants, with all their vast resources and advanced technology, can hope to serve every small business with the sort of specialized applications and advice that large corporations can afford. If they partner with smaller providers and developers, however, they just might have a chance.
A web of such associations is now forming. Though some of these are merely marketing arrangements, others involve sharing and technology. Rival's partnership with Microsoft is a good example. "Microsoft is giving us a lot of help in using .net technologies," says Rivio's Navin Chaddha. "We are a good showcase of what could be done."
Other software companies also have far-reaching plans in place. Lotus, for instance, hosts few Web services itself, but more frequently functions as what Bill Bliss calls a "a back-end provider to the ASP value-chain," helping companies integrate Lotus' collaboration software.
Likewise, Intuit recently announced the formation of its developer's network, which will allow smaller companies to create custom applications based on the company's proprietary technology. "Intuit is never going to create an application particular to a grain farmer," explains Alison Mnookin, director of marketing for the Quickbooks line of products. "But a third-party developer might."
Both companies benefit from these partnerships. The developers get access to technology they desperately need, and the software companies are able to extend their reach and offer their services to more customers. "Our goal is to have hundreds of developers creating specialized applications for your specific business," Cook says.
Small businesses should be aware that when they sign on to a service, they're really signing into this complex system of partnerships. In the brave new world of software-as-service, you may have to switch financial applications to get access to that great grain-farming application. But maybe, just maybe, you'll get the service you'll really need.
For tech companies, Web-based applications are a way to provide technology services and support to small businesses. But many small businesses already outsource their IT. "The competition we run into is your cousin Clem, or occasionally local six- or ten-person shops," says Andrea Skov, vice president of business development for All Bases Covered, which provides consultants and IT support to small businesses in several metropolitan areas in the U.S.
"The small-business owner who's getting service from consultants, he's been using this same VAR for 5 years, he has a strong relationship," says Lyndon Rive, co-founder and vice president sales for Everdream Corp, which along with Centerbeam Inc. pioneered the concept of subscription computing for small businesses. His company has now changed strategies primarily to the resellers and consultants businesses already look to for support.
Cousin Clem, modest as his services may be, has at last one thing no technology company does: A face. "Just offering small businesses remote services without face-to-face contact, trust, and understanding doesn't work," Skov says. "To ask small businesses to remotely purchase and manage something that's critical to their business is something that a lot of small business ASPs had trouble with."
Recognizing that, HP provides dedicated technical advisers to business that sign up for its subscription computing services. "We've always just assumed we could throw them the next generation of hardware and off you go," Weir says. "You also need to be able to provide what someone who can physically be there should."