When Sterngold Dental opened its doors in 1898, the first automobiles were beginning to clog the streets, the US annexed the Hawaiian Islands, and Scott Joplin's ragtime recordings were all the rage. The dental manufacturer has seen a lot of technological changes in its 107-year history.
When the Internet took the world by storm in 2001, Sterngold, which manufactures crowns, bridges, dental alloys, implants, and the products dentists use in their office, knew it wanted to sell those products on the Internet. But it also knew it did not want to bite off more than it could chew. So it decided to outsource its eCommerce venture.
"We realized we were a perfect fit for eCommerce," says Gordon Craig, Vice President, Business Development. Sterngold wanted to create a Web site that mixed product information with clinical education. And it wanted easy-to-use online ordering for its Internet customers.
Sterngold conducted a feasibility study, drilling down to the details to determine what it would take to create one internally. The conclusion: setting up an eCommerce Web site "would take an enormous amount of internal resources we didn't have," recalls Craig. He says Sterngold was not interested in Web hosting or database architecture. "We want to remain experts at what we do best--manufacturing dental products," Craig says.
Outsourcing Cut Deployment Time
A major factor in the decision to outsource the eCommerce project was deployment time. Craig says Sterngold could have assembled a team to create and manage the Web site, but it realized that would take more time than outsourcing the project to someone already staffed with eCommerce experts. The feasibility study predicted it would take the internal team two years to get the site functional. Sterngold wanted to extract as much time as possible from that estimate. "We wanted our site up and running as quickly as possible to reap the financial benefits," he reports.
You don't need wisdom teeth to realize that turned out to be a wise decision. The first year Sterngold's Internet sales totaled $750,000. Today the Web site adds $1.2 million in sales to the company's revenue. Sales have increased every year, reports Craig, and he expects this year to be no different.
In addition, Craig says the technology environment changes so quickly "it would be tough" for a dental manufacturer to keep up. "We didn't want to focus on the IT arena. We need to be building more innovative products for our customers," he adds.
The Service Provider Become eCommerce Advisor
Sterngold executives decided to outsource its eCommerce venture to NaviSite, who was able to get the site up and running in six months. "They focus on customer satisfaction and support. We focus on offering their customers a pleasant buying experience," says Keith Depari, Regional Sales Manager for Enterprise Services for NaviSite, a provider of managed application and outsourced hosting services for mid-market companies.
While NaviSite, an application service provider (ASP), began the technical work, Sterngold drilled down into the company's product knowledge for the Web site copy. "We had to do a lot of data mining," recalls Craig. The company scoured its files for information and interviewed employees to gain "the contents of their minds." Then NaviSite put the site together. "We couldn't have done it on our own," says Craig.
The four-year agreement expired last year and the manufacturer eagerly renewed. NaviSite's first assignment in the new contract is to transition the site to Microsoft's Commerce Server. Originally NaviSite created the eCommerce site using One Soft, which went out of business in 2001. The ASP, however, has been able to support the site even though it receives no support from the now defunct software vendor. Moving to a Microsoft product will make the site easier to maintain and to add new products and services, according to Depari. "The total cost of ownership will be less expensive. And we know Microsoft will be around for a long time," adds the executive.
Sterngold wanted more features, so now was a good time to migrate to the new platform. "We have become their eCommerce advisors," says Depari.
Depari says NaviSite has many mid-sized manufacturers as its buyers because their diminishing margins require cost savings elsewhere. They have a low up-front investment and a nominal monthly usage and hosting fee, which translates into predictable charges. "Manufacturers typically focus on building products. Outsourcing allows them to succeed in the technology economy without becoming a technology company," he says.
The Success of the New ASPs
The fact that Sterngold renewed instead of pulling its contract speaks volumes about the value provided by the new breed of ASPs. There was a time when pundits claimed the ASP model would become a relic.
The number of ASPs burgeoned during the rise of the Internet and burst with the Internet bubble. "What the ASPs promised back in the day was pure snake oil," says Ted Chamberlin, Principal Analyst, Communications, for Gartner. "They promised they could deliver an application across a distributed network using a pay-as-you-go model in a real time environment. That was a major pipe dream," he says. Corporations have enough trouble installing ERP systems like Oracle and SAP in a local environment. "Putting them on the Internet and making them work well? Come on. The promise of the ASP was overblown," says the Garner analyst.
For the last three years ASP[s] have gone underground like earthworms and figured out what they can do well. Application hosting and eCommerce are two processes that turned out to be a good business model.
Chamberlin says the model is now "baked" or completely cooked. Today the hosting environment is more static. It's more costly because the ASP has dedicated servers for its customers and can customize the application for them. "The hosting market has hit its maturity years," he notes.
The Gartner analyst says ASPs offer a "selective sourcing solution" or "outsourcing lite" that buyers seem to like. He notes "the road is littered with big outsourcing deals that didn't work." Instead, many companies prefer to only outsource certain processes. "They don't want to give up the keys to the shop but do want to give up certain processes," he says.
Another reason for ASP growth: many enterprises cut their IT staffs to the bone to survive the lean years. Now they realize they will have to do more Internet and IT projects if they are to generate more revenue. "Selective sourcers like NaviSite will reap the benefits of this new energy because they can set up a Web site in a matter of weeks," says Chamberlin.
For that reason Gartner estimates Web hosting companies will enjoy a compound annual growth rate of 28 percent over the next three years. This year he estimates application hosting companies will generate revenue between $9-10 billion. By 2008 he predicts that number will grow to $23.4 billion.
Now those are numbers ASPs can sink their teeth into.