Fewer ASPs, More Services

Even as the number of ASPs is dwindling, customers are demanding a wider range of services. But can ASPs deliver?

Hundreds of dot-coms have failed in the past year, and many observers assumed that the ASP business model, by virtue of being hyped along with the Internet start-ups, would die with them. It's true that the number of application service providers, many of which emerged two years ago in the midst of the economic boom, has declined sharply since Framingham, Mass.-based IDC reported a peak of 800 last year. But surviving companies say that they're seeing customer demands for increasing numbers of services.

And IDC actually predicts that the ASP market will grow 89% per year during the next five years, with worldwide revenues rising from $986 million last year to $23.9 billion in 2005. But with new players continually entering the market, no one is safe - not even the current leaders. "The top 10 can't rest on their laurels," says IDC analyst Jessica Goepfert.

Surviving ASPs face the challenge of scaling up to provide more types of rapidly delivered, standardized implementations while still maintaining high uptime and service levels.

Competition should be good news for IT shops that use ASPs. But so far, "I know from colleagues that their ASP experiences have been mixed," says Mitchell Dickerman, CIO at Boston-based advertising agency Hill, Holliday, which has current billings of about $1 billion. "Of those [ASPs] that are surviving, the key differentiator and thing that will keep them in business is not the technology they're offering, but their levels of service."

ASPs will also be sustained by offering more services, says Pradeep Khurana, chairman of Surebridge Inc., an ASP in Lexington, Mass. "It's always been part of our strategy to add services and value to our customers over time, especially now that they're looking at cutting costs and asking us if we can take on more of the services that they used to host in-house," he says.

Surebridge's business model is to be a one-stop shop, especially given what Khurana sees as an increasingly CFO-driven demand from customers for more outsourced applications. "Additional services are really ours to lose," he says.

Skills Search

Talent concerns are also driving the use of ASPs, says Jan Jackman, vice president of strategy for next-generation businesses at IBM, which has an ASP business.

"Overall, there's a skills shortage, and a lot of companies don't have the capability to integrate a lot of these Web-based applications," she says. "[ASPs] are a way for them to get to market faster and to test out these new value-added services, as well as to see if it brings new customers to them. If you're comfortable with the service, you might stay with it."

Hill, Holliday chose an ASP two years ago because it didn't have the in-house expertise that it needed to run its PeopleSoft modules. Surebridge now hosts the advertising agency's time and expense software modules from Pleasanton, Calif.-based PeopleSoft Inc.

"It cost me less to hire Surebridge than it did to hire someone with Oracle experience," says Dickerman, who would have needed to hire three full-time people with Oracle database experience to run the modules. The time system, which has been up for a year, and the expense system, which was launched four months ago, have had "absolutely no downtime," he says.

Dickerman says he'll also use Surebridge next year when he adds business intelligence software from Ottawa-based Cognos Inc. "They have the expertise, and they can add it to the box or add another box for a minimal increase in price," he explains.

The promise of lower costs led Victor Inglese, global IT project manager at DaimlerChrysler Capital Services in Norwalk, Conn., to select an ASP to run his new SAP installation in January of last year.

"We found it would save us much more money to do it externally. We've also limited our exposure on turnover and also on the cost of hiring people," he says, adding that he's pleased with the service levels and uptime.

Inglese uses Denver-based Qwest Cyber.Solutions LLC to host and manage his SAP enterprise resource planning applications. He, too, says he plans to continue to rely upon the ASP for more services as he adds SAP modules in the future.

Using an ASP can also help IT managers get new applications into the hands of their business users more quickly. In her talks with ASP users, Goepfert says, "What I hear time and time again is that they want the cutting-edge application environment, and if IT is not their core competency, they don't want to have to spend the time and money to develop that in-house, so they look for an ASP to help them do that."

"Time to market - that's always why we want to go with an ASP," says Chris Farmer, director of global transaction systems at San Rafael, Calif.-based Autodesk Inc., the maker of AutoCAD software and digital design applications used by movie effects houses. It's quicker because ASPs have dealt with the new technology before, he says. And though Farmer doesn't charge users for internal applications, he does pass on ASP costs, and ASPs charge more for customizations. That's a good thing, he says, since simpler applications get to market faster.

"Our internal customers are far more likely to accept a vanilla solution when it comes from an ASP, whereas when it comes from our internal resources, they're far more likely to want to customize the hell out of it," says Farmer.

Nineteen months ago, Autodesk began using three ASPs: Cupertino, Calif.-based BlueStar Solutions Inc. for its SAP installation (notably, a single-instance installation over three locations and in multiple languages); San Francisco-based Salesforce.com Inc. for managing major sales accounts; and Emeryville, Calif.-based Evolve Software Inc. for managing its consultants' time sheets and projects.

So far, so good, says Farmer, and though he sees the ASP market consolidating, he says he doesn't feel the need to use just one ASP for all outsourced applications. "I think we'll play it by ear. We're always extremely interested in finding a point solution from an ASP to a business problem," he says.

Next year, Farmer says, he wants to automate higher-level reporting from other applications back to SAP, with half the work handled internally at Autodesk and the other half done at BlueStar. In the future, he says, he'd like to move the electronic-procurement software from Sunnyvale, Calif.-based Ariba Inc. that his company uses to an ASP such as BlueStar.

DaimlerChrysler's Inglese is optimistic about using ASPs. In the future, he says, he wants to "get my entire environment hosted" - and in some cases managed. "If I could, I would not have anything in-house," he adds.

Making the Right Choice

Of course, choosing the right ASP at the outset is a critical success factor. When evaluating ASPs, Inglese looked for a one-stop shop, stability and a depth of SAP knowledge. One shop hosting many of his applications would give Inglese only "one throat to choke" should the need arise, he says.

He chose well. Of the other vendors he seriously evaluated 19 months ago, "one is not in the business of SAP hosting, and another has gone through a downturn and changed its name 1,000 times," he says.

In case their ASPs fail, Farmer and Dickerman purchased all of their hosted applications' software licenses. As an added safeguard, Dickerman also bought the Oracle boxes his software runs on in the Surebridge data center.

Perhaps the best way to keep ASPs accountable and service high is, like so many things, through proper management. Farmer says that rather than leaving ASPs "to their own devices," he actively manages them.

"We're treating them as an integral part of our systems infrastructure, so we manage them like we would our internal services," he says. "Because the ASP should be transparent to the end user; they shouldn't know."

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