The New ASP

 

10/17/01

As Mark Twain might say, reports of the death of the ASP market are greatly exaggerated.  In fact, some parts of the market always did quite well and new parts (or reinvented ones) are regularly appearing, which show great promise both for their investors and their clientele. 

The original idea behind an ASP (Application Service Provider), wasn’t wrong, but it was almost always impeded by a naïve business model, inept management, or flawed execution.  The idea of being able to “rent” the use of software as a service, for a reasonable price, rather than needing to take the time and resources to assemble the skills to design and implement a system that might include hardware, systems and applications software, customization and support, is inherently appealing.  That’s what got the idea started. 

But in the rush to ASP nearly any kind of software, ASPs and their investors made some wrong turns.

• In an effort to “be competitive,” they often priced their services far too low to allow them to build reliable, well-supported systems and make money.

• Many ASPs proceeded on the “if we build it, they will come” theory of marketing, assuming that their very presence in the marketplace would assure them of customers.  It didn’t work that way.  Web-based software was a new concept and it required MORE not less marketing to get it started.

• Early ASPs, particularly ISVs (independent software vendors) looking for a new distribution channel and new customers thought their target market should be small companies.  Small companies are conservative in their business practices and expensive to market to.  In face, most of the early ASP customers fit entirely different profiles.  They were often:

1. High tech companies of any size who could quickly understand the appeal (and the technical and financial logic) of the ASP proposition.  Unfortunately for the ASPs, a good number of these were dotcoms who later vanished with the bursting of the dotcom bubble.  However, they also included well-known, big companies who would be continuing, stable customers and first class reference accounts.
   
   

2. Ad hoc groups in customers who already used complex software who needed access and support before their IT department could provide it.  They might be new users added as the result of growth or merger, special task forces, or groups that included suppliers or contractors who presented security issues for internal access.  For these users, speed rather than cost is often the issue.

3. Departments or other discrete groups in large accounts who wanted to pilot new technology before recommending its adoption through the more conventional (and longer) IT cycle.

Many of the ASPs who survived during the earlier days of the market did so by recognizing where the customers actually were and providing the services they required.  This meant they did a lot more customization and integration than they intended – and learned how to modify their business model to charge for it.

From ASP To xSP 

Some analysts, venture capitalists, and Service Providers (ASPs or not) believe the ASP name has been so identified with failure, or at least lack of success, that the best thing to do with it is to bury it.  Therefore, you may notice that many programs and conferences are moving to other terms.  As we noted in our original study of the ASP industry, Wohl Associates ASP Market Study, March, 2000, http://www.wohl.com/aspflash.htm, this is a market with many different kinds of vendors offering many different types of services.  The initial impulse, to brand them all ASPs, led to much confusion. 

The new impulse is, to refer to the market as the xSP market (as in the algebraic “x”), allowing companies to fill in various identifiers plus SP for service provider.  Various sectors are referred to by their own, narrower and more focused names that seem much wiser.  Particularly popular segments now include:

• VSPs (Vertical Service Providers who generally focus on a vertical market or a particular field of expertise, e.g., human resources)

• MSPs (Managed Service Providers) who provide a variety of tools for managing the ASP environment or for introducing management into other on-line environments such as e-commerce.

• Hosters and Outsourcers who provide data centers with various levels of support.

Expect new segments, of course, to emerge, including a new name for ASPs who provide integration across multiple offerings (today, mainly provided by partners in the systems integration or consulting business).  

Summit Strategies has offered a new name for the ASP business.  It proposes ASPs be renamed Internet Business Services Providers, or IBSPs.   In Summit’s lingo an IBSP is an ASP that develops its own applications specifically for hosting on the web, rather than attempting to internet-enable existing programs.  We had a separate category for these ASPs in our original report, calling them NetGens (short for Network Generation), implying that they were the new, network-based generation of software.

This is fine as long as we remember that there remain a core of “real” ASPs who actually do provide application hosting of applications that they are sourcing from their ISVs and reselling to customers.  These might be generic (non-customized) or they might be within a more sophisticated model that includes some customization and integration, either across the hosted applications or with data and applications within the customer’s own IT shop.

More Than A Name Change:  Focus, Partners, Business Plan 

There’s more going on here than a name change.  New and reinvented xSPs have a different kind of business model:

1. A much more focused approach to everything – customers, markets, and offerings.  An xSP is likely to sell to particular customers in particular markets and to stay on target, even when it’s tempting to do something out of the plan to get a lucrative customer.

2. Much less need to take a top-to-bottom, we-do-everything-ourselves approach, which characterized (and haunted) the original ASPs, with its high capital requirements and need for skills in every area.  Today’s xSPs are much more likely to focus on one or two areas of competency such as a vertical market area or application expertise and to leave the rest to partners, from data center hosting to systems integrators for customization, to marketing partnerships.  Note, for example, the rise of xSP hosting groups within each of the big system vendors, i.e., IBM and Sun.
   
   

3. Gone are the days when ASPs jumped into this market because it was hot and venture capitalists backed them because it was a no brainer.  Today’s xSPs have well thought out business plans, including realistic marketing budgets and timelines.  

Selecting An ASP

We regularly hear from subscribers who have questions about the ASP business model, especially about the risks, about how to minimize risk, and about how to calculate ROI.  This article’s timing was initiated by one of those letters.

Frederico Freitas, the manager of the IT department of a publishing firm in Rio de Janeiro recently wrote me asking for my opinions about the advisability of using an ASP for mission critical applications such as ERP.  His firm currently uses an internally implemented version of JD Edward's ERP software. 

It is certainly possible to use ERP software from an ASP or to have your customized version provided to you as a hosted application.  The latter might be more interesting if you have invested in considerable customization for the software.  It can be particularly interesting to consider hosting if your vendor has ASPs who have customized your chosen software for your industry and/or integrated with other industry-specific applications.  (In that case, you’re probably talking to a VSP, not an ASP.)

In any case, many companies are beginning to find the xSP model interesting.  This, in itself, is a change.  Most large companies and many smaller ones are now aware of the xSP alternative and are using it or considering it for future implementations.

• It can save money on hardware, software licenses, support, and technical staff
  
  

• It can allow customers to implement more quickly
  
  

• It can permit customers to scale more quickly or to support users in remote locations
  
  

• It can provide a back-up to internal operations, accessible in case of emergencies or peak periods of activity

For any of these reasons, a customer might choose, with great validity, to use an ASP as a substitute for some (or indeed all) of its internal ERP.

Of course, this is a moving target.  Just what you can buy (which applications or combinations of applications, with what level of service, and from whom) is getting better all the time.  Things will be more solid in a year or two than now, as the xSP market settles down and the original (and less durable ASPs) leave the market behind to a smaller number of larger and more stables Service Providers. 

Success Stories And Potential Success Stories

It seems worthwhile to consider a few xSP success stories – or potential ones – that show the direction in which this market is moving.

• AMICORE:  An Office Automation ASP For Doctors  
  Last Spring, Microsoft, IBM, and Pfizer announced their intention to form a new joint venture to form a company to provide integrated clinical, financial, and administrative tools to help physicians streamline their workflow via on-line access to complete medical histories, insurance information, lab results, and billing arrangements.  Amicore, now formally announced as a new company, will focus on small medical offices, with up to ten doctors

  The new company has acquired PenChart Software of Connecticut to help get things started.  The ASP will use technology based on Microsoft's .NET Enterprise Server Platform, Windows 2000 and wireless devices. IBM will provide web-hosting services for Amicore and run a help desk. Pfizer will come up with leads for its sales reps.

  ASP Amicore will be offering its services on the usual monthly rental basis, starting with the PenChart Windows-based software which offers access to patients’ records from handheld devices.  You can follow its expansion of its offerings at its website, www.amicore.com.

   

• PORTERA:  A VSP For The Professional Services Industry
  We like to use Portera as a good example.  They were early to the market.  They figured out the idea of a vertical focus going in.  They are a NetGen (or as Summit would say an IBSP), offering their own ServicePort Suite software to their customers, but they combine it with other offerings that they resell to their focused market.  They don’t just focus on the Professional Services Industry as a whole; they’ve further refined their model and they focus on such individual sub-segments as Technology Consulting Firms, Management Consulting Firms, Professional Services Organizations, Interactive Agencies, Marketing, PR and Advertising Agencies, and Government Contractors.

  Importantly, they have succeeded at charging an appropriate premium for their unique software and have attracted not just smaller firms, but the traveling professionals from a number of much larger organizations.  Enough so that they were recently able, even in a tough venture market, to attract an additional $16 million in financing, all from their existing venture partners.

   

Bottom Line

The bottom line is that this is a market with a long way to go – Up.  Not everyone who tries will make it, but with much more understanding of what it takes to succeed and lots more expertise available to help the players along, things are beginning to look much rosier.

Helping things along are two rosy lining scenarios.

1. The September 11 tragedy has taught a lot of IT managers that having a back-up plan for how to get back in business fast is a good idea.  xSP customers could do that.  
   
   

2. In a down economic period when management is looking to cut capital expenses and headcount the advantage of an xSP to the bottom line look particularly appealing.  We’d bet that a lot of companies that try an xSP out this year and next will keep the arrangement when the economy comes back up.

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