ASPs Grapple With Tactical Barriers

By Art Williams

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ASPs, despite glowing customer-satisfaction and ROI reports, are still the butt of quips like Red Herring's "ASP stands for awful stock pick" and Gartner's "60 percent of ASPs to fail by 2001."

Additionally, ASPs have been lumped into the deflating dot.com bubble. This is unjustified, as only a small minority of ASPs have gone out of business. The inconsistencies between customer satisfaction and ROI, on the one hand, and profitability and stock performance on the other can be understood in terms of the distinction between strategic benefits and tactical hurdles. In other words, investors and early market prognosticators focused on the strategic benefits of better, faster and cheaper service to customers, but ignored the tactical impediments that have slowed market penetration, growth and progress toward profitability.

I have called these tactical impediments "breakage." They include sunk costs, job security and control. One of the most common scenarios of the ASP market is a prospective customer nodding in acknowledgement of the strategic benefits, but delaying consummation of the outsourcing deal, because the breakage is too daunting.

We discuss below the accumulating evidence supporting the strategic benefits, some of it new, and steps ASPs and potential customers can take to reduce the tactical hurdles to overcome breakage. Note, as a preliminary, that breakage accounts for the mutual affinity of ASPs and startups (relatively little to 'break"), an affinity that has complicated ASP profitability.

Strategic Benefits: Better, Faster and Cheaper
The strategic benefits of ASP outsourcing all follow from the greater technical focus, depth and experience ASPs offer, relative to the insourcing alternative. What makes possible the counterintuitive combination of better service at lower cost is the sharing of costly human skills by multiple customers. Few individual companies can justify the investment in human skills required to manage increasingly complex software solutions.

The proclamation of these benefits is not new; what is new is the arrival and accumulation of evidence that the claims are more than hype. Availability reports like that announced recently by USi and customer-satisfaction reports like that available on the BlueStar Solutions Web site are consistent with the nearly perfect customer-retention across the industry. The cost reduction was predicted early on by Cherry Tree Associates, and others, but a recent report from IDC confirms those predictions with an average five-year ROI of over 400 percent and the fact that almost half of the 54 ASP customers studied achieved payback in less than six months.

With regard to "faster," there is broad acknowledgement that ASPs can bring complex systems online very quickly (see, for example, Appshop and ManagedOps).

A common and important benefit of ASP outsourcing is availability. The value of availability is unquestionably high, but it is often not discussed, because quantifying that value is complex and difficult.

Tactical Hurdles: Sunk Costs, Jobs and Control
In its common form, ASP outsourcing requires writing off investments in hardware, infrastructure and personnel. This is a huge hurdle. It is especially troublesome for enterprise customers who often have elaborate facilities, including raised floor, air conditioning, network connections, firewalls and on and on. Even for smaller businesses, investments in server hardware constitute a strong disincentive.

As important and understandable as sunk costs are, the impact of outsourcing on jobs and personnel is often more emotional. Few ASPs are willing to take on the employees of their customers. More fundamentally, if customer costs and ASPs profits derive from the sharing of expensive skills, then some personnel and jobs must be affected.

Control is a complex issue taking several forms. Applications, such as enterprise resource planning (ERP), are utterly critical to a business. Customers can be wary of relinquishing control over such business-critical processes. Of the three forms of breakage we have discussed, control is probably the most amenable to negotiation. The increasing complexity of information technology combined with the scarcity and mobility of the skills required to manage it are making outsourcing difficult to avoid. The rapid rise of the managed service provider (MSP) suggests that the control issue can be managed.

What ASPs Are Doing About Breakage
Some ASPs are trying to reduce the sunk-cost hurdle by offering solutions in which the physical resources (servers, routers and so on) reside on the customer's premises. Oracle, for example, announced its "AnyPlace" offering earlier this year. Similarly, BlueStar Solutions offers "Remote Managed Operations", and Qwest Cyber.Solutions offers "Freedom for Managed Application."

Corio's recent acquisition of Carlson Companies as a PeopleSoft customer is described by Carlson's CIO as follows: "They (Corio) have joined forces with our internal IT organization which provides us flexibility and allows us to maintain control of our mission-critical employee data."

Qwest describes the objective of their offering as allowing the customer to "capitalize on your (the customer's) current IT investment". As observed above, it is not a coincidence that all of these ASPs target enterprise customers. Note that such variations on the original hosting theme can, if carried too far, reduce the standardization from which both ASPs and their customers benefit.

Help Potential ASP Customers
Potential ASP customers can do two things to reduce tactical barriers: plan and get help. Planning allows customers to defer investments that will complicate outsourcing. Perhaps the most effective use of planning is the identification of new assignments for personnel affected by outsourcing.

ASPs can be a valuable source of help for potential customers. While breakage problems are complex and demanding, ASPs have seen most of them before and can suggest solutions and contribute to the planning process with their awareness of technology developments, such as the impact of technology changes, like the Web enablement of PeopleSoft, for example.

Don't Let Breakage Be a Deal Breaker
It is easy to say that strategic benefits should not be held hostage to tactical inconvenience. It is much harder to actually deal with the various forms of breakage. Nonetheless, breakage is such a fundamentally gating factor in the growth of the ASP market that both customers and service providers should do all they can to reduce these barriers. The single most important recommendation is to plan.

Art Williams is a freelance analyst and consultant focused on the ASP market. Previously, he was the director at the Giga Information Group responsible for the ASP market. In addition, he had a 30-year career at IBM career, where he managed an "internal-ASP" data center built around IBM's SP line of Unix servers, which he invented. He can be reached at art@artw-consulting.com..

Editor's note: This column first appeared on ASPnews, an internet.com site.