ASPs Still Alive and Kicking

By Lynn Haber

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Shedding its over-hyped skin of the late 1990s, today's application service provider (ASP) market is stabilizing as its players move into profitability, enjoy reoccurring revenue streams, and aggressively seek new business.

According to industry watchers, investing in the ASP model can help CIOs deliver business value to their companies. "By partnering with ASPs, CIOs can dedicate more time to higher value, revenue generating activities," said Amy Mizoras-Konary, a program manager at IDC.

If the message sounds familiar, that's because it is. What seemed to be a good idea back in 1998 -- the time-to-value proposition of delivering complex applications as a service -- continues to be a good business idea today. So good in fact, that in October 2003, IBM tossed its hat into the ASP ring. Along with Siebel Systems, the company announced a new on demand hosted customer relationship management (CRM) service called Siebel CRM On Demand, designed to meet the growing market for fast, easy, and affordable CRM.

Industry Resurgence

In the late 1990s, the birth of the ASP industry was marked by newcomers touting a radical, alternative software business model: selling the use of applications in a pay-as-you-go, a la carte model. Three-to-four years ago, at the peak of the dot-com boom, more than a thousand ASPs set out to change the IT world. Then, reality set in.

Vendors, exposed as being more hype than substance, were focused on growth rather than profit. And the quick signing of dot-com customers, which drove the financials of many early ASPs, proved to be the undoing of many service providers as the Internet bubble burst. By 2002/2003, the ASP market seemed all but dead, with a whopping 90 percent failure rate, according to industry analysts.

Despite the doom, a handful of players survived, because the basic software-as-service concept was viable despite poor execution. Pioneering pure-play vendors such as USinternetworking (USI), Corio, BlueStar Solutions, and Surebridge retrenched quietly as a number of mergers and acquisitions helped reshape the market, according to Gartner.

The pure-plays, however, aren't alone in this market. There is a second-wave of ASPs represented by vendors who deliver software over the Internet, or net-native service providers, such as Salesforce.com, NetSuite and Salesnet to name a few.

Rounding out the ASP industry are independent software vendors (ISVs), such as Oracle, PeopleSoft and SAP which have had their fits and starts in this market. "In the past, ISV hosted applications was done more as an obligation of doing business. Today, it's a growing piece of their business," said Jeffrey Kaplan, managing director at ThinkStrategies.

While pure-play ASPs promote multi-vendor third-party software delivery, net-native vendors offer more targeted applications, and ISVs are vendor specific.

Second Look

With significant market activity over the past 12 months, IDC's Konary said the growing interest in the ASP market cannot be ignored. Currently, software revenue derived from ASP delivery accounts for three-to-five percent of all software revenue.

Andrew Stern, chairman and CEO of USi, reports that despite a slow start at the beginning of 2003, by year-end business was up.

"With most organizations spending 75-to-80% of software costs on software maintenance, savvy CIOs are looking for ways to off-load such expenditures and find business value," he said. This, in addition to budget pressures, is forcing CIOs to seek alternative approaches.

Lance Travis, vice president of outsourcing strategies at AMR Research, said today's ASP market targets midrange organizations, where application requirements are less complex and companies lack the internal IT application integration experience.

The types of applications offered by today's ASPs tend to be those that are important to most businesses but are not a core competency. For example, order management and accounting in the financial area, salesforce automation, marketing automation and customer support in the CRM realm, and email, groupware and conferencing in the messaging application area.

When searching for an ASP, industry watchers recommend IT managers consider application expertise, services expertise-security, availability, reliability, and making sure the service provider fits into their company's five- year plan.

Industry consensus recommends CIOs definitely give fair consideration to the ASP model. "Outsource non-strategic applications, and save some money to invest in innovation," said Travis.