ASPs Grapple With Tactical Barriers - Page 1

Dec 18, 2001

Art Williams

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 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.

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