IT'S APPLICATION FIRST, DELIVERY SECOND!

Some heart-to-heart advice for ASP vendors

by Ian S. Hayes

How you react to the "ASP" acronym depends on your point of view. If you are a potential customer, an ASP is just another means of acquiring application functionality. If you are a provider of IT products or services, becoming an ASP is an entirely new business model. It is e-business coming to the IT vendor community, and is as radical a departure for the IT industry as Amazon.com was to booksellers. Given this significant impact, it's hardly surprising that trade press coverage tends to focus on the vendor's view of the ASP market.

Buyers have been slower on the uptake; after all, it is hard for them to get excited about the simple concept of renting applications over the Internet or private networks. Yet, it is exactly this simplicity that inspires analysts from Forrester, Gartner Group and other research organizations to predict phenomenal growth of the ASP market over the next few years. Just as leasing, rather than buying, a car has become the option of choice for many new car buyers, ASP delivery will become the preferred choice for many business situations. To put this growth in perspective, one Gartner Group estimate expects the ASP market to exceed $ 22.7 billion in annual sales by 2003.

When applied to the right situations, and implemented with the right mix of applications and services, the ASP model provides such attractive benefits to both buyers and sellers that it is destined to become business as usual for many segments of the IT industry. Buyer benefits include decreased cost of ownership and operation, access to large-scale application functionality, higher quality support and faster access to updates and new functionality. These benefits will only increase as the ASP model and the delivery technology evolves. Well-positioned ASP vendors reach new markets, receive predictable income streams and achieve significant economies of scale in support and delivery.

These factors have spawned a gold rush of solution providers racing into the ASP market. These companies include everyone from "pure play" vendors, who offer ASP services exclusively, to independent software vendors (ISVs), hardware infrastructure providers (ISPs) and even consulting services firms. The result is a highly confused marketplace with almost as many variations on the ASP model as there are vendors. The result is constantly changing partnerships and alliances and shifting business formulas. Many budding ASPs are discovering that the transition is far tougher than anticipated and the first round of market shakeouts have already begun. It’s no wonder that potential buyers are proceeding with caution.

It is with this situation in mind that I offer the following advice to prospective ASPs. While the final winning strategy may not be obvious yet, some clear trends are emerging. Potential buyers of ASP services should consider these points as well, since they may shed some light on the seemingly erratic behavior of the ASP marketplace.

As traumatic as the ASP model may be to an ISV's long cherished methods of doing business, to potential buyers it is merely a delivery option for a desired set of functionality. The buyer wants an ERP system, office productivity software, or perhaps an accounting package. The ASP model is simply an option for renting and supporting that application. If you don't have the right functionality, being an ASP means nothing. If you do have the right functionality, keep the buyer's viewpoint in mind. Focusing on the ASP model first is silly. It's as nonsensical as focusing a consumer on rent-versus-buy before considering whether that consumer wants a car, a house or a floor sander.

One of the most common mistakes made by potential ASPs is assuming that because a solution is good for them, it must be good for potential clients. The mechanics of Internet delivery make it possible to provide almost any type of software through an ASP model, however, some categories of software offer far more compelling advantages than others. Currently, these categories are:

• High-end software that the buyer could not otherwise afford. The ASP model enables smaller organizations to gain access to ERP systems and other large-scale applications without a massive investment in software and hardware. The desire for the functionality was already present; the compelling value proposition for the ASP is reducing the buyer's barrier to entry.
• Integrated, end-to-end solutions. ASPs are unlikely to capture the core applications of a Fortune 500 company, but they can cover the functional needs of a department or small company. If the services are sufficiently comprehensive, the buyer can eliminate the cost and overhead of operating its IT organization and equipment. Since the ASP's operational costs are spread over many clients, the buyer reaps considerable savings. These solutions are most attractive to organizations with little interest or expertise in technology. To provide a compelling value proposition, the ASP must offer enough functionality to cover all of the buyer's needs and single -point-of-contact support. If the ASP functionality is insufficient, and some portion of functionality must remain in-house, then the value proposition weakens by forcing the buyer to retain its IT organization and equipment.
• Freestanding function or service. For an ASP, the lowest barrier to entry is to provide new functionality that does not require integration with existing systems. Web-hosting is a classic example of this type of service. The buyer gains fast access to the desired functionality while avoiding the investment in new software and equipment. To be successful in this category, the offered service must not replace an entrenched application and must be able to operate independently from the buyer's IT organization. ASP services in this category are likely to be the first to penetrate the Fortune 500.

Within these categories, different types of ASPs will dominate. Due to the nature of the software, only the largest and best financed ASPs will succeed in the first category. Specialist ASPs with strong domain knowledge in a vertical category such as healthcare or retail will dominate the second category. ASPs lacking this type of vertical integration will have to gain end-to-end functionality through partnerships and acquisitions. ISVs without end-to-end offerings will be locked out of the market unless they partner with a successful ASP. The final category is wide open, but will experience the greatest fallout from poorly positioned offerings.

Application functionality and potential cost savings may hook the buyer, but the quality of service will keep them. Loss of control is one of the greatest concerns cited by potential buyers of ASP services. Renting a critical application from an ASP makes the buyer completely dependent on the ASP's performance. Fear of poor service is driving down the initial term of ASP agreements to as low as one year. Since ASPs typically invest heavily during the first year of a customer relationship, loss of a customer after the first year is financially traumatic.

While ownership of their software assets gives ISVs a financial advantage in becoming ASPs, many lack the outsourcing and customer service skills to achieve success in the long run. Twenty-four-by-seven support and guarantees of performance are alien concepts to many ISVs. Making the transition from software provider to service provider will be difficult for these companies. To come up to speed, they should study and adopt the practices of the traditional outsourcing industry. Outsourcers have years of experience and have learned many painful lessons in customer service. For example, high quality service level agreements (SLAs) are essential to protect both the ASP and the buyer. Few buyers will accept the types of disclaimers contained in a typical software agreement. SLAs set the buyer's expectations and focus the ASP on the most important issues. Meeting the measures defined in the SLA proves that the ASP is satisfying its commitments and bolsters the odds of contract renewal.

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The ASP market is still in its infancy and many changes are yet to come. As they gain a fuller understanding of their new model, ASPs will get better at designing, marketing and delivering their services. In the meantime, my advice to ASPs boils down to three simple things: talk my talk, give me something compelling and support me!