How to pick and choose in the new ASP world

It's time for my annual column on application service providers. The collapse of the dot-com sector raises questions about all IT market segments feeding off those successive rounds of capital.

It’s time for my annual column on application service providers (ASP). This isn’t just because I’ve been widely quoted in the US media recently as saying they will disappear (and need to explain myself), but also because the collapse of the dot-com sector raises questions about all IT market segments feeding off those successive rounds of capital.

The real story about ASPs is that some will disappear, others will be acquired and many more will adjust their business models to make up for the collapse of their dot-com customers and to deal with customers’ changing needs. And a lot of hype will disappear.

The ASP business model has always looked good on paper: let somebody else buy and manage complex enterprise application packages while you go about running or supporting your core business. Indeed, the number one reason early ASP users chose that model, according to International Data Corporation research, was so they could "focus on core business". The second was to cut down on application implementation costs. ASPs would make money based on economies of scale centred around application expertise and infrastructure investment.

But if any ASPs thought that all that customers wanted was access to software owned by someone else — dial-an-app, if you will — they were mistaken. The problem that users really want ASPs to solve isn’t one of software ownership but one of integration with other applications. Some of these other applications will be in the ASP’s product set, with more, probably, in the user’s own environment.

As a result, the basic ASP business model will morph from one of renting software access to one of delivering services. This changes how companies will make money in the business.

IDC research conducted toward the end of last year, in which early adopters were interviewed, confirms this. The choice of services offered by ASPs ranked higher in importance among early adopters than did which applications the ASPs supported. Having contractual service-level agreements ranked number one, with integration services ranked second. What are the takeaways? Based on the research and some common sense, it means the following:

  • First, you shouldn’t dismiss the ASP alternative just because a market consolidation is under way. IDC still expects the US market to double to more than $US1 billion this year.
  • Second, you should evaluate your ASP like you do your big vendors — the top four success criteria seeming to be (1) ability to scale, (2) applications offered, (3) the range of services offered and (4) the stability of the management team.
  • Third, at least for this year, you also need to evaluate your ASP’s financial staying power. Will it be able to survive? What percentage of its customers were dot-coms? How does cash flow look? Can it keep the people you need to run your applications?
  • Fourth, you also need to evaluate the staying power of your ASP’s business partners. Who’s actually running the data centres? Will that company survive? Who’s offering customer support? Is the software vendor going to bail out?

This will be a frenetic year in the ASP space, as companies buy and sell each other, rejigger their business models, adjust their marketing plans and reposition their services. It will be confusing.

You might also consider choosing another abbreviation by which to refer to your ASP. The dot-com crash could drag the acronym through the mud, and ASP will have a different connotation this year than it did last year.

Gantz is a senior vice president at research company IDC in Framingham, Massachusetts. Send email to John Gantz.

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