Your ASP has closed shop: Now what do you do?

AUSTIN, TEXAS - Application service provider Agillion is operating with a skeleton staff these days: 20 employees, mostly developers, who are supporting the company's existing customers as executives shop for a buyer.

It's another casualty in a tough funding market that is creating woes for more than just ASPs. Companies big and small are dealing with hard times as the economy slows.

For companies wary of the still young ASP market, however, the recent demise of several firms is cause for concern. What do you do if your ASP goes under? How do you know if it will? There are no easy answers, but the experience of one jilted customer offers a few clues.

Since last summer, several ASPs have fallen by the wayside, including Pandesic, a joint venture between Intel and German software firm SAP; Red Gorilla, which offered an online time and billing application; HotOffice.com, a virtual office services company; and iSearch, which marketed Web-based recruiting applications.

Robin Muhlheim, senior manager of staffing and development at ESI, a Portland, Ore., manufacturer and designer of parts for electronics, was an iSearch customer. Last November, ESI went live with iSearch's online recruiting service. In February Muhlheim got a call saying the ASP was going under. Now Muhlheim is looking for another ASP.

"It's like a crapshoot again - who is going to be left standing?" Muhlheim says. "Hopefully we pick that one."

For years, ESI had used a manual system to handle resumes and the hiring process. But with more than 20,000 resumes flooding their offices in the past year alone, executives decided it was time to outsource the process. Muhlheim says ESI looked at eight ASPs before settling on iSearch, and it took four months to implement the system.

Now that she's in the selection process all over again, Muhlheim says that in addition to cost and functionality, an ASP's financial situation will be a key factor in any decision.

"Last time we pretty much just took iSearch's word that they were in good shape," she says, adding that she checked out the company's customer list, which included names such as Sears, and called references. Now Muhlheim says she's talking with CFOs and getting a look at financial statements. "It's definitely a lot more escalated this time. But even with all that there's no guarantee."

Nevertheless, Muhlheim remains committed to the ASP model and says that ESI saves time and money by not handling the software in-house. For the moment, ESI is one of about a dozen former iSearch clients that have turned to BrassRing, an ASP that also hosts a Web-based recruiting service. BrassRing offers a 48-hour installation and a month-to-month contract, which lets companies leave whenever they choose without penalty.

Muhlheim says BrassRing lets ESI keep an active Web page for job candidates while the company decides what to do next. And the thousands of ESI resumes that were stored on iSearch servers?

"They told me that we would receive [the data] two weeks ago," Muhlheim says. "I'm holding my breath that that tape arrives." ISearch did not return phone calls from Network World.

Just in case, she says, after hearing about iSearch's pending closure, she and her staff spent about a week manually pulling all information about candidates they were interested in off the system and printing it.

Data recovery is one area that experts agree businesses should focus on when negotiating with an ASP. Muhlheim says ESI did have an exit strategy in place in case of problems.

"But really all you can do is ask for your data back," she says. "It just comes down to that."

As for Agillion, a spokeswoman says the company will continue to support existing customers and plans to transition them to an Agillion buyer.

Agillion seemed positioned to make it through the long haul. Launched amid much fanfare by technology industry veterans Steve Papermaster and Frank Moss in 1998, the company reeled in more than $40 million in funding from investors that included Goldman Sachs and Cisco in 1999.

But the firm was stymied by a tough funding climate this winter and was unable to get a second round of investments. It had secured about 70% of the $30 million it was seeking, but when it couldn't close on the balance, all the investors pulled out.

"You look at that and say, it doesn't matter what company, it doesn't matter what kind of management team," says Diane Myers, program director for ASP Competitive Strategies at market research firm Stratecast Partners.

Myers and other analysts expect a shakeout in the ASP market over the next year. Gartner Group, in fact, predicted last summer that 60% of ASPs would fail by next year. At the same time, analysts also agree that ASPs will not go away, but will grow into a multibillion-dollar market by 2004. The question is who will be there to share the multibillion-dollar pie.