Picking a winner

Not all the ASPs will make it past the starting gates. When it comes to betting your business on one, you can't afford not to be choosy.

By Lauren Gibbons Paul
Network World, 01/22/01

Technology Insider The application service provider business reminds Troy Tate of Jenga, the game where you pile up wooden blocks and see who can strategically remove them without making the stack come crashing down.

"The ASP is still a very shaky structure, "says Tate, corporate network manager for the $677 million CTS Corp., an electronics components manufacturer in Elkhart, Ind.

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Tate is in talks with Corio and a few other ASPs to see how they can run the customer relationship management application that CTS is planning to implement. Of particular concern to him is that many (if not most) ASPs outsource the networks they use to deliver applications to their clients. "ASPs are pulling out blocks and then having other people stack them on top. It makes me a little nervous, "he says.

T. Tate Tate isn't alone in his worries. ASPs can be alluring to companies that lack the time, money and IT staff to implement today's ultracomplex software applications. But ASPs are unproven. The largest ASPs - among them Breakaway Solutions, Corio and USinternetworking - continue to post losses.

It's a bit early to expect ASPs to be profitable, especially as they scramble to overcome user fears and weather the funding drought. But last year saw the earliest tremors of a coming market shakeout as Pandesic and Red Gorilla closed their doors. While estimates vary on the number of ASPs doing business today, 250 to 500 is the best guess. Not all will survive.

Because you don't want to sign up with an ASP that's going to leave you high and dry, you need to know the right questions to ask and how to perform due diligence before you sign on the dotted line. For starters, there are several types of ASPs. Don't bother going through the effort of investigating one until you know roughly which category meets your needs. It's always important to investigate the firm's financing, cash reserves, revenue, business partners and plans for going public.

Survival of the fittest

Market researcher Gartner Group estimates that only 40% of current ASPs will survive in their initial form until mid-2002. The rest will crumble due to inadequate business models, mismatched business partners and failure to execute. In a recent report, Gartner went so far as to predict grim consequences if ASPs begin to fail in great numbers. The research company believes that will occur because each failure will cascade through the economy and cause other businesses to go under.

It's not a pretty picture, agrees Amy Mizouras, senior analyst for IDC. "We see most of the consolidation being in the form of companies shutting down, as opposed to mergers and acquisitions, "she says.

The greatest struggle facing all ASPs is the need to build repeatable business processes and configurable software that can be easily tweaked for use by multiple customers. "Right now, we're still in the one-to-few stage. There are few customers out there, "Mizouras says.

That's been a problem for ASPs because they don't begin to recoup their costs until their customers have been in place for months or even years.

When Tate began to investigate the possibility of using an ASP last year, he was immediately struck by the fact that most ASPs are only a few years old - at the most. The immaturity didn't do much for his comfort level, especially because CTS got its start making hand-crank telephones a century ago. "We have a legacy of stability. How can they show us they're going to be around for the next 100 years? I look for stability from the very beginning," he says.

He approaches each ASP with a list of questions, ranging from how it will service users with varying types of network connections to describing some of the typical pitfalls that crop up during the implementation phase. He also asks if the ASP can provide 24-hour support worldwide, but hasn't found an ASP that is ready to do so.

Most important, Tate says, is to speak to current ASP customers - not just the supplied references, but anyone you can find who uses the ASP. Tate recommends going to ASP trade shows and posting on ASP discussion forums to get the lowdown from the trenches.

Choose carefully

Don't expect to rush your selection of an ASP. When Victor Inglese, global project manager for DaimlerChrysler Capital Services in Norwalk, Conn., was looking for a service provider to host SAP AG's R/3 enterprise resource planning suite early last year, he was eager to have the process go quickly. Inglese thought he would be able to evaluate three ASPs and pick the best one within two weeks. "We were either naive or aggressive in our approach, depending on how you look at it, "Inglese says.

"We quickly discovered the ASPs are new at this. There's a lot of inconsistency in the data you get, "he says. Inglese had to slow down and start asking a lot of pointed questions rather than waiting for the ASP to provide all the information he needed. Finally, after six to seven weeks, Inglese felt ready to choose Qwest Cyber. Solutions.

For Randy Gardner, vice president of IT for Viking Freight in San Jose, the ASP choice was easy. When IBM announced in December 1999 it would no longer support AS/400 on which Viking ran its Infinium financial, human resources and payroll applications, he chose to let Infinium run its own application for Viking. "We figured, who better to run the system than Infinium themselves," a seemingly stable company that was founded in 1981, Gardner says.

At DataCert.com, a legal software vendor in Houston, the question wasn't whether its chosen ASP, Interliant, would survive, but rather, whether DataCert would survive. "Early on, we were a two-person company. We didn't worry about their viability a whole lot, "says Eric Smith, vice president of software. DataCert has 25 employees, and Smith believes he has a winner with Interliant.

The niche players and the ASPs that can achieve critical mass will survive, says Liza Henderson, vice president of consulting for TeleChoice. "All the guys in the middle that look the same and sound the same will not," she says .

ASPs that host multiple applications are more likely to stay aloft than those that host a single application, according to Henderson.

And those that provide content and on-site services are the likeliest of all to thrive. "Any time they're putting people on site, that increases the survivability, "she says.

To protect themselves, customers should be certain to make provisions for an escrow service to take over in case they need to change ASPs or the provider goes out of business, says Nathan Ridnouer, ASP director for the Information Technology Association of America in Arlington, Va.

For example, if the ASP outsources its data center to a hosting firm such as Exodus Communications, there should be a clause in the contract stipulating that the customer has the right to have the application kept up and running should there be a disruption in service from the ASP.

Who will survive?

ASPs that have the best chance for long-term viability are those that either work with or replace entire business processes rather than those that focus on lower-level commodity services.

Survivability scale: increasing involvement in business processes:

Business process outsourcing

Content

Applications

Content delivery management

Hosting

Data centers

Network and access

Source: telechoice