ASP Advisor hed: Reality check dek: are you ASPing for trouble by outsourcing? dek: low-cost broadband access services will play a big role in the success of an ASP. by Don Fitzwater

It might be wise to pause for a moment and survey the ASP marketplace. A lot has been happening in the high-tech sector in the first few months of this year. Chaos is reigning supreme. On one hand, you have analysts predicting major doom for the ASP sector. On the other hand, you have other analysts upping the ante by predicting even larger growth figures for the ASP market. Which camp is right? Which one is wrong? Or can both be right? One thing is for certain: The winds of change are blowing strong this year.

And regardless of who gets the numbers right, the thing that will prove most important to you is how all this change is going to affect your outsourcing plans. Let's examine the trends that seem to be developing in the ASP sector as a step toward helping you successfully negotiate the changing outsourcing landscape.

Good news and bad news

A recent study completed by AMR Research predicted that 60 percent of ASPs currently in business will be gone by next year. On the face of it, that all sounds pretty grim, especially given the skeptical financial environment the whole industry finds itself in these days. Throw in the fact that ASP business models seem to be in constant flux and "grim" might sound like a bit of understatement.

Other analysts, while acknowledging the negative trends, are still optimistic about the ASP and outsourcing marketplaces. According to analysts at Framingham, Mass.-based International Data Corp. (IDC), 2001 should prove to be a mixed bag for ASPs. IDC feels that some ASPs are sure to lose the battle to survive as they fail to define and then successfully execute on their business models. On the other hand, they also see great rewards for those operations that get their acts together.

"It is going to be a billion-dollar market this year and for those who understand their needs and play wisely, the best is yet to come," according to Jessica Goepfert, an IDC analyst.

Goepfert says happiness will likely depend on adapting to customer needs, such as integrating a company's existing application software with newer ASP-provided software.

IDC's positive attitude about the ASP market is also shared (with some reservations) by the folks over at the Meta Group. In a recently published report, the Meta Group said that while they believe most ASP start-ups will disappear, the mainstream outsourcing market will grow 20 to 25 percent per year through 2005-06 from its $100 billion base in 2000. But the path to all that growth is not without some significant challenges, according to the report. In the Meta group's opinion, only the large outsourcers, which already have the necessary data-center infrastructure and experience in integrating and customizing applications, are likely to have the staying power to survive in the ASP market.

Keys to ASP survival

Industry analysts say there are several elements in an ASP's ability to survive. One is cost. Starting an ASP entails large sums of money, and most ASP start-ups will be looking at two or more years of operation before attaining any kind of profitability (if they ever do so at all). Being a start-up ASP takes deep pockets and the courage to deal with many risks. The pioneers in the marketplace are faced with the fact that big software companies and even small upstarts may have a better chance at success than the early adopters because these newcomers have learned from the early adopters' mistakes.

Another key is that in order to be a successful ASP, a company has to do much more than just license its software. Most of the ASP companies interviewed by researchers from the Meta Group charged extra for integrating and customizing their software. They see those services as profit centers and difference-makers for ASPs. Indeed, the Meta Group's research points out that ASP prices can jump 200 to 300 percent when even modest levels of customization are required. Software companies that attempt to start their own ASPs soon discover that they need to develop much deeper knowledge of specific markets and integration techniques than they currently do.

Strategic partnerships between software vendors and large outsourcers may well be a pathway to survival. Over the next couple of years, large outsourcers will begin to leverage their infrastructures and technical expertise to provide ASP service delivery. Software vendors will have the opportunity to significantly increase sales into these market segments through such partners, especially if they are willing to consider alternatives to traditional license-sale business models in support of ASP efforts.

Low-cost, accessible broadband access services will also play an important role in the success of an ASP. Currently, a lack of such connectivity is clearly an impediment to ASP growth and success. Access costs and bandwidth deficiencies are contributing to some early ASP customers' unhappiness with outsourcing. And keep in mind that cost takes on even more significance during an economic downturn. Cheap, plentiful bandwidth is a must.

Growing ASPirations

So what do these trends mean to you as a prospective customer of an ASP?

First, you need to be aware that despite all the public handwringing, and the fact that application service providers haven't lived up to all their hype, they aren't dead yet either. IDC says the service provider market, which today consists mainly of ASPs, MSPs (managed service providers), and NSPs (network service providers), will expand to become a $400 billion industry by 2004, up from $115 billion last year.

The ASP market alone is currently worth $1 billion, exceeding the $800 million that IDC had originally predicted. That kind of money is not only going to keep existing ASPs in the game, but it will also serve to attract plenty of new players. In other words, more choices for you, with competitive service pricing to boot.

Second, you need to be aware that any ASP you choose may not survive in the long run. If you choose an ASP to host your company's applications, you must be prepared to move to new service providers if your present vendor fails financially. Your company might use an ASP for small applications or to support peripheral operations, but should be cautious about committing to an ASP version of a highly customized, central system such as Enterprise Resource Planning (ERP) or Customer Relationship Management (CRM), which would be more difficult to move.

Also, you need to keep security in mind. An ASP that assures heavy-duty encryption or a virtual private network is a must for any company that puts its data on an ASP's server.

And finally, to help resolve the confusion from some of these conflicting analysts' reports, you need to understand that what constitutes an ASP varies depending on who you listen to. For example, the Meta Group talks about "pure ASPs" and "large outsourcers" in its report. They state that pure-ASP vendors are still not profitable. They are fairly pessimistic about pure ASPs' survival chances. The Meta Group's analysts see only the large outsourcers as likely candidates for having the staying power to survive in the ASP market. Other analysts lump both of these types of players together under the heading of ASP, so you can begin to see how the experts can predict the failure and the continuing success of ASPs all within the same time period (and sometimes within the same report).

If you decide to take the plunge, ask hard questions about security, data backups, data ownership, reliability, and business stability. Negotiate a tough service-level agreement. And have a disaster-recovery plan in place from the outset. While an ASP might be your company's savior, you really need to know that your business can continue without undue interruption even if your ASP doesn't.