When the application service provider (ASP) model was introduced, it was hawked as the wave of the future, a way for small businesses to get networked, grow quickly, and take on industry Goliaths with minimal pain and expense. But like most ideas that turn out to be too good to be true, the ASP vision got trashed faster than an overstock of Pets.com puppets.

Although many high-tech endeavors were touted as the next big thing, ASPs did seem to have some nice reality behind the hype. Basically, they aided small and medium-sized businesses (SMBs) by buying, upgrading, and maintaining software and offering them access via the Web for a set monthly fee. The most popular applications have been financial and accounting software, e-commerce applications, and e-mail and messaging programs. Because many smaller businesses can't afford these kinds of high-powered software applications, here was a way to finally level some of the playing field.

However, the promise suddenly became a false one. Larger ASPs like Red Gorilla and Pandesic flamed out, and smaller providers followed suit. Unlike the rocky ups and downs seen in other sectors, ASPs simply plummeted in a short time, leaving only upset customers and disappointed investors to survey the wreckage.

Today, those in the industry are hoping that SMBs are willing to take a second chance on loving them. Although the ASP model is still far from perfect, survivors of the shakeout have worked for the past year on streamlining their offerings, beefing up security measures, and paying more attention to customers. The result, they believe, is a model that delivers more value than hype. Now it's up to the SMBs to decide if they're right.

Shake, shake, shake

In 1999, ASPs didn't have to try to convince SMBs that they were worth the fees. Venture capitalists were throwing money at start-ups at a prodigious rate, even though the industry was all promise and no proof at that point. By 2000, there were about 480 ASPs in the country. Two years later, the shakeout has slashed that number by up to 60 percent, according to the Gartner Group.

The fault for the crash and burn, those in the ASP industry say, was not in the model, but in the questionable business practices of those who rushed into opening shop and signing up customers in the Internet land grab of the late '90s. Sketchy business plans, lack of differentiation from competitors, and poor customer service all served to poison the industry.

Joel Sider, communications manager of Seattle-based data mining firm digiMine, notes that although the turbulence may have been violent, it certainly wasn't unusual. "The model has taken the roller coaster ride of the hype cycle, but that's pretty common in the tech industry," he says. "You see it with Linux and wireless now. ASPs enjoyed overblown excitement and then as companies began using the model, it fell into the trough of disillusionment, as they say." It may not be comforting to former clients of Red Gorilla, but it shouldn't have surprised them that something so new could go so awry. Sider says, "With any new concept or model there's going to be a lot of people trying to capitalize on it, and then naturally there will be a thinning of the herd. The fact that a good percentage of ASPs that started out have failed is to be expected. But now that it's been proven, CIOs and tech folks are seeing it as an option again." Some former customers may still flinch, however. Since ASPs targeted their services at SMBs, many smaller companies adjusted their way of doing business and wrote quite a few checks, only to find themselves in the cold when ASP doors closed. Data was compromised or lost, and the resulting perception of many small-business owners--that all ASPs are bad--has been hard for the industry to shake.

The remaining players are working even harder to convince SMBs that the model is still valuable and potentially a goldmine for smaller businesses. Shane Jones, president and CEO at Seattle-based software development company eProject, is optimistic that the industry can get back some of its former glory.

"There was a huge amount of distrust when people lost data and these companies went out in a burst of flame," he says. "It's taken a long time for this market to regain credibility. Fortunately, the shakeout happened really fast, it was pretty much done by mid-2001, and all the bad companies were gone. That left good companies with the task of rebuilding credibility, which we've done in 2002. Now we can move ahead."

Renovation project

One sign that the service model truly may gain new respect is that ASPs aren't depending on their PR machines to change perceptions. Rather, they're focusing more on meeting with their customers instead of their investors, and SMBs are responding to the attention.

At Redmond, Wash.-based expense management software provider Concur Technologies, frequent check-ins have become routine, as they have for many ASPs. Senior director of product marketing Chris Juneau says that the company calls each customer monthly for a chat about how they like the service, what kind of product features they'd like to see, and how they'd want the company to improve its practices. Although this is more often than some people call their family members, Concur goes even further by sending out an e-mail newsletter and also doing surveys. National and regional user group meetings round out the feedback cycle.

"The reaction has been great," Juneau says. "Our customers feel that we're listening, because we are. They know that often their suggestions end up in the product, and that's a huge benefit for them."

Michael Christian, senior vice president of San Diego-based Web analytics firm WebSideStory, agrees that this ability to tap into customer feedback is one aspect of ASPs that SMBs are finding quite refreshing, and worthy of loyalty in return. He says, "We have more ways than a software company to get a customer's ear. For one thing, we don't waste any time or consulting resources telling them how to install and maintain the software, since we do that here. So all of our time spent with customers is focused on how they're using it, and how they'd want it to be better."

He adds that this has been setting up a nice exchange for the past year. "It's a very healthy relationship between the vendor and the customer," he says. "They don't expect us to give them software that's a tool to solve their problems, they expect us to solve their problems. So we constantly add value to the service, and they constantly pay us to do it. It's a good arrangement." Because ASPs can move quickly, acting on those customer suggestions is easier for them than it is for software houses that have to spend much more time on development and delivery. The speed at which an ASP can add new features to a product has turned out to be another major selling point for the model.

Christian calls the ASP development time cycle "the secret killer competitive edge that nobody ever talks about." Basically, a software company takes one to two years to do a single major release, because they have to develop the product for multiple platforms and anticipate a variety of environments. Once they get most the development done, then comes the debugging and product testing. But since an ASP hosts the application, and can debug centrally rather than sending patches to users, it can do two to four major releases every year and tweak features even more often.

The result is that customers see constant updates, usually based on their input, and fewer bugs. They also see them rather than having to deal with them directly. Ease of use is another compelling aspect of signing up with an ASP.

Stephen Wolfe, vice president of product development at San Mateo, Calif.-based application provider NetLedger, says, "One of the big benefits of an ASP model is this whole notion of nothing to install, no databases to configure, no systems to deal with. It's just as simple as logging in and turning on the features you want." For SMBs, this is an especially attractive arrangement, since buying and working with applications can be pricey and sometimes time-consuming for installation and maintenance.

Which brings us, as all discussions about business matters will, to the question of cost. In the current economic climate, with belts not just tightened but hocked, SMBs are finding outsourcing of employees to be an effective solution, and that line of thinking lends itself to application outsourcing as well. Many ASPs are now offering multiple price levels, usually depending on number of users. SMBs with few bodies in the office can find themselves paying a low monthly fee to use an application that they couldn't have afforded with even double the revenues. Also, the more SMBs that are signed up at an ASP, the lower the fee becomes, since the model depends on distributing the cost.

"We're running the kind of application that no single customer could justify," says Christian. "But we're able to spread the costs over thousands of customers, so each company ends up getting it for $30 a month. That's the benefit of an ASP."

The road ahead

As far as ASPs have come in conquering old perceptions and attracting the attention of SMBs, they still have some terrain left to cover before the model is widely adopted.

For one thing, definition continues to be a problem. When ASPs were first launched, a host of firms jumped under the umbrella term, and soon it was difficult to pin down exactly what an ASP did. As some companies expanded their offerings to include Web hosting and multiple business functions, they began calling themselves MSPs, or managed service providers. Others claimed they were merely ISVs, or independent software vendors, with a Web-based delivery method. The alphabet soup proved confusing, and less than palatable.

Keith Raffel of Mountain View, Calif.-based CRM provider UpShot says, "I think it's muddled what an ASP is. When I look at UpShot, we're a software company, we just have a better way of delivering it. It's as if you took Hertz and General Motors and said they're part of the automobile industry. That's true, but the business model is very different. In the same way, the term ASP has been used to describe a mishmash of companies with very different business models, and we've been tarred by that brush."

ASPs also have yet to fully address today's issue du jour: security. Bernie Cowens, vice president of security services for Irvine, Calif.-based security firm Rainbow Technologies, says there are definitely security concerns to keep in mind with ASPs.

"The industry suffered for a number of reasons, not the least of which was how security was handled," he says. "Today the market has stabilized a bit, but security is still a tremendous issue, especially for small businesses." Cowens notes that large companies tend to use high-end packages that have better security built in, and security on staff to monitor electronic issues. He says, "Small companies have a challenge, because ASPs that host applications make up their costs with volume, so a lot of SMBs will be on the same server, they may even be sharing the same database. The small-business owner has to make a point of making sure that the security is rock-solid." If SMBs can work with ASPs to iron out the kinks in the system, however, the model may truly have a shot at climbing out of the trough of disillusionment and finally becoming what so many in the industry have wanted it to be: worthy of the hype.