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Thinking the unthinkable

What happens when your ASP fails? ASP advisor hed: Thinking the unthinkable dek: What happens when your ASP fails? by Don Fitzwater

Fact: Outsourcing some or most of your business’s critical applications can be a godsend in the form of reduced costs, improved service, and reduced support issues. Fact: Such outsourcing has a darker side–a side so dark that in some situations the very existence of your business might be threatened. Think about it: What do you do when your ASP fails?

ASP industry groups don’t like to talk much about such things. They’d rather focus (naturally enough) on the positives about the industry and its great potential. But if you do (or intend to) outsource any mission-critical business applications to an ASP, then you’d better think about this question. And think about it before you have to come up with some good answers to a particularly nasty question.

Failing to plan is planning to fail

And, truth be told, the chances are likely that you will have to think about it sometime in the next few years if you are outsourcing mission-critical apps. GartnerGroup of Stamford, Conn., predicted in August 2000 that as many as 60 percent of the then 480 ASPs operating could fail by the end of 2001. Gartner also estimated that by 2004, the number of viable ASPs will shrink further, with about 20 focusing on enterprise-class applications such as ERP and 100 more offering single-function applications. And Gartner’s predictions are starting to be realized.

Last year saw a crop of ASP consolidations. Since then, smaller providers that had developed niche applications specifically for the Web have been hit hard. Even the larger ASP pioneers that are focused on enterprise applications, such as USinternetworking Inc. and Corio Inc., are battling declining stock prices.

A growing number of ASP customers are learning that when a provider fails, they have to make difficult choices about whether to take over management of the technology themselves or investigate new ASPs. They often face tight deadlines by which to make a switch, as well as to avoid downtime and lost productivity. All the while, they must navigate new ASP contracts and settle difficult issues about the migration of data and application set-ups, whether in-house or to another ASP.

As serious as this sort of situation is, it doesn’t necessarily mean companies are giving up on the ASP business model. One ASP’s failure doesn’t always deter customers from using an ASP. This is especially the case when dealing with applications that are somewhat less than mission-critical. Affected companies sometimes turn to surviving ASP competitors, and those providers are more than happy to pick up the new business. Many ASPs have even begun to target customers of failed competitors as a way of acquiring more business.

And even if the unthinkable does happen, it’s possible that the failed ASP itself may arrange part of the solution. Sometimes, a failing ASP works out details in advance for customers, partnering with a competitor to take over service and migrate customers. This was the case last year when ASP HotOffice.com realized it was running out of funding and would have to cease operations. HotOffice.com contacted one of its competitors, Intranets.com, about taking over servicing HotOffice.com’s customers. Intranets.com helped HotOffice.com’s customers migrate their data and information out of HotOffice.com’s systems and into Intranets.com’s systems.

The smooth transition gave HotOffice.com’s customers very little disruption to their businesses. But not all ASPs will be so helpful. Some will just cease operations with nary a warning word. One day your applications are running fine, the next you can’t access your ASP or your outsourced apps.

Warning signs

So how can you tell if your ASP is in trouble before you find yourself left high and dry? One thing to do is watch for signs that all is not well. For instance, deteriorating customer service or the performance of your outsourced applications might be a sign that things are not going well for your ASP. Another thing to keep in mind is that ASP enterprise application often struggles to scale to support a large number of customers. But not all warnings are as obvious as deteriorating customer service or badly performing apps. Current and potential customers also need to dig into a provider’s financial situation. If the provider is public, that means reviewing recent quarterly reports and finding out how much cash it has left. If it’s private, it means grilling the ASP about its financial performance (hopefully up front before you sign any contracts).

Paying attention to such details can help prevent the hassle and costs of recovering from an ASP that has gone south on you.

Market realities

There are two powerful forces impacting the ASP marketplace today. The first is the inevitable fallout that occurs as an industry matures. Weaker operations (or poorly executed ones) will start dropping out of the race while others continue to grow and become stronger. The second force is market consolidation. The larger, more successful ASPs will buy or merge with some of their competitors. The result is that your ASP might cease to exist or, once merged into another operation, change the focus of the market segment that it serves to better match those of the company that acquired it.

As the ASP market consolidates, it’s better for customers to be prepared than caught by surprise. Here are a few tips that may help you to prevent an ASP disaster for your company:

Do the math. Crunch the numbers. Check an ASP’s financials and delve into its business model. If the ASP is struggling financially, you may want to start heading for the lifeboats now. Be particularly cautious if the ASP is offering an advertising-supported free service, this ASP business model is definitely one of the riskier ones.

Talk to the ASP about its current customers. Try to talk to existing customers. Analyze an ASP’s customer mix to avoid those relying too heavily on dot-coms. Find out an ASP’s retention rates if it’s been around long enough to have contract renewals. Also, check its rate of sign-ups if it is a relatively new operation.

Have a buyout plan for the applications you use. Many ASPs own the licenses for the software or amortize the cost for the customers over time. Either way, make sure your contract contains a way to purchase any necessary licenses outright. You may have considerable resources sunk into training employees in the operation of the provider’s applications. Being able to purchase those applications and find a home for them either in-house or at another ASP may represent considerable savings over starting over from scratch.

Own your data. Keep ownership of data clearly spelled out in your contract with an ASP and devise a procedure for obtaining, backing up, and transferring that data should you need to. You don’t want to find that you don’t have access to all your customer data at the same time you lose mission-critical services if your ASP goes under.

Have a business-continuation plan. Have a course of action already laid out with responsibilities assigned, alternate providers (or the decision to move things in-house) already in place for dealing with an unexpected ASP failure. Just what will you do (and who, in your organization will do it) when you log on to your ASP-provided system and find it is not there?

Caveat emptor

For companies using an ASP or considering outsourcing to an ASP, one thing is clear: More up-front due diligence and the inclusion of service-level agreement provisions that ensure migration of data and software licenses are absolutely vital in order to avoid an ASP-caused meltdown.

Contributing Editor Don Fitzwater is a principal partner in Interface Solutions, a Minneapolis consulting firm.

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