An Insider’s View of the Future for ASPs | Article

Farris WheelThe Ferris wheel attracted more attention at the World’s Fair in 1893 than Buffalo Bill’s Wild West Show or the belly dancer, Little Egypt. Everyone was talking about it, and a lot of people made money from it. One of the giant revolving wheel’s wonders was that it could provide amusement for so many passengers at the same time — 36 cars on the steel framework, each holding 40 passengers.

Application Service Providers (ASPs) attracted more attention than anything else in outsourcing in 2000. Kirk Krappe, senior vice president of products and markets for Corio, Inc., one of the industry’s pioneers and leading ASPs, predicts even more incredible growth in this arena for 2001.

In order to be competitive, he says, companies need enterprise applications. Without the services of an ASP, a company must have access to capital and IT resources with specific application skills for configuring the system, implementing the software, managing and maintaining the solution — all while focusing on their core business.

“The underlying forces driving the ASP marketplace are only getting stronger,” comments Krappe. He lists those forces: demand for web-based applications; unfulfilled ERP expectations; scarcity of IT skills; mid-market explosion and bandwidth expansion. “ASPs take those burdens off the table for the end user customer; so it is a very attractive value proposition,” claims Krappe. And it can be accomplished at a lower total cost of ownership for the customer.

Huge Demand in 2001

Although the ASP model has been ideal for small to mid-size companies thus far, Corio’s Sr. VP says the company has recently seen increasing demand from large companies. In the 1990s, he explains, large companies installed ERP applications but went through a great deal of pain in doing so. They found out, the hard way, that ERP implementation was not easy, cost more than was budgeted and took longer than they had expected. “They also learned that there was nobody accountable to manage the process end to end,” Krappe says.

Today, SAP, Siebel, PeopleSoft and Oracle’s applications that were previously implemented by large enterprises have all released versions of their software that are pure Web-architected; and all those companies that completed implementations in the 90s need to upgrade into the new application suites. They haven’t forgotten their pain the first time around. They don’t need to be sold on using an ASP the second time around. “The ASP value proposition is very compelling because we are accountable for the end-to-end process,” comments Krappe.

“Many companies are upgrading now” to Microsoft’s recent release of its Exchange 2000 email system, he says. Demand for CRM and supply chain management solutions is growing significantly — “we see a large pipeline in Siebel currently.” B2B exchanges are exploding, and Corio recently began hosting the global energy procurement exchange called Enporion . “We expect more of these exchanges demanding ASP services,” Krappe says, “and the deal sizes are significant.” Everywhere you look, the demand for ASP solutions promises incredible growth in the next 12 months.

In Europe and Asia, typically lagging 12-18 months behind the U.S., he says there is growing awareness of the potential in ASPs. “In Europe everyone is talking about it. In Japan, there are a lot of companies on the ground actually building up ASP services. I think 2001 will be the year for Europe and Japan,” states Krappe.

Big Changes on the Supply Side

Krappe categorizes ASP suppliers as (1) pure plays (such as Corio); (2) infrastructure management companies (such as the telecos, Exodus, Loudcloud); (3) legacy software vendors that have an ASP division (like Oracle and PeopleSoft); and (4) vertical niche ASPs (such as Portera and Salesforce.com). Many of the infrastructure companies don’t have application management expertise, while the software companies do not have technical (network and systems) expertise. Vertical ASPs offer point solutions that are not integrated with other enterprise applications.

“There are very few ASPs that are public today. The market values of these companies are quite low. That’s because there is a lot of naysaying in the marketplace, pivoted around the business models that these companies have put together,” Krappe explains. He believes the stock market and private funding markets are punishing all ASPs because of the confusion in business models.

He predicts that within the next six months, many ASPs will need to raise money. If the stock prices stay low, they will have difficulty doing so. “We believe that there will be a significant number of these companies (and Gartner Group confirms this) that will be turning out their lights or sold to other companies within the next six months. That will clean up the bad business practices in the marketplace today.” According to Corio’s spokesman, the companies that survive will be “those that truly have a business model that is nailed and is economically viable.” They will have built strong management teams; established their brands; developed strong field capability; built strong relationships with software vendors, ISPs, implementation and infrastructure partners; and “know what it takes to execute.”

In July 2000, Corio raised enough money to see the company through to profitability and will not need to go back to the markets for further funding. “There are very few ASPs in that situation,” Krappe says. “In 2001, you will have a handful of ASPs that really know what they are doing. They will be the big dogs of the industry. The industry will continue to evolve similar to other normal industries where you don’t have thousands of players — just a handful who know it well and a string of other specialty boutique companies. Right now there is overcrowding and, consequently, a lot of bad business practices.”

Lessons from the Outsourcing Primer:

  • In 2001 the demand for ASP services will increase greatly, but the number of suppliers will diminish.
  • Before you outsource to an ASP, check its business model and its plan for staying in business until profitability.
  • Choose an ASP supplier that has built strong relationships with software vendors, ISPs, implementation and infrastructure partners.
  • Large companies are turning to ASP solutions for upgrading their 1990s ERP implementations because they want the ASP to be accountable for the results.


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