In 1999 Ben Pring predicted 2000 would be the year ASPs would have to “cross the chasm” and prove their legitimacy. Big customers would have to sign on the dotted line to signal the ASP proposition was more than just hype. And that happened. “ASPs crossed the chasm. 2000 was their year,” says the principal analyst for the Gartner Group in Mountain View, California.
Fortune 50 companies discovered ASPs last year. They signed large contracts “proving the legitimacy of the model.” Examples of major contracts include DaimlerChrysler and Nestle who signed contracts with Qwest Cyber.Solutions and Akzo-Nobel, who signed a contract with eLine.
These contracts demonstrated the ASPs’ new approach to managing applications is attractive to large corporations as well as the small and medium market, which had been their main medium. “The ASP solution is not just for startups and dotcoms,” Pring says.
Pring hypothesizes the popularity of ASPs is a reaction to corporate unhappiness with how they had to deploy their applications over the last five years. Heretofore corporations had to determine what software to use, spend “a lot of time and money” licensing the application, and then “spend even more money” with an implementation company. Pring estimates that for every dollar a company spent licensing software, it had to spend $10 on ancillary services.
In addition, implementation moved at a snail’s pace as measured by the compressed time frames of the Web world. Pring says implementation companies needed nine to 12 months on average to get enterprise resource planning (ERP) client-server software running. A year could go by before the buyer saw any benefits from the purchase.
60 Percent of ASPs May Be Gone by 2004
Utilizing an ASP radically shrinks the time necessary for a company to be able to use its new software. Implementation costs are “vastly reduced” too, because ASPs provide their clients with a template “which has best practices already configured into the software,” explains the analyst.
Although the ASP value proposition is definitely here to stay, the fate of the ASP providers is far from certain. Pring suspects there will be a consolidation among suppliers which “will happen rapidly.” By the end of 2004, he estimates 60% of companies that operate as ASPs will no longer be in the marketplace. The beginning of the end for them should start in the second quarter of this year.
He observes some ASPs are running out of their venture capital funding; it is difficult to go back to the trough during the current stock market meltdown. Cash starved ASPs who were arch competitors are now networking together or merging to stay alive. Unfortunately, the third and fourth tier ASPs will disappear when the cash runs out.
Leading suppliers, however, will do “very well” by picking up more market share.
For now, ASPs are splitting into two distinct rivers. One group is going after the companies who already have a vested interest in their ERP software. These buyers have a large installed base and they are loath to throw it away and start again. Instead, they want to migrate to the next generation of this ERP application that is available on the Web. Pring says the migration often focuses on ecommerce and customer relationship management (CRM), too.
In these cases the ASP has to build a bridge between the old and the new. MySAP.com and eLine are two companies that specialize in vested solutions.
Moving to Application Neutral Services
The other tributary is focusing on companies that don’t have a large ERP software network in place. Their buyers are looking for mission critical software that was written for the Web from the ground up. Pring says these ASPs are offering 100 percent Internet solutions; there are no client-server versions. To date, these are “much lighter applications that are easier to manage and cost much less,” notes the analyst. A good example is salesforce.com.
Currently, more ASPs are managing the old style technology. But Pring predicts more and more ASPs will migrate to the second river. The real race will be to bring new Web-enabled applications to the market first, in his view.
The analyst also believes ASPs will begin to offer application neutral business services. That is a buzzword for Corio, he says. Instead of selecting PeopleSoft or SAP, customers will just receive services they need to get the job done. “It won’t matter what the software is,” he explains. “What’s important is you have a relationship with Corio who delivers the business service you need.” Instead of the applications becoming important, it will be the services that are critical to ASP success, Pring predicts.
This development will speed the rise of the business service provider (BSP), in Pring’s view.
ASP Model Goes Mobile
Finally, Pring predicts a collision in the ASP market between the bricks and mortar ASPs and their wireless competitors. Right now an ASP who provides email services and those who support the Blackberry, a mobile email pager-like device that is enjoying a wild popularity among the technologically advanced, are approaching the problem with two “quite separate” solutions. “ASPs are based on a telephony model and telephony is becoming more mobile,” observes Pring. “By 2002 I think mobility will be a big part of the story.”
He mentions a recent deal Ford signed with Qualcomm. The next generation of Ford cars will have a navigation system. “Qualcomm will be pumping that application to a screen. That’s an ASP model,” he says.
Better yet, I can email this story to you and you can read it in the car. At stop lights, of course.
Lessons from the Outsourcing Primer:
- ASPs gained needed legitimacy by signing contracts with major corporations. This proved the ASP concept is not limited to small and medium sized companies.
- Sixty percent of the ASPs as we know them will disappear by 2004. Many will run out of money and will be unable to go back to venture capital firms for a new infusion.
- ASPs are currently dividing into two camps: one group is serving companies with established ERP systems and the other is going after Internet-only applications. More and more ASPs will be hosting applications written only for the Web.
- ASPs are moving toward application neutral offerings, providing a set service instead.