Through the Looking Glass, Brightly? | Article

A Snapshot of the ASP Market Midterm

Discussing outsourcing agreementAt mid-year, what’s shaking in the application service provider (ASP) market is the predicted shakeout.

“ASP had been the acronym du jour,” says Jessica Goepfert, senior analyst at IDC in Framingham, Massachusetts. “Everyone jumped on the bandwagon. Six months later, the wheels fell off.”

“We are at an interesting crossroads. The market is still tracking the promise of the ASPs although at a difference pace than we predicted earlier,” adds Sanjay Katyal, senior director, marketing for PeopleSoft eCenter in Pleasanton, California.

In Katyal’s scenario, the market is now headed toward the third generation of ASPs. The first generation was characterized by the pure play providers who serviced the emerging dotcom companies.

Goepfert says the consolidation and constriction of this marketplace is taking two forms. First, ASPs are closing their doors. Many did not have a sound business plan, something that wasn’t crucial during the Internet land rush. For instance, Freeworks was giving away its service, relying solely on ad revenues. Others lacked the expertise to perform as an ASP. “It’s a tough model to execute,” she notes.

She predicts we may see “a couple of giants” fall this year. Management as well as the liberal venture capitalists are partly to blame. Money flowed too freely, and the ASPs didn’t chose to send their millions wisely. “Now they are paying for their mistakes,” points out Goepfert.

The current survivors form the second generation ASPs, according to Katyal. They are busily experimenting with various business models and focus niches so they can offer compelling value for the long term.

To survive, some companies are cutting back or refocusing their ASP initiatives. FutureLink, a Lake Forest, California, ASP, and Interliant, a Purchase, New York ASP, had expanded into areas beyond their core businesses. Now they are returning to their original strengths so they can weather the current market forces driving vendors to focus on what they do best.

Interliant, for example, specializes in managed messaging, hosting and security. But it had invested in ASP solutions in eCommerce and Enterprise Resource Planning (ERP). In April, it announced it would invest no more capital in these areas and eliminated 14 percent of its workforce. “Pulling back the reins and carefully setting priorities” are a good business tack to survive in this competitive landscape, believes Goepfert. “ASPs are realizing they can’t be everything to everybody.”

Focus, Focus, Focus

“This year it’s all about focus,” says Goepfert.

One increasingly popular survival tactic is to take a more vertical approach in a few select industries. Concentrating on one industry helps the ASP surmount issues around scalability and customization, points out the IDC analyst. Integration templates can be replicated across customers, for example. Popular industries include health care, financial services like banking and insurance, and professional services.

Knowing their way around a specific industry also helps the ASP provide value added services. “They can select the most crucial offerings that will benefit this market,” says continues. These value added services help differente an ASP in the still crowded marketplace, another plus, she adds.

Katyal adds some ASPs are focusing on specific customer groups or geographic regions. “They are finding their niches,” he says.

The PeopleSoft executive believes a third generation of ASPs will develop. These providers will take many forms, but all will be expert at what they do. He says they will be “true enterprise grade ASPS who thrive in the steady state mode.”

For example, some may become business service providers and take over an entire business process by forming alliances. Others may just focus on network architecture but do it well. Katyal predicts “the third generation is where the ASP growth will be since they uphold the initial promise of the ASP concept.”

Last month PeopleSoft released version 8.0 of its customer relationship manager (CRM) suite. Some in-house users are now migrating to the eCenter so they don’t have to make the changes to the new version. “If they go the ASP route, they just have to flip a switch. The ASP model mitigates risk,” he says.

The downturn also has altered the ASP sales pitch. “In this economic climate, an ASP must demonstrate value,” the analyst says. One way to do this is to use return on investment (ROI) as a selling tool. “This is a great way to demonstrate on going value,” Goepfert continues. Pointing out less visible gains — such as freeing up staff to focus on other more strategic issues — explain how outsourcing “can make a substantial difference on a company’s bottom line.”

Software vendors and pure play ASPs are reached a rapprochement that benefits both sides, notices Goepfert. In the beginning, long, long ago in a galaxy far, far away, software vendors allowed pure play vendors to host their software. Then, the vendors came out with their own ASP offering.

Today, the vendors are primarily concentrating on hosting their own products. For example, if a company wants the entire PeopleSoft suite, Katyal would hope PeopleSoft e Center, the fourth largest ASP by revenue according to the latest Gartner Group report, would be its ASP. But if a company wants PeopleSoft human resources (HR) but another vendor’s customer relationship management program, it will pass the project to an ASP partner like USinternetworking or IBM to host the portfolio of services.

She likes the idea that there is competition among the software vendors and the pure play ASPs. “Competition clearly helps the client,” she says.

ASP Value Proposition Still Strong

The analyst for IDC, an information technology analysis company, believes the current woes were simply a problem of over supply in the market. She firmly believes that the ASP value proposition is more valid than ever. Application outsourcing is a recognized way to reduce corporate expenses. “When there’s an economic downturn, companies turn to ASP providers. They understand outsourcing is a viable and compelling alternative to managing the application environment in-house,” says Goepfert.

In fact, a few ASP suppliers told Goepfert their sales pipelines are full. That’s a good sign for the ASP industry.

Lessons from the Outsourcing Primer:

  • The ASP value proposition is as strong as ever, especially during an economic downturn.
  • The ASP shake out continues.
  • Some surviving ASPs are cutting back on their expansion into new areas and are choosing to focus only on their core offerings.
  • ASPs are using ROI as a sales tool.
  • ASPs are going after vertical markets, specific customer groups or customers in a specific geographic region.


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