ASPs Face a Changing Market | Article

Evolution, Consolidation Shape 2003 – and Beyond

ASP outsourcingThe state of the application service provider (ASP) industry is a snapshot of change.

The market faces continued consolidation, as smaller providers are acquired or go out of business. Other providers are going to market in teaming arrangements in order to present service offerings that cater to potential clients. Meanwhile, more small-to-medium organizations are turning to ASPs as a means to relieve themselves of burdensome back-office functions.

At the same time, the ASP business is evolving to include a wider array of offerings – from application hosting to business process services.

In other words, a young industry, already long accustomed to evolving, will continue to experience Darwinism.

“There’s a shakeout,” says Bill Parsons, vice president of alliance sales and channels for North America Peoplesoft in Pleasanton California. “The low-end ASPs are dropping by the wayside. It’s the same with many startups. They figured they would provide Web services and host ERP (enterprise resource planning) software. But the business just wasn’t there. They have shriveled up and gone away.”

What has emerged is buyer desire for software vendors to do more hosting of their own products. Peoplesoft, for example, hosts its HR, supply chain, CRM and financing and accounting modules at eCenter. As the economy has slowed, it has helped providers like Peoplesoft grow its buyer base – 30 percent in 2002 – with companies looking to trim costs out of their infrastructure.

A Snapshot of Growth

ASPs continue to be a snapshot of growth. The U.S. ASP market hit US$1.8 billion in 2002, representing a 49 percent growth over last year, according to IDC, a research firm in Framingham, Massachusetts. While the market grew, growth of individual providers varied widely, with some showing flat or negative growth over 2001, others in the mid-double digit, and some – particularly Web-native providers – enjoying double-digit growth, says Jessica Goepfert, program manager for IDC’s AppSourcing Services Research division, which covers applications, software and service and Web service.

For 2003, Goepfert sees no “killer app” emerging – only continued focus on Web-native ASPs, and a strengthening of CRM. She also expects more “healthy” consolidation, mostly through mergers and acquisitions and not bankruptcies. Companies will increase their BPO offerings with more consulting or partnering with others to provide that service.

Analytics & Verticals Growing

Analytics and reporting also will be a driver for the coming one to three years, she says. With all that amassed data, buyers will be looking for assistance in extracting the valuable data and making sense of it. “There might be an opportunity.”

Finally, verticalization will be closely watched, with companies in healthcare and financial services broadening their offerings to better serve their clients – without spreading the offerings too thin to lose focus or expertise, she says. This forecast should last through 2005, she says.

“This increases customer value because the providers know their customers’ business,” she says.

A recent IDC demand-side study of 65 large global firms revealed that 80 percent plan either to increase their outsourcing spend or remain at the same level during the next three years, Goepfert says. This points to robust growth opportunities for well-positioned products and services and, especially, for application and business process outsourcing as a way to to provide more value to customers, she says.

“Some ASPs are moving up the stack into the actual business process,” Goepfert says. “Implementing the application is one thing. Sometimes you have to change the client’s business process. If the ASP can provide the consulting around the business process, that’s more value for the customer.”

ASPs & MSPs See Greater Returns

This evolution will affect both ASPs and managed service providers (MSPs), both of which will experience verticalization with a focus on stronger service level agreements, says Tony Greenberg, CEO of Ramprate Technology Advisors LLC, Santa Monica, California, provider of outsourced IT hosting, co-location, content delivery and content delivery procurement services.

“The new decision is not about insourcing or outsourcing but getting a common blend of both,” Greenberg says. “If you’re not enabling immediate uptime, you’re just going to die.”

To reach new markets in the coming year, Greenberg sees growth in service delivery channels and partner selling arrangements. Already, channel sales are about 30 percent of his new business stream. That should top 40 percent by the end of 2003, he says. This not only grows his business, but also helps buyers get fuller product offerings, he says.

“It helps them stop thinking about individual purchases and achieve one-stop shopping,” he says. “The best solutions are always bundled.”

Steve Pace agrees. As vice president of sales and marketing with Surebridge Inc., a Lexington, Massachusetts-based provider of enterprise applications solutions for middle market companies, Surebridge is focusing on broadening its offerings in healthcare and pharmaceuticals, manufacturing, financial services, publishing and media, and the service industry. Selective channel partner development – along with a strong internal direct sales organization – will be the most feasible paths to finding new business opportunities, he says.

By working through channels, growth will come more quickly. After five years in business, Surebridge just signed its 100th buyer. The 200th should come in half that time.

“It’s becoming more competitive. People are looking for ways to grow their businesses,” says Pace, who oversees relationships with 10 channel partners.

While companies like Peoplesoft have seen growth, they have to stay focused on buyer trends. Businesses are focusing on their core competencies and don’t want to spend money on IT, Parsons says. This leaves many BPO service providers to ask the hard question: “Where do I want to make my money?” They are leaving applications management and hosting to the ASPs. The large consulting firms will move up the BPO value chain, leaving application management and hosting to the ASP players.

“This trend will create tighter alliances with ASPs,” he says.

ASP Outsourcing Trends for 2003:

  • Eighty percent of 65 large global firms surveyed said they plan to either outsource the same or more in the next three years, adding to a US$1.8 billion industry.
  • Watch for evolution from providers moving into new areas. Beware of those who offer too much to stay focused on their core strengths.
  • Channel sales partnerships will grow the product offerings available to existing buyers, making the sales cycle shorter and the menu of services greater.


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