Outsourcing can produce some spectacular results. How about a return on investment (ROI) of 404 percent? And guess who turned in such stellar results? Those much maligned application service providers (ASP).
Late last year IDC, the Framingham, Massachusetts IT research and services firm, conducted 54 case studies of ASP relationships. The analysts spent about half a day with each company who participated, reports Jessica Goepfert, program manager for ASPs and business service providers (BSP) for IDC. "Customers are getting a tremendous return on their ASP investment," says the analyst. In almost all cases, the ASP outsourcing relationship helped these buyers "transform their business."
These successes occurred in a year when ASPs endured a lot of bad press. Goepfert attributes that to the stratospheric hopes that turned out to be based on unrealistic hype. "Now the dust is settling," she says.
Heavy Consolidation to Continue This Year
There was "a heavy amount of consolidation" in the ASP zone last year. The analyst says the consolidation was due to both an oversupply of suppliers and poorly conceived business plans by some of the newcomers. ASPs disappeared by either going out of business or finding themselves acquired by a bigger, more successful company. Goepfert expects this consolidation trend to continue this year, too.
That said, she nonetheless predicts this year will be a more prosperous one for ASPs if "they can do a better job of conveying their value proposition." She expects the IDC findings to help ASPs sign more contracts this year.
Successful ASPs will adopt more of a focus this year, be it by company size, vertical industry or (better yet) both, she says. "ASPs are realizing they can't be everything to everybody," she notes. This year's winners will focus on a few complimentary markets. Two good examples are Portera, which concentrates on the professional services industry, and Trizetto, which is a health care specialist. One of the big benefits of a vertical focus is that happy clients will tell their peers. "Word of mouth marketing is a cheap way to go," the analyst points out.
In addition, the ASP bifurcation will continue. On one hand are ASPs like Corio and Agilera who offer large, complex enterprise applications using someone else's software. These ASPs have realized their delivery model is not one-to-many but one-to few and have adjusted accordingly.
Large ASPs Face Off With 'The Big Boys'
This year these ASPs are targeting larger customers. In this quest, the analyst predicts they will face some stiff competition from the big guys in the IT world, like EDS, IBM and CSC, who are adopting some aspects of the ASP delivery method.
The other group is composed of ASPs who developed their own applications directly for the Web, like Upshot and OpenAir. Goepfert says there are hundreds of these smaller companies. She expects to see a continued consolidation among these "Web-native" ASPs.
BSPs are an emerging market. IDC's definition of a BSP is a company that takes on the support or execution of a business process, charges a fee for its services, and delivers the service on a one to many basis over the network, typically the Internet. The BSPs who have made the greatest inroads are those in the customer care and finance and accounting fields, she reports. She feels the BSPs will grow more slowly this year because of the down economy. "People right now are risk adverse when it comes to trying a new business model," she says.
Unlike ASPs, companies look to a BSP when they want to outsource a business process. Companies selecting an ASP view this more as an application purchasing decision, not an outsourcing decision, she notes. "Right now no one is buying new applications. So ASPs are not getting a crack at any new deals," she says. An economy recovery in the second half might release some pent up demand for them.
Finally, Goepfert predicts the telecommunications companies will "dip their toes into the ASP space." The ASPs, on their part, are aiding this entry.
Lessons from the Outsourcing Journal:
- Last year IDC discovered the ASP customers it surveyed enjoyed a 404 percent return on investment.
- The heavy ASP consolidation that began last year will continue this year.
- Successful ASPs will start to gain focus by honing in on a particular company or choosing vertical markets.
- Telecommunications suppliers will try the ASP delivery method this year.