The path a buyer should take in selecting an ASP depends on the buyer's intent for use of the outsourced application. Adam Braunstein, Senior Research Analyst with the Robert Frances Group, explains that the buyer could use an ASP to host a full-blown integrated application set, or it could use an ASP as an automation tool for a simple application that doesn't need to pull information from external systems. Despite the intended use of the application, Braunstein, suggests there are crucial characteristics to seek in an ASP supplier.
Ability to Customize and Integrate
One of the reasons ASPs are so popular is that they allow companies to get applications up and running in a minimal amount of time for a minimal investment. Braunstein says if time to market is your primary objective, the ASP strategy is an effective solution. However, he warns that the application must be one that can "sit on its own and not have to play with anything else in the enterprise." What can happen is that the application can become such an important business process for the buyer's organization that the application will need to be integrated into other systems.
How to accomplish that integration will depend on the supplier. "Any customization or integration work is going to do one of two things," Braunstein explains. "Either it will eat away hugely at the ASP's profit, or it will drive the buyer's costs significantly higher.
Commitment to Buyer Needs
An ASP's level of commitment to meet customer needs can range from the application infrastructure, to security mechanisms. He says one of the buyer's top priorities should be to ensure that all components of such commitment and level of service are clearly written into the SLA. With an ASP, it often happens that the supplier uses a contract template and standardized service levels and metrics. Obviously, for the buyer paying $30 a month for a hosted application, there is no leverage in the ASP's business model. But for large customers, the ASP can be much more customer oriented. Even a form document can be altered to specify particulars the buyer wants to see.
The Business Model's Profitability
A third important characteristic to be sought in an ASP is the viability of the ASP and its business model. "When you enter into an agreement with an ASP," he warns, "it needs to state an exit plan, should something change along the way – such as the ASP being acquired by another company, or a change in the ASP's core business so that it no longer appropriately serves your business needs." The plan should state whether the buyer will migrate to another ASP or will need to bring the applications in-house.
Although most ASPs have not been around very long, buyers still have reference points from which to judge the capabilities of the company. As Braunstein advises, "Everybody grew up somewhere-- the question is, where did the ASP come from?" They all basically evolved from three core groups: Internet service providers (ISPs), independent software providers (ISVs), or data center hosts. Each one of those groups brings a particular competency to the table, which a buyer can use to determine the ASP's level of ability to provide for its needs. He says, "Data center folks have spent their lives hosting or duplicating databases offsite for large-scale companies that require that both the operating system and the database be tuned and have high levels of availability. They know how to take all these disparate things and get them to work as one." It's also important to talk to the ASP's customers – and not just the ones on the reference list.
More importantly, he advises spending a day at the ASP's facilities. Check out the network construction, the level of competency of the staff. "Talk to folks and ask to see their procedures list and their escalation list for when something goes wrong. Get a real feeling for how they conduct business." How committed are the ASP's financial backers? Ask about their plan for profitability and when they expect to be there. Do they have an alternate business that is already profitable? Ask about their exit strategy (if they continue to run in the red, will the company gets acquired or will it go under?).
Don't Stop Thinking About Tomorrow
Braunstein says that buyers end up in a trap when they don't go over everything with a fine-tooth comb. "The key to making all this work," he says, "is to make sure everything is spelled out in the service level agreement." He is adamant, too, about using a one-year contract. "Even if you are confident you'll be satisfied once it's up and running, things are going to change, and you might become dissatisfied."
How long a buyer should go over things with the fine-tooth comb depends, again, on the level of importance of the application, as well as nonstandard requirements. Where an ASP is used as a strategic partner and is hosting an important application, buyers should take a longer time to consider everything.
Still others may want to use an ASP as a strategic bridge over troubled waters. The buyer could have a short-term goal of getting an application up immediately because its customers are unhappy that the company doesn't have a particular application, and the company is losing money. The company's long-term goal, though, might be to integrate that application on an enterprise-wide basis. In this instance, Braunstein says the strategy would be to "do a real quick review of the ASP, get decent SLAs, and quickly enter into the agreement. While the application is running on the ASP, the buyer can concurrently build it in-house. By the time it's up and ready in-house several months later, the buyer already knows what service levels it needs."
While the ASP business model allows companies to rent applications rather than incur significant costs, buyers should still select their suppliers with the same level of scrutiny as they would for any other outsourcing provider.
Lessons from the Outsourcing Primer
- Buyers should seek an ASP with the ability to allow and support customization and integration, if that is something that is going to be important later on.
- A buyer's top priority is to ensure that all components of commitment and level of service are clearly written into the SLA.
- Spend a day at the ASP's facilities, ask questions, and get a feel for how they do business and about the company's financial backers.