Application First, Delivery Second!

Software Magazine, August, 2000 by Ian S. Hayes

Some heart-to-heart advice for ASP vendors

How YOU REACT TO THE "ASP" ACRONYM depends on your point of view. If you are a potential customer, an ASP is just another means of acquiring application functionality. If you are a provider of IT products or services, becoming an ASP is an entirely new business model. The ASP model is e-business coming to the IT vendor community, and it is as radical a departure for the IT industry as Amazon.com was to booksellers. Given this significant impact, it's hardly surprising that trade press coverage tends to focus on the vendor's view of the ASP market.

Buyers have been slower on the uptake; after all, it is hard for them to get excited about the simple concept of renting applications over the Internet or private networks. Yet, it is exactly this simplicity that inspires analysts from Forrester, Gartner Group, and other research organizations to predict phenomenal growth of the ASP market over the next few years. Just as leasing, rather than buying, a car has become the option of choice for many new car buyers, ASP delivery will become the preferred choice for many business situations. To put this growth in perspective, one Gartner Group estimate expects the ASP market to exceed $22.7 billion in annual sales by 2003.

Why the ASP Model Makes Sense

When applied to the right situations, and implemented with the right mix of applications and services, the ASP model provides such attractive benefits to both buyers and sellers that it is destined to become business as usual for many segments of the IT industry. Buyer benefits include decreased cost of ownership and operation, access to large-scale application functionality, higher-quality support, and faster access to updates and new functionality. These benefits will only increase as the ASP model and the delivery technology evolve. Well-positioned ASP vendors will reach new markets, receive predictable income streams, and achieve significant economies of scale in support and delivery.

These factors have spawned a gold rush of solution providers racing into the ASP market. Companies entering the fray include everyone from "pure play" vendors, who offer ASP services exclusively, to independent software vendors (ISVs), hardware infrastructure providers (ISPs), and even consulting services firms. The result is a highly confused marketplace with almost as many variations on the ASP model as there are vendors. There are constantly changing partnerships and alliances and shifting business formulas. And many budding ASPs are discovering that the transition is far tougher than anticipated and the first round of market shakeouts has already begun. It's no wonder that potential buyers are proceeding with caution.

I offer the following advice to prospective ASPs. While the final winning strategy may not be obvious yet, some clear trends are emerging. Potential buyers of ASP services should consider these points as well, since they may shed some light on the seemingly erratic behavior of the ASP marketplace.

1 Remember the Buyer's Point of View

As traumatic as the ASP model may be to an ISV's long-cherished methods of doing business, to potential buyers it is merely a delivery option for a desired set of functionality. The buyer wants an ERP system, office productivity software, or perhaps an accounting package. The ASP model is simply an option for renting and supporting that application. If you don't have the right functionality, being an ASP means nothing. If you do have the right functionality, keep the buyer's viewpoint in mind. Focusing on the ASP model first is silly. It's as nonsensical as focusing a consumer on rent versus buy before considering whether that consumer wants a car, a house, or a floor sander.

2 Be Realistic with Your Solutions

One of the most common mistakes made by potential ASPs is assuming that because a solution is good for them, it must be good for potential clients. The mechanics of Internet delivery make it possible to provide almost any type of software through an ASP model, however, some categories of software offer far more compelling advantages than others:

High-end software that the buyer could not otherwise afford. The ASP model enables smaller organizations to gain access to ERP systems and other large-scale applications without a massive investment in software and hardware. The desire for the functionality was already present; the compelling value proposition for the ASP is reducing the buyer's barrier to entry.

Integrated, end-to-end solutions. ASPs are unlikely to capture the core applications of a Fortune 500 company, but they can cover the functional needs of a department or a small company. If the services are sufficiently comprehensive, the buyer can eliminate the cost and overhead of operating its IT organization and equipment. Since the ASP's operational costs are spread over many clients, the buyer reaps considerable savings. These solutions are most attractive to organizations with little interest or expertise in technology.