Victoria Piper was shocked when she heard that her application service provider was going to die. "It was a complete surprise," says Piper, chief information officer at Express.com, a Los Angeles e-tailer of DVDs, music and video games, of the summertime news that Pandesic, the joint venture between Intel and SAP, was going to be put to sleep by its masters.
Pandesic will terminate service on Jan. 31, 2001, leaving Express a relatively brief time in which to reconceive its Enterprise Resource Planning and e-commerce strategies. "We don't know if we'll outsource again, or bring the e-commerce and ERP systems in-house," Piper says. Also unclear at this point are the costs of the transition in terms of money, time and system performance.
Get ready for more uncertainty ahead. Coping with application service provider (ASP) turnover hasn't been much of a problem so far in the industry's evolution, but that could soon change. One reason is the inevitable sector consolidation, of which Pandesic's demise is just the first faint rumble. GartnerGroup estimates that six out of 10 ASPs operating today will be out of business by the end of 2001, with only a fraction of today's 500 or so ASPs still operating by 2004.
Also a factor as the industry matures is the coming expiration of the first wave of service contracts that bind users to providers. So far, very few customers have switched their business from one ASP to another. USinternetworking, one of the young industry's more venerable players, reports a handful of switched customers, while Corio says it has had none. The typical ASP contract requires customers to pay a penalty if they switch within three years.
Laurie Orlov, research director for e-business applications at Forrester Research in Cambridge, Mass., says unhappy users will vote with their feet when they can. "It will amount to survival of the fittest," Orlov says. "The ASPs who are giving good service, are responsive and provide customer support, they'll do fine. The ASPs who have alienated their customers, those contracts will be abandoned, and the customers will either find a new ASP or bring the application in-house."
Not that anyone will be able to undertake the switch lightly. Research by GartnerGroup analyst John Pescatore suggests that the costs of switching from a complex ERP system, especially one with a significant amount of customization, will be high. Peter Jackson, chief executive of Intraware, an Orinda, Calif., technology management firm, doubts that the customer shift will be massive for ASPs hosting complex, mission-critical applications such as ERP, supply chain management and customer relationship management. He says the cost and uncertainty of moving the application will be too prohibitive.
But as the Pandesic fiasco demonstrates, customers won't always be able to control the circumstances around an ASP transition.
Ophir Marsh, CEO of eBatts.com, an online replacement battery e-tailer and distributor in Westlake Village, Calif., was surprised by Pandesic's announcement at a time when his company was, ironically, preparing to take its systems back in-house.
"It gave us a time-to-market advantage, and it was an inexpensive way to start our business, but as we got more sophisticated, we didn't have flexibility," Marsh says. Pandesic's pedigree, he says, was no assurance of its success. "You have to keep tabs on who you're outsourcing with," he says.
As for the actual transition: "We are hoping to extract the data from Pandesic seamlessly, import it, just flip the switch and go live without interruption," Marsh says. "We hope."
Another Pandesic customer, eVineyard, a Portland, Ore., online wine e-tailer, is making plans to switch to another ASP. "Our relationship with Pandesic really worked so well that we didn't have to worry about operating the systems or staffing," says Brett Lauter, chief marketing officer. Lauter estimates switching ASPs will cost the company less than $5,000, and believes that eVineyard can make the transition with no service interruptions, in large part because the company has maintained some ownership of its crucial data.
"We already back up the database in-house," Lauter says. "We switch live on the [in-house] database, and then when the data is ported to the new ASP, we will go live there. We weren't caught with our pants down. We are going to do everything in our power to make sure our customers are not affected."
Despite the hassle of switching, Lauter is still sold on the ASP model. "Without an ASP, we'd have to have teams of people working around the clock, and that would be a headache. Using an ASP is headache-free."