Will your ASP be a survivor?

Recently, when launching a new company on the Internet fast was the mantra of every eager college graduate with a fresh venture capital check, application service providers (ASPs) quickly became a much-hyped genie in a bottle. An ASP offered to handle any number of applications over the Internet using its own servers. For the young dot-coms short on existing infrastructure and money and for traditional companies saddled with aging, legacy technology, ASPs were a very appealing prospect. But the demise of dot-coms left a lot of dead or dying ASPs in their wake.

The damage is palpable. Customers of now-deceased RedGorilla, an ASP that delivered time-and-billing software over the Internet, get rough treatment at www.redgorilla.com these days. Under the guise of a service to former customers, the site is now actually a hard-sell advertisement from another time-and-billing ASP: Elite.com. Blunt answers in the site's FAQ section tell the story: Will customers get credit for service they paid for? (No.) Will the mobile features work? (No.) But Elite's product is "much more professional."

Other notable ASP failures over the past year include Agillion (customer management), HotOffice (virtual office), iSearch (Web-based job recruiting), and Pandesic (e-commerce).

It seems like a bloodbath, but actually, it's just evolution—survival of the fittest. ASPs that debuted without a solid business model are going under or being acquired. "The ASP market—all things considered—did pretty well last year," says Meredith Whalen, vice president of ASP and Internet services research at IDC. "This is an emerging market. Customers spent almost a billion dollars. For an emerging market, that's pretty good."

USinternetworking (USi) will be among the likely survivors. It delivers software from companies such as Microsoft and PeopleSoft over its own servers to large corporate customers such as chemical maker Rohm and Haas Co. and Blue Cross Blue Shield. While USinternetworking has yet to make a profit, the company's sales more than doubled from $17.8 million in last year's first quarter to $36.7 million in the first quarter of 2001. The company claims it will be the first ASP to break even when its third-quarter results are reported. One of the keys to USi's success has been that it sells only to clients who are likely to be around to pay their bills in a year or so.

Another survival route for some ASPs has been to become an expert in a specific industry. That's the strategy that The TriZetto Group, which provides information technology and services to the health-care market, has used. Like USinternetworking, TriZetto packages solutions from several companies. Many of these programs are from software makers too small to market their solutions on their own. "We are becoming a magnet for companies that otherwise would be failing," says Dan Spirek, president of The TriZetto Group.

Other wide-ranging types of ASPs that are likely to make it through the shakeout include NetLedger (accounting for small businesses), Portera Systems (professional services automation), salesforce.com (customer relationship management), and UpShot.com (sales force automation).

Clearly, it's a risky business. And for potential ASP customers, it can be a dangerous business, because trusting a company with data and software essential to operations can become regrettable if they don't choose the right partner. There are, however, clear benefits that make using an ASP very much worth considering. For instance, a new 100-person company would spend approximately $200,000 the first year, implementing a group messaging and calendering system (which would include software installation, maintenance, training, implementation, testing, consulting, updates, and other things), but the same system outsourced could range from $30,000 to $55,000 in annual costs. This would allow the company to apply cost savings to its core business and free up IT personnel. It's important to select an ASP carefully, though. Once you've identified one that suits your needs, ask probing questions, such as when it expects to be profitable and how it plans to get there. And be tenacious about the contract. Put in writing exactly what you want the ASP to do, and be specific, right down to the minute details. Also, don't forget to stipulate what happens to your data if the ASP goes under.

"="">Myth	Reality
A service-level agreement (SLA) is everything.	An SLA often covers only the basics of how much the service provider guarantees in the way of uptime, seats, and licenses. Make sure that you and your staff can work with the provider's philosophy and that the provider will be flexible and will stick with you for the long haul.
Outsourcing is less expensive.	Service providers usually represent a smaller initial investment than self-hosted applications, and they typically have a monthly or yearly subscription fee. But you may pay a premium for more guaranteed uptime, and you might incur significant additional costs for extra applications or services.
Outsourcing is more expensive.	Over several years, you may spend more than if you bought and hosted applications yourself, but many other factors come into play: the hiring and training of support personnel, the cost of upgrades, and other factors depending on the type of applications needed.
Outsourced companies will always be there.	A track record is important: Check the company's fiscal heartbeat and make sure it will be around for a while, especially if it's providing mission-critical applications. Don't forget to consider the amount of uptime you will need, remembering that the difference between 99 percent and 99.999 percent uptime is 3.7 days of downtime a year.