In-Depth

ASPs: Service bureau redux or tectonic change?

• By John K. Waters
• May 29, 2001

Larry Ellison is explaining to a room full of reporters and industry analysts the ins and outs of Oracle Corp.'s online application service provider program. The Oracle chairman and chief executive declares that his company is the world's largest and fastest growing ASP.

"Everyone else has gotten it wrong; we got it right," he boasts. Because such hyperbolic pronouncements are not rare at Ellison-hosted events, the audience took it as another example of overstatement from Oracle's colorful leader.

But then his expression grew serious. "That is not the big story," he said. "It's that the software industry is in the process of a huge change, a tectonic change. Software is on its way to becoming a service. Unless you understand this, and get ready for that transition, you're going to get yourself into a lot of trouble. We had to become an ASP."

Ellison's claims about Oracle's application service provider (ASP) market leadership snagged a few headlines, but the latter comments were little noted. To many observers, this Ellison prognostication is closer to correct than many of his others. In fact, if several industry analysts are to be believed, and if the recent proliferation of ASP providers is any indication, Ellison could be right on the money. If software is on its way to becoming a service - and a lot of people believe that it is - the way is already being paved by ASPs.

"ASPs do represent an industry-changing trend," said Clare Gillan, industry analyst at International Data Corp. (IDC), Framingham, Mass. "It's an evolution, not a revolution; we're not feeling the ground shake just yet, but things are moving very fast. The only real questions are, how quickly will this market develop and how pervasive will it be."

And maybe one more: What exactly is an ASP?

"There's really no definitive answer to that question at this point," said Paula Hunter, vice president of the ASP Industry Consortium. "This is a very new market. You can talk to a dozen providers and they will all have a different take on it. Most of them don't have firmly documented contracts in place. They're evaluating the model, looking for guidelines and talking with their colleagues. But it's so early in the marketplace, you're going to see a lot of hybrid models for a while."

Although the details are still sorting themselves out, most agree on the basics of the concept: ASPs are service companies that deploy, host, implement and coordinate the ongoing support, maintenance and upgrades of application software for their customers on a network. But there are plenty of variations on this theme.

Most of the companies currently identifying themselves as application service providers provide application access to end users on a rental basis, but some ASPs sell the applications to the end users first and then offer management services separately. ASP customers access the applications remotely over wide-area networks (Internet, leased lines and virtual private networks) from data centers. Some ASPs build and maintain central server farms to host applications; others lease space in existing data centers. Most ASPs do not write their own applications, but partner with software providers that provide the applications to be managed.

A number of ASPs are also ISVs that bundle packaged applications, hardware, implementation and connectivity services, and ongoing application management into a single offering. Others simply provide and service the software. Some ASPs are "pure play" enterprises, formed for the sole purpose of application provisioning and service; others are "born agains," companies that have shifted gears to move into the ASP market.

"This is about provisioning and servicing of business-process-enabling applications delivered over a network via a subscription-based outsourcing contract," explained the ASP Industry Consortium's Hunter. "The key words here are 'business-process-enabling applications.' That is where the true challenges lie, around the process enabling apps, like ERP, CRM and high-end e-commerce."

Demand for such enterprise applications is strongest in the ASP market right now (so strong that some industry analysts have identified the market segment as "enterprise ASPs"), but there is a wider range of ASP-supported software available. Emerging ASP applications include data warehousing, decision support systems, personal productivity tools (Word, Excel) and collaborative applications.

And to larger firms with established IT infrastructures, the ASP model can provide the means for slimming down and refocusing on so-called core competencies.

For the short term, the big opportunities for ASPs lie with small- to medium-sized firms. ASPs can offer smaller operations access to powerful computing functionality without the pain of shelling out the big bucks up front, and the enormous commitments of time and resources.

"Enterprise applications - the ERPs, the CRMs, the e-commerce, the procurements, the manufacturing - offer tremendous value," said Kirk Krappe, vice president of marketing at Corio Inc., a Silicon Valley-based ASP. "But the fundamental delivery model is broken. Enterprise applications can work in Fortune 500 companies that can spend the time and money and still get the business benefit. But smaller companies have never had access to tier-one capabilities. ASPs are making the business capabilities that tier-one applications provide available to smaller companies without the high cost, the challenges and the headaches."

According to David Wittenkamp, chief financial officer at Ericsson WebCom, headache avoidance was a big motivator behind his company's decision to hire Corio to provide a financial services system. Formerly known as Touchwave, the Mountain View, Calif.-based start-up was acquired last year by telecom giant Ericsson. Ericsson WebCom develops IP-based phone systems for small- and medium-sized businesses and branch networks of larger organizations.

"We've been going the usual route for a start-up," noted Wittenkamp. "You get by in the beginning with a cheap accounting package because all you need it for is to cut a few checks to pay your employees and vendors. Then, as you grow and your manufacturing becomes more and more complex, you need a system that can cope with that. We wanted to have a tier-one system - a system the big guys are using - at our disposal, but we didn't want to take on the burden and staff required to host the application here. And we didn't want to have to become experts at a new system to be able to go live on it."

Corio is hosting a PeopleSoft financial package for Ericsson WebCom, though Wittenkamp said that the new delivery model makes the software provider itself almost irrelevant to the end user. "We're interested in the functionality, not the actual application," he said. "To be honest, if it had been something other than PeopleSoft, we probably would have done it anyway."

Defining the concept

The ASP concept, some argue, is reminiscent of the service bureaus of 20-plus years ago and of traditional outsourcers like Electronic Data Systems (EDS) and Sapient, because the result is a customer gaining access to an application it does not have to run locally. Asha May, industry analyst for the Dataquest IT Services Group, said ASP can be described as a new delivery model for application outsourcing.

"The ASP model differs from traditional applications outsourcing in the way it bundles all the necessary systems, applications and services required to run and manage the application," May said. "And it does so in a predictable pricing model."

Other observers - mostly from the ASP community - insist that ASP systems represent an entirely new model for organizations.

"This is radically different from outsourcing," said Michele Perry, vice president of marketing at ASP pioneer USinternetworking. "Outsourcing was traditionally done to cut costs. The outsourcers delivered the same thing you were getting before, but cheaper.

"The ASP market is being driven by an entirely different phenomenon, what I call 'the Amazon factor.' It used to be okay to wait two years to get an ERP application. But today, people look at that and say, 'Whoa! In two years there's going to be an Amazon.com in my industry. I can't wait.' There's a very big need for speed," she said.

However one defines the current model, the business of providing and servicing software from afar has long been something of a niche enterprise. The term "application service provider" is said to have first appeared in a June 1998 report published by International Data Corp. The report, The Emerging Application Service Provider: Will a New Generation of Application Outsourcing Prevail?, was based on research conducted in 1997 to gauge buyer interest in the concept of "renting" access to popular enterprise applications.

IDC researchers had found an emerging software delivery channel that they determined could spawn a new breed of software vendor. The report noted, "Emerging application service providers (ASPs) hold the potential to make the best technology available to even the most resource-constrained companies. For packaged application suppliers, the ASP will be a new channel ... Successful ASPs will help drive a paradigm shift in the market, moving competition beyond software features and operational efficiency to the total business solution. We believe that an opportunity exists for ASPs to change the structure of the packaged application industry as we know it today."

The latest surge of activity in this space probably began in late 1997 or early 1998, when electronic commerce providers, searching for fast, easy and economical ways to help small-to medium-sized companies set up shop on the Web, began embracing a rented-application model. Renting space on a server was (and is) the norm among all but the very largest e-commerce operations; renting the software to run the show was the logical next step.

But according to IDC's Gillan, co-author of the report and the analyst some credit with coining the term "ASP," e-commerce innovation was only one of the forces driving the new model.

"We saw other market drivers moving in this direction," Gillan explained. "We saw large ERP vendors trying to move downmarket and having mixed results. We saw small- to mid-sized companies often lagging in technology and having difficulty recruiting the right people. And we saw an increasing gap between the number of IT jobs available and the number of people available to fill those jobs. Something had to change."

And something did: When "ASP" entered the industry lexicon in mid-1998, only a handful of companies identified themselves with that label. Within a year of the release of the IDC report, ASPs were everywhere. When the newly formed ASP Industry Consortium first announced itself last May, only 25 companies appeared on its membership roster; within five months, its ranks had swelled to 178. Today, between 250 and 300 organizations, both private and publicly owned, are members of the consortium.

Hype surrounding the ASP concept sizzled through mid-1999 as software suppliers jumped on a new bandwagon. "The running joke around here," said Mike Mitsock, vice president of the ASP business unit at Progress Software, Bedford, Mass., "is that ASP years are even faster than Internet years. Things in this market space are evolving incredibly quickly. It has become a phenomenon; it's gathered a lot of steam."

IT companies of virtually every stripe are scrambling to stake out some turf on this new ASP-studded landscape. According to Bill Martorelli, vice president of application resourcing strategies at Hurwitz Group, a Framingham, Mass.-based consulting firm, Oracle's foray into this market may be emblematic of the industry's overall reaction to the rapid ascendancy of the ASP model.

"Pretty much everybody wants to become, or has become, an ASP," Martorelli said. "It's getting to the point now where you can't find a new software vendor who is not offering some aspect of the ASP model. The venture capitalists and others who help spawn these new software companies are insisting on it. They're really squarely behind this idea of software as a service."

Progress Software's Mitsock believes that the rush into the ASP space is not only understandable, but probably essential. "Our advice to our ISVs has been to get into the market early and figure out these things as you go. Don't sit back and wait," he said. "There is no second-mover advantage on the Internet.

"Look at America Online. It's not the world's greatest ISP, but they got into the market early, and they made it easy for people to do business with them," continued Mitsock. "They learned as they went along; they made their mistakes, recovered from them and, today, they've got something like a 40 percent market share. Others who got into the market later - even if they had a better mousetrap - haven't been able to make up the ground that AOL gobbled up."

The new ASP marketplace is populated by more than just the ASPs themselves. ASPNews.com, an online newsletter covering the market, currently lists nearly 500 ASP-related companies and more than 100 ASP-related products. And Progress Software, for example, supplies ISVs with application development, deployment and management tools. Recently, the company launched its ASPEN program (ASP ENablement), through which it is helping its customers to shift gears and transform their business apps into Internet-based rental products. The firm's Mitsock sees the ASP market as "a fairly complex ecosystem" filled with many different IT companies and a host of new relationships necessary to make the model work. "You've got infrastructure providers; outhosters who run data centers; the bandwidth providers who deliver the transport to get the applications content and data to and from the end users; and then there are enabling technology vendors like us," he said. Mitsock and others see the emergence of the ASP model as a new opportunity for ISVs, especially some of the larger operations. "Our ISVs have typically done very well in the mid-market," Mitsock said. "[The ASP model] gives them an opportunity to move into the small business space - that's an opportunity for the big vendors, too. Companies like Oracle and SAP have made several failed attempts to move down-market. This gives them a real chance to take another shot at those markets."

But along with opportunities, the rise of the ASP is bound to generate concern in some quarters. If the new model does take hold, the effect on traditional software licensing models could be profound. It may already have changed forever the service/vendor value proposition. IDC concludes that the ASP model will function like "disruptive innovation," threatening to encroach upon and displace existing ways of doing business for all sorts of technology providers. In a recently published report, IDC analysts wrote that ASPs are beginning to "alter the balance of power in the [software delivery] channel, and cause everyone to rethink key questions, [such as] Who is my customer? With whom do I partner? How do I go to market now?"

And a few dangers lurk for incautious ASP service buyers. Until the market sorts itself out, potential customers are well advised to adopt a buyer-beware posture in their dealings with ASPs, experts say. The ASP Industry Consortium's Hunter advises potential ASP customers to look for a standard service-level agreement and, most importantly, a single point of access.

"End users should be looking for that single point of accountability," Hunter said. "AOL doesn't point you to AT&T when you can't log on. You want a single place to call. And even though there certainly are some customers who have very specific requirements that demand special kinds of service, you should be seeing a very high degree of commonality across the different contracts."

Progress Software's Mitsock expects to see the market experimenting soon with "creative" pricing schemes. "Right now we're seeing a lot of three- to five-year contracts," he said. "But it won't be long before we start seeing other approaches. In the ASP space, it'll be a four-year contract for the price of three years of service, or 60-day free trials. It's tough to sell someone, say, a human resources package that might cost tens of thousands of dollars, and give them a 60-day free trial. But when you do it on a subscription basis or a service basis, I think it's much easier to get creative."

"This is still a very nascent market," warns Dataquest's May. "ASPs need to focus on customer acquisition and proving that this model actually works. The ASP market can't afford any negative press at this point in time."