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
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
"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
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."
A beehive of ASP activity
| The last
few months have seen new application service providers (ASPs) emerging almost
weekly. Start-ups and long-established software suppliers are jumping on
the ASP bandwagon, expecting business to boom as the millennium draws to
a close. Some recent events worth noting in the ASP space include:
- November's first ASP Industry Consortium-sponsored conference. Held
at Denver's Omni Interlocken Resort, the event included keynote addresses
by executives from Lucent Technologies, IBM and Sprint. A second consortium-sponsored
event was held in San Francisco in December. Speakers for that conference
included executives from Nortel Networks, Sun Microsystems, Oracle,
FutureLink, Microsoft and Compaq Computer. The consortium has scheduled
conferences for venues around the world throughout next year.
- Compaq turned its attention to the ASP space in a big way. In his
keynote address at the Denver conference, Eduardo Pontoriero, vice president
of Compaq's eService Providers Practice, said that his company will
provide the hardware, software and services needed to make the ASP model
work. Compaq's strategy is to work with ASPs along "the ASP value chain,"
which includes data center management, availability, application hosting,
help desk, systems integration and market strategy.
- Compaq also joined with Cable & Wireless, one of the world's leading
telcos, to provide a mass-market global ASP for small- and medium-sized
enterprises. Compaq has reportedly committed $200 million to the project,
and will supply applications, services and other resources. London-based
C&W will deliver applications from a global network of data centers
connected to its Internet backbone. C&W and Compaq will begin offering
services in the United States, the United Kingdom and continental Europe
this month (January).
- On November 9, Microsoft outlined plans to offer a hosted version
of its flagship Office suite of applications. Called Office Online,
the new offering uses Windows Terminal Server technology to deliver
Word, Excel, PowerPoint, Access, Publisher, FrontPage and Outlook to
users across an Internet connection. Office Online is available now
on a pilot basis from some 15 initial partners. Microsoft is also expected
to offer the service through its central Web services portal for small
businesses by year's end. The first partner to announce an existing
customer for the service was Fort Lauderdale, Fla.-based ASP Telecomputing,
which rolled out a pilot program in Maryland, Virginia and Washington,
- Early-to-market ASP Corio launched a new, modular suite of business
applications. The Corio Intelligent Enterprise integrates products from
Broadvision, Cognos and CommerceOne with its PeopleSoft and Siebel offerings.
- Qwest recently disclosed plans to redouble its efforts to build CyberCenters
across the country in partnership with KPMG and HP. The CyberCenters
are being expanded to include data warehouses that can feed applications
hosted by Qwest.
- Several companies, including giants Cisco Systems and Sun, are developing
standards and practices guidelines for ASPs. Cisco's Hosted Applications
Initiative partnership program works with ASPs, software companies and
other technology providers to test and certify that ASP offerings meet
minimum performance standards. Sun's certification program, called SunTone,
will give a seal of approval to ASPs that follow technical specifications
for ensuring that their networks and applications are providing high
- Marc Andreessen, co-founder of Netscape Communications and who recently
left America Online, has apparently joined the ASP fray. In October,
Andreessen and a cadre of star-level talent from Netscape, Frontier
GlobalCenter, Epiphany, Morgan Stanley, Infoseek, Cisco Systems and
other top companies, formed Loudcloud. Based in Menlo Park, Calif.,
the company aims to help Internet businesses manage the ever-increasing
complexity of running large-scale, transactional Web sites. Loudcloud
has been described as a "software and services" firm that will bring
together software and operations expertise. Its founders have said that
it will not be a consulting or Internet data center company.