The ASP market has grown and evolved since people first asked, "Just what is an ASP?" Now everyone knows it is an application service provider, a company that rents software applications via Web-based browser interfaces. The expanding acceptance of Internet connectivity and the idea of renting, not owning (or licensing) software applications inspired companies to set up data centers and host their own or other companies' applications for customers.
ASPs began in, and still dominate, the business process outsourcing arena. Many companies or their divisions were already outsourcing call centers, payroll and HR processes to service bureaus and were not at all uncomfortable doing that through a portal on the Web. For such business processes, fears of data security had long been assuaged, and companies found it economical and convenient to outsource their non-core competencies to ASPs.
The number of ASPs exploded as the idea of renting an application appealed to companies with limited IT resources and to those who wanted to get solutions up and running quickly. Dot com startups needed the speed, while small and midsize businesses and independent divisions within larger companies liked the scaled-down model. They didn't really need or want to pay for a deluxe functionality package or a lot of customization.
Speedy implementations were a major selling factor for ASPs. They were possible because the ASP already had its own installed and scalable version of the solution and only needed to transfer its client's corporate data into the ASP's data center and establish a Web portal for the customer to access the application. In the CRM space, contact center solutions and Web-based personalization solutions were a natural for ASPs--especially cutting-edge technologies, many of which were only offered by an ASP. David Boulanger, research director, enterprise management, at AMR Research in Boston, says, "There are now software companies that believe selling licenses is passé."
Now there are many choices--perhaps too many. But there are also significant differences in ASP offerings, and understanding those differences can help you make an informed choice.
As renting solutions from ASPs caught on, some companies found themselves dealing with the old licensing gremlin: integration. Just as with licensed technology stacks, a company renting many different solutions from one or more ASPs must find a way to make the different software programs talk to each other. Renting point solutions from different vendors may become problematic in itself.
Amy Mizoras, senior analyst at IDC in Framingham, Mass., describes the problem potential. "The way that companies are buying ASP solutions right now is according to point solutions; they're generally choosing a product. But what we're finding is that very quickly they want an additional product from the ASP. We tell ASP customers to look down the road--not just to what you need today from an ASP, but what you think you're going to need tomorrow. And if that ASP doesn't have what you think you're going to need tomorrow, then you might want to question whether or not you should look at another ASP that has a broader application offering.
"This is specific to companies," she explains. "If a company is very happy dealing with multiple vendors and dealing with having to integrate application environments, then this is a non-issue for them. They can choose many different point solutions. But the problem is, when you do that, you still have to deal with integrating those application environments; you still have to deal with working with multiple vendors; you still have to deal with disparate upgrade cycles. Suppose you do integrate point solutions together--what happens if one version changes and the other doesn't and that integration doesn't work anymore? You have to manage that if you choose to go to more than one vendor for your applications. I don't think I want to have to worry about integrating those environments and managing all those vendors and dealing with finger pointing."
One solution to this problem is renting suites. PeopleSoft, SAP and Oracle offer complete suites through ASPs. If you prefer to buy best-of-breed, however, shop for an ASP that packages integrated point solutions, such as eConvergent, or an ASP that partners with companies that have vertical expertise, such as eLoyalty. Boulanger notes that many companies do want best-of-breed, and "that in today's market, the world really doesn't revolve around one software vendor." However, he says, "customers will have to understand that they can get hosted best-of-breed solutions, but in terms of the implementation and integration, long-term it's a more expensive proposition."
Meeting CRM Demands
One of the greatest changes in the ASP market may also be a harbinger of enormous future growth. ASPs began as one-size-fits-all solutions made available to all interested comers. The early solutions offered were not very customizable, if at all, and had fairly generic functionality. The competition was mostly price-driven, and ASPs were really just alternative delivery systems. Enterprise applications, especially CRM applications, required more flexibility and tailoring capacities, and extensive consulting services. The CRM space, itself driven by the customer perspective, was moving toward creating solutions that integrated front-office interactions with back-office information and offering their customers personalized service. If ASPs were going to play for a piece of the CRM market--estimated by AMR Research to be worth $5 billion to $8 billion by 2004--they had to provide flexibility, integration and service, too.
A sign that ASPs are responding to CRM market demands is the growing number of ASPs that are partnering with consultancies or bringing consultants on board. ASP e-Convergent claims to have a staff of around 26 consultants. Boulanger says Andersen Consulting "is offering their centers of excellence across the United states, providing the data center. Along with their partnership with some of the companies like eLoyalty and eConvergence, they expect to create hosted CRM applications targeting certain verticals." The Alexander Group has entered the ASP arena and hosts solutions. Major systems integrators are looking to broaden their footprint by partnering to become business process outsourcers/application hosters/system integrators. Call center giant Nortel partnered with Pricewater-houseCoopers and Telstra in Australia, and Boulanger expects them to bring a hosted integrated call center application to North America.
Service Level Agreements
AMR Research sees a lot of growth in the ASP arena, with the biggest part in business process outsourcing. Such ASPs offer companies more than application delivery, and will feed and care for entire business processes, maintaining complete operations of business areas such as call centers, finance and procurement. This focus on service and taking over maintenance responsibilities brings the relationship issue front and center. "The relationship between you, your customer and your enterprise ASP is going to become paramount," says Boulanger. "We see the chief marketing officer and the chief information officer in this environment becoming more relationship managers. Service level agreements will have to become very definitive, in terms of who owns the experience, what the escalation process is, what the resolution process is. From an ownership perspective, agreements must ensure that the enterprise ASP provides the background, but doesn't really interfere with your own customer relationships. The paramount objective is to maintain that relationship with your customer and to let the enterprise ASP do what it does very well, but in the background. The relationship between you--the buyer of the service--and the enterprise ASP providing the service is going to become crucial."
Service level agreements (SLAs) began being very technology-oriented, aiming to provide the "five nines"--99.999 percent up-time. What is becoming more important is a business-oriented SLA. For instance, there are key times of operation that are more important to some businesses than 24-hour up-time. "You should get business-oriented SLAs that deal in the customer experience, the actual time before they pick up the phone and all the other interactive experiences that are the hallmark of you dealing with your customer," says Boulanger. "Business rules surrounding the relationship between you and your customer should become part of the SLAs."
With the myriad choices of ASPs, there will naturally be a convergence, as some go out of business and others are acquired. According to Boulanger, 60 to 70 percent of these enterprise ASPs are either going to go out of business or be bought. "If they've got a poor business model and they haven't targeted the services and the pricing and the customer base, then they'll probably go out of business," he says. "If their business model is really good and they've got live customers, then they'll be prime acquisition candidates. If you look at the 400 plus enterprise ASPs, the billion dollar plus organizations, such as the Nortels, the PricewaterhouseCoopers, the Apacs of the world that have the bucks to spend, you're going to see them coming in and really gobbling up or forcing out of business a lot of these niche players."
So how can you protect your investment when you sign up with an ASP? Take a careful look at two things--the company's revenue stream and the number of live customers. Even if a company has a lot of cash it could easily burn through that very quickly. "This is a very capital-intensive business," Boulanger says, "It costs millions to build data centers, to hire staff. Ironically enough, it's a technology story we've seen before. In the case of USinternetworking, for example, they have spent hundreds of millions of dollars in building data centers, hiring staff, building support centers, actually leasing the hardware, software, the racks, the networking--all that costs money." It does cost money to get an ASP in business--and there will be cash flowing out. The key is to discover whether the ASP can get money to come back into it.
When an ASP has happy repeat live customers, then its chances of having a healthy revenue stream are very good. Consequently, you can feel more assured it will survive. Live customers provide revenue streams from monthly fees, implementation, integration and maintenance services. But beware of ASPs that have live customers but no revenue streams. "Ironically enough, we found more than one ASP that had priced their offering to get customers under management," says Boulanger. "In other words, their initial customers were never expected to be profitable. In fact, that's how they went to market, through gaining market share, gaining customers under management."
According to Boulanger, the outlook for CRM ASPs is good. Competition should shape the offerings to better fit the CRM space. "Looking out 12 months, I will predict that the larger folk, the PricewaterhouseCoopers and the Nortels, will invade the space," he says. "They'll do very well; they'll bring bucket loads of experience and talent and technology. You'll see a real battle between them and the existing eCRM hosted players--the eConvergents and the eLoyalties--which will make great acquisition candidates. Look for some acquisitions and look for some new entrants with big bucks.
"From a numbers perspective, we see tremendous growth--anywhere from 40 percent growth to 200 percent growth, depending on the area of CRM," he adds, "From the numbers that we have seen here, there is lot of space in CRM. There are whole sectors of the economy, both domestically and internationally, that have no CRM applications."