Rebirth of the ASP
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The ASP concept is springing back to life, driven by new technology, cheaper bandwidth and sharper business models.
In 1999, just as dot-com companies started to lose their lustre, analysts, entrepreneurs and venture capitalists began to talk excitedly of a new 'model' of computing. Harnessing the power of the Internet, they said,
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Christopher McCleary, the-then CEO of USinternetworking (USi), one of the most hyped and lavishly-funded of the new wave of ASPs, was invited to explain the 'revolution' to an audience of IT directors in Boston, Massachusetts.
He had the perfect pitch for the assembled crowd: let USi run your packaged enterprise resource planning (ERP) applications and deliver them direct to your offices over the Internet for a flat-rate monthly fee and the company would do the implementation, free of charge.
To an audience of seasoned executives that had spent several painful years installing complex ERP applications, the promise seemed fantastic. They knew how difficult it was and how much it had cost. But McCleary still could not have expected the response he received.
They laughed. Out loud. "They tell me to say this stuff," he shrugged defensively, mimicking the style of US chat show star Johnny Carson backing out of a duff joke.
It was not the only audience that McCleary and many other high profile ASPs failed to win over. Within a year, they had joined the dot-com sector in free-fall, a process that culminated for USi in a filing for Chapter 11 bankruptcy protection in January 2002.
The market that Deloitte Consulting had once forecast would be worth $48.5 billion by 2003 had seemingly crumbled to dust.
Back from the dead
Yet in the last year there have been a number of tentative signs of re-birth. Some of the surviving ASPs, names such as Salesforce.com, NetSuite and UpShot, have been rapidly adding customers and increasing their revenues at a time when most established software vendors have seen their sales fall and their new-signings list dwindle.
Customer relationship management (CRM) ASP Salesforce.com has been so successful that CEO Marc Benioff is now boasting of a revenue run-rate of $110 million. "We have been cash flow positive since November 2001... now everybody wants to get in on the act," he says.
That includes his number one rival Tom Siebel, founder of CRM packaged software market leader Siebel Systems. Siebel closed down its own Sales.com CRM ASP in April 2001, only for Tom Siebel to announce the company's re-entry into the market in October 2003 - first, with plans for a service called Siebel CRM OnDemand and then, two weeks later, with the company's $70 million purchase of Salesforce.com rival UpShot.
A more important endorsement, perhaps, is the growing number of customers eager to talk about their experiences - and the savings they have made.
For example, DuPont Air Products NanoMaterials, a 75-person joint venture between chemical giant DuPont and Air Products and Chemicals, claims it has saved $100,000 in annual IT costs by replacing its in-house applications with CRM and ERP application services from NetSuite.
There have been other benefits too in terms of productivity and corporate visibility. "We have more real-time data. Before, we couldn't always gain customer information on a timely basis," says the company's CEO Robert Grashoff.
For Norman Sanders, CIO at the United Nations Development Programme (UNDP), his PeopleSoft ASP implementation with Corio and Unisys is also driving a programme of modernisation to the organisation's management processes, helping to better manage its $2.5 billion annual budget.
New drivers
The renaissance of the ASP sector has been driven by a number of factors. At a business level, says Phil Wainewright, founder of ASPnews.com and Procullix Ventures, the biggest change is simply that the profligate and over-ambitious ASPs born in the dot-com era have fallen by the wayside, leaving
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Back then, too many ASPs were supplier-led and ignored the needs of customers, says Catherine Hawley, senior vice president of applications management and hosting at telecoms giant BT. A prime example was BT itself. At one point, it offered about 100 different enterprise applications on an ASP basis, largely because the software vendors had wanted to partner with BT, she admits.
However, most of those applications were not suitable for delivery over the Internet and certainly not appropriate for the small and medium-sized businesses for which the ASP model was deemed most appropriate.
Those ASPs that have positively thrived have done so by first focusing on one or two core areas - such as sales force automation or financial software - and offering only their own software, written from scratch entirely to an Internet architecture, running on shared servers to minimise costs.
The ability to service multiple customers from one server is the key to the cost-savings that an ASP can generate. "We can put 300 customers with 50 employees on one $10,000 Linux server," says NetSuite CEO Zach Nelson.
Now, having proved the viability of their business model and the value of their services, ASPs such as NetSuite are expanding their offerings to take advantage of businesses that have become comfortable with the ASP idea and want to move more functions over to application services.
For example, NetSuite originally focused purely on financials. But this year it has introduced a range of CRM, sales force automation, business intelligence, human resources and ecommerce modules. Salesforce.com, meanwhile, is moving in the other direction.
Taking a different tack, Peter Boni, CEO of another ASP, Surebridge, says that his company is now "verticalising" its software to enable it to attack particular industry sectors.
Step-by-step, Boni is plotting to take over organisations' IT, lock, stock and barrel. "We will run their applications software, then we will drill down and do some of their IT infrastructure and we are also moving into business processes," he says.
New models
More significantly, ASP software today looks and feels more like traditional client/server applications because of the use of JavaScript to provide error-checking and validation at the client level and, most important of all, the development of dynamic HTML (DHTML).
DHTML in particular has introduced a degree of interactivity to web-based applications that was simply not possible three years ago, says Wainewright.
Then, users were either forced to fill in and submit cumbersome HTML forms, or they had to run thin client software, such as Citrix MetaFrame, on their PCs. Neither of these approaches were satisfactory and while thin client software on the face of it provided a good solution, it still have a number of drawbacks.
First, it increased costs because the software had to be licensed on a per-user basis. When Vistorm, a well-funded UK-based ASP, was touting the benefits of Microsoft Office as a hosted service, the cost of the Citrix MetaFrame licence accounted for more than half of the less-than-enticing £90 monthly fee.
Second, that approach was slow and increased the load on the network at a time when bandwidth was at a premium because the screen was effectively being 'painted' hundreds of miles or more from where the user was actually seated.
Finally, users still had to run and maintain the proprietary thin client software on the PC, defeating the object of running server-centric, web-based software and, therefore, not cutting costs by as much as originally promised.
Flexible friends
Three years of declining IT budgets have, however, had a positive double effect for ASPs. On the one hand, it has forced CIOs to think longer and harder about how they can implement new software at a lower cost and, in particular, for a smaller up-front cost.
On the other, it has also softened the attitude of many established software vendors, says Hawley at BT. Microsoft, for example, has become much more flexible with the licensing terms it offers ASPs, particularly with its Exchange server email and collaboration tool.
"A year ago, they insisted that customers had to have everything and pay for a full licence," she says. Now, they can buy a licence that only covers those features they want to use. IBM has always been as flexible with its licensing of Lotus Notes.
Yet despite this, ASP is still not yet ready to become the so-called fourth utility provider because the sophistication of most custom-built ASP applications is still lacking, says Gartner analyst Beth Eisenfeld.
For Sanders at the UNDP, his decision to outsource was simplified by the fact that he was jettisoning most of the organisation's aged legacy infrastructure.
For others, the choice will not be so clear-cut. For one thing, almost all of the ASP applications are targeted at small and medium businesses. There are also questions about how application services integrate with key legacy systems, adding to the cost and complexity of any ASP offering.
Predictably, ASPs, without exception are looking to web services to solve the integration problem, but it will be some time before web services technology is mature enough to be able to replace the message brokers and integration hubs that major companies depend on.
But that does not daunt people like Benioff, who believe that it is only a matter of time before Siebel - not to mention his old boss Larry Ellison - are eclipsed by the new wave of software delivered as a service.
"We are not at the middle or end of this journey, we are at the beginning," says Benioff.
