Introduction to The ASP Survival Guide

My thoughts on the enterprise application service provider market. This is the forward and introduction to a macro report commissioned by Zanthus.


The unprecedented economic high of recent years, most notably between 1998 and 1999, gave some the impression a new economy had permanently replaced the old economy. When you get to a granular level of how technology has impacted business it’s easy to understand why this speculation occurred. Rather than a grand hoax, the new economy was premised on the notion of ever-improving efficiencies. With technology’s impact compounding slowly at first and then more intensely by the late 1990s, old economy companies were temporarily eclipsed by new economy upstarts. Without investors requiring immediate profitability, many businesses, including many application service providers that focused on accelerated growth strategies or failed to focus at all.

ASPs deploy, host, manage and rent access to software from a centrally managed location. ASPs allow customers to rent software electronically, via the Web, as an alternative to buying, installing and maintaining it themselves. In many ways, they are the software industry’s revolutionaries; they came on the scene three years ago to shake up the IT outsourcing establishment. They are widely viewed as a sign of the beginning of the end of software purchasing as we know it; but whether they can survive as a separate industry in defiance of the IT powers is questionable.

Today, we see very few thriving independent enterprise ASPs, while other IT outsourcers fold ASP services into holistic, or all-encompassing solution sets. Many of the successful enterprise ASPs today are linked in one way or another to powerful pre-established players.

The ASP Survival Guide: Enterprise Workflow Solutions reveals the market penetration strategies of a small group of companies offering corporate IT departments an alternative to high-cost, complicated-to-manage client/server systems. The report explores the prevalent reasons why some enterprise ASPs are succeeding and others are failing. Despite a lot of bad publicity, domestic enterprise ASPs led in worldwide revenue for this market, with analyst projections showing industry growth of up to 200% from 1999 to 2000. As for the headline-making failures, the shocking truth is many ASPs tripped over rudimentary business problems both strategic and tactical; they adopted unpromising business models; selected the wrong partners; failed to execute, managed cash flow poorly, and lacked a differentiated market focus.

The report goes on to observe critical questions of perception such as: will the recent spate of business failures create a credibility issue for otherwise healthy enterprise ASPs?

In this ASP Survival Guide, Zanthus treats the enterprise space as a market separate and apart from the small- to medium-business market (SMB) because of fundamental differences in customer support and service.

Enterprise ASPs work with more robust, scalable, complex and tailored applications than the lighter, cross-industry applications typically offered by SMB ASPs. Also, companies in the US $100 million revenue range typically have demanding integration needs associated with complex legacy systems. The result is a considerably different set of market dynamics and compensatory survival strategies.

The Survival Guide is the result of six months of study ending in November 2001. It includes commentary with a range of key industry players and observers: senior executives from enterprise ASPs and their customers, venture capitalists and noted analysts and the best insights of Zanthus analysts. Content is organized by topic in the following ten sections:

1.0 Distinguishes enterprise ASPs from the SMB market and defines enterprise applications

2.0 Discusses the top competitors for enterprise ASPs, including systems integrators, software vendors and telecommunications companies

3.0 Assesses the impact of consolidation on the IT outsourcing market with special attention to enterprise ASPs

4.0 Builds on the ASP value proposition, highlighting the benefits most important to enterprise customers

5.0 Provides insight into how enterprise ASPs should prepare for future challenges, including integration across legacy systems, infrastructure management and customization, financing and the prevailing gloom around the ASP model

6.0 Enumerates the overarching strategies for success including adopting a vertical focus, streamlining of infrastructure deployment, customization and infrastructure processes

7.0 Brings the enterprise ASP market to life in three case studies:

7.1 eCenter: Is this PeopleSoft’s big return from a nearly fatal ERP strategy?

7.2 Is Qwest Cyber.Solutions, and infrastructure owners in general, well-suited to provide ASP solutions?

7.3 Why didn’t AristaSoft’s tight vertical focus and strong financial backing save this once promising company?

In the aftermath of the new economy, profitability is once again a requirement across industries. The ASP market will continue to consolidate as the market matures slowly. The years ahead will see the falling out of weaker companies but these failures shouldn’t obscure the value Web-based application provisioning brings to enterprise customers. Adopting ASP services remain a cost-effective alternative for companies struggling to maintain complicated IT infrastructure on their own.


Forward: Technology’s Compounding Impact

At the US $25 billion global enterprise Lockheed Martin it’s no mistake a recent annual report begins by affirming the cyclical nature of technological innovation and real profits.

The Bethesda, Maryland, aerospace and technology services company has a history of improving business processes and solving problems with technology. Among the most prominent solutions is its Missiles and Fire Control division’s Internet-based procurement system. Developed in 1997, it saves Lockheed Martin millions of dollars every year by speeding up the procurement process from 16 to only five days.

According to Lockheed Martin’s Robert Proffitt, the manager who spearheaded the initiative, the resulting e-procurement system reduced cycle time by up to 50% and cut costs by 25% to 50% for its customers.

It can be argued that the economic boom of the late 1990s was a direct result of IT investments like this one. The U.S. Bureau of Economic Analysis’ recent Survey of Current Business states the ‘IT revolution’ improved corporate productivity, rates of return, and the value of capital investments. Bureau economists surmise direct contributions of high-tech products to real GDP growth averaged an impressive 29% in the period between 1995 and 1998.

While economists find it difficult to quantify spillover effects (there’s no clear empirical evidence because adequate statistical measurements don’t exist at this time to directly link purchases of IT equipment to productivity growth across all industries) this view is supported by findings the industries most closely associated with high tech tended to have above-average productivity growth. If this relationship between innovation and economic rewards truly exists, it helps explain why the enterprise ASP market is buckling despite the inherent promise of the idea and recent market growth estimates of up to 200%.

Further explanation lies in a more expansive discussion of compounding advantages. To comprehend the ASP market’s troubles is to look beyond the scope of the market altogether. Jared Diamond makes the case that compounding advantages are a recurring theme over the entire course of human history in his Pulitzer Prize-winning Guns, Germs, and Steel; The Fate of Human Societies (1997). Wealth and power are distributed as they are now, Diamond asserts, because human development on some continents enjoyed early advantages over others, starting with east-west axis; the proliferation of species suitable for domestication (among them, the horse) and farming. Sedentary stratified societies flourished as a result and with that came such things as writing, political organizations, guns, swords, and ocean-going ships. Innovations rather than racial differences provided some with a higher platform of further advantages from which they were able to conquer and absorb the best of others, and, many times eliminate them in the process, with warfare or, unwittingly, through the introduction of deadly diseases.

The author’s sociological analysis of the last 13,000 years has a special significance for ASPs as they struggle in the nascent market. Like past civilizations, independent ASPs face severe competition from a variety of powerful companies. Companies such as IBM and EDS compete on scale, reputation and breath and depth of products and services offerings. They have made strides to either participate in or closely monitor the Web-based subscription model in its first years. In fact, today, few genuinely independent ASPs remain, with most strongly backed by established players in one form or another. This category includes the likes of PeopleSoft’s eCenter and Qwest Communications’ Cyber.Solutions.

In the future, their advantages are likely to be increased as the knowledge they have gained through either market participation, acquisition or close alliances with profitable ASPs is only compounded by the ASP market’s recent bad luck, namely, attrition and resulting credibility issues.

Taking advantage of the ubiquity of the Internet, the ASP model promises a faster, always-on subscription-computing environment for: faster rollouts for complex IT systems; inexpensive upgrades and expertise in supporting IT systems; and amortized payments as opposed to upfront capital outlays for software and hardware.

The enterprise ASP is anything but another mirage of a speculative climate. With that said, the next few years are likely to bring an end to the revolutionary ASP market but not its revolution in software provision.

Over the horizon, we’ll see the ASP market’s demise as well as an end to purchasing software as we know it. That’s the paradoxical state of application service provisioning today.