Poor Economy Not Paying Off for ASPs

In tough economic times, the ASP value proposition, which is big on reducing fixed costs, should shine through bleak financial forecasts. So why are customers holding back?
Posted September 4, 2001

Allen Bernard

Allen Bernard

Like most U.S. industries, the current economic doldrums are negatively affecting application service providers (ASPs). But there is a bright side. In the long run, corporate belt tightening is expected to raise the average businessperson's awareness of the ASP industry and the inherent benefits of outsourcing will eventually lead to increased sales.

"The economy has caused people to investigate, which is good for us," said Ronald Brown, CEO of e-commerce ASP Bizfinity.

In the short term, however, the poor growth rate of most markets is causing longer decision-making cycles -- up to 120 days, double the time of just 10 months ago -- and more cautious buying, said Joel Schleicher, chairman and CEO of enterprise ASP Interpath.

"It's 'no' on the bottom line today," Schleicher said, "but 'yes' on the bottom line over the next 12 months. It's raised recognition, but the economy has extended the sales cycle."

Brown is seeing a similar phenomenon at Bizfinity, of Cupertino, Calif., which offers small business e-commerce packages ranging from $25 to $300 per month. Companies are searching for ways to increase revenue today through technology and ASPs, but those potential customers are wary.

"I would tie (Internet interest) back to the economy," Brown said. "The economy is driving (companies) to be much more motivated about exploring options. But, while they're motivated to investigate, they're still cautious."

ASPs Fight Customer Fright
"What we're finding," said Michael Edell, president and CEO of eLabor, "is customers are just really scared of making a move, even though financially the ASP might be the way to go."

eLabor, a Camarillo, Calif., company that offers enterprise-level workforce management software, has been in business for 18 years, having made the switch to an ASP model two years ago. In recent months some of its clients have actually changed their contracts from ASP delivery to a license sale.

"We've had three deals that have flipped over from hosted to licensed," said Edell. One customer recently decided it would be better to spend $300,000 on a licensed version of eLabor software than spend $6,000 a month for the hosted version.

This, says Edell, is an example of the skittishness caused by overall economic weakness and the recent shakeout in the ASP industry. Not only are customers concerned about their own financial health, they are worried about the health of ASPs in general.

Customers "would rather wait or go license than take the chance the economy is gong to polish off the rest of the pure-play ASPs that are out there."

For Some, Customers Abound
While some companies may have reservations about the health of the ASP sector, others have customers embracing it. For example, one sign that there is still confidence in the ASP model are reports of full sales pipelines. Managed Ops.com, Salesforce.com, and Mi8 have all reported that sales reps are spending most of their time qualifying potential customers, as opposed to finding leads.

"Salespeople always want more, of course," said Tom Brennen, vice president of marketing at ASP wholesaler Managed Ops.com. "But we've got a healthy amount of activity right now. The spring slowed down for everybody, but I'm encouraged."

eLabor's Edell agrees that the worst may be over. Although not on track to pull down the numbers it did last year, eLabor's second quarter, so far, is the year's low point, says Edell. Since then, interest and sales have picked up.

Mixed Messaging Message
For messaging ASP USA.net, the current economic slowdown is both a blessing and a curse, said Scott Chasin, the company's chief visionary officer.

On the plus side, interest in their services has picked up considerably. But, on the down side, since they offer what's often considered a non-mission critical solution, companies are not buying as fast as they once did.

"Is the economy and the current state of the market shrinking the sales cycle? I would say no," Chasin said. "Is opportunity increasing because of companies looking to outsource messaging? Yes."

Also of particular benefit to USA.net are rapid changes in messaging technology and the demand for anytime, anywhere access to messaging that is driving interest. "That complexity equals cost that has to be spent inside of someone's budget," Chasin said.

Because of this added dimension, some companies are making buying decisions more quickly to take advantage of cost savings and technological innovation that could boost productivity when it's needed most. Still others, however, are fence-sitting, waiting to see which way the economic winds blow.

Surviving the ASP Mystique
It appears that even though ASPs are uniquely positioned to deliver cost savings and productivity gains in the same package, most of their potential customers are still fearful of placing mission-critical applications with a company that may not survive the current economic slump. This, according to Edell, is a change from a couple of years ago. Customers are not so much fearful of the technology as they are about their partner ASP staying in business.

"There's an interesting combination of things that has nothing to do with reality," Edell said. "It has nothing to do with someone being nervous because there's significant downtime or the equipment is not performing. It's pure and simple nervousness about the economy and where things are going."

Allen Bernard writes for ASPNews.com, an internet.com site where this story first appeared.

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