Faulty Assumptions Give Way to ASP Reality

The rapid rise and fall of ASPs is creating significant consternation throughout the IT industry. On one hand, the model of packaged applications, variable pricing and scaleable services appears logical; on the other hand, existing ASPs are struggling to find customers, to become profitable and are changing their “song” regularly — saying anything, it seems, to win customers.

At the same time, most IT managers remain confused about ASPs and are attempting to reconcile the numerous startups with longer-term evolutionary changes within the services industry — in essence, asking “when, what and how is this ‘ASP thing’ appropriate for my mission-critical IT operations?”

ASPs were founded upon certain assumptions (see Figure 1) that have yet to materialize. Vendors are increasingly developing consulting organizations to augment these deficiencies, but doing so at the cost of many advantages touted as unique to ASPs (e.g., rapid implementation).

Vanilla Not the Flavor
ASP startups assumed that clients would be satisfied with vanilla application implementations, but most IT organizations still require at least 10 percent customization to adapt to current business processes and provide legacy interfaces and data conversions. The customization not only incurs implementation costs, but also significantly raises the ongoing support (e.g., hosting, stability, patches, updates), negating any price points quoted in early vendor discussions. Indeed, our research indicates that applications with even 10 percent modifications cost 2.5x-3x more to support over three years than the vanilla application.

Early ASP market predictions proved overly optimistic and assumptions of application capabilities were premature, resulting in the fallout of many startups (through acquisition, merger or bankruptcy). In fact, many of the firms that were acquired or went bankrupt in 2000/01 had excellent offerings; they just could not secure secondary or tertiary private equity funding.

A common question asked of META Groupis “Why have large, traditional outsourcing vendors failed to develop ASP offerings?” Our research indicates that large vendors will develop offerings when the market becomes stable and profitable. By 2003, we believe nearly 80 percent of technology service providers (including IBM, EDS, CSC, and the Big 5) and software companies — including enterprise resource planning (ERP) as well as infrastructure and application management — will offer variable pricing, hosting and management services. Many are currently conducting test marketing, but will eventually launch full-scale offerings.

Through 2003/04, ASP services/products will stabilize (beyond the hype) and shift from services and software into full business solutions. Market growth will be most rapid in financial services, government and healthcare (industries sensitive to assets and large project costs). Moreover, ASP solutions will reach into small and medium enterprises as they evolve to provide business services around (or that include) software purchases.

IT organizations that are lured by ASPs’ comparatively low price quotes must carefully assess the customization required (either the application is adapted to business processes or the internal business processes must be adapted to the application). Moreover, IT managers should involve financial controllers, because the decision to pay for the fixed costs or a monthly fee (including the appropriate financing cost) is often determined by the company’s financial objectives (e.g., capital versus expense) rather than strategic IT objectives.

In essence, ASP products and offerings will remain in the market for a very long time. What remains to be determined are models for actually calculating accurate prices (pricing models remain highly volatile). Moreover, vendors are realizing that small and medium enterprises are not high-risk, aggressive technology adopters, but rather will wait for services to be proven and then build them into multi-year technology adoption plans.

META Group has always believed that the ASP market would grow 50-100 percent per year through 2007/8, but that degree of euphoria exhibited in 1999/2000 precluded an ominous “reality check” for many idealistic technologies and investors alike.

Dean Davison is vice president, Service Management Strategies at META Group. He specializes in the outsourcing industry, including market trends and analysis, service providers (ASPs, etc.), vendor positioning and service-level agreements. He advises IT organizations on best practices for planning, executing and managing sourcing agreements. He also helps clients identify, qualify and select vendors for their sourcing initiatives. Prior to joining META Group in 1996, he served in senior positions with Sequent Computer Systems. He received a B.S. at Brigham Young University and an M.B.A. from the University of Connecticut. He can be reached at deand@metagroup.com.

This article first appeared in ASPnews.com, an internet.com site.