The end of the ASP as we know it

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Today, Web Application Hosting (WAH) is simply a different way to deliver business applications. The early adopters are fast growing companies with virtually zero IT infrastructures. They want to focus on their core competencies instead of spending time and money implementing and managing software applications. Since customization is generally not allowed, customers are forced to adapt their business processes to the workflow provided by the software. Customers typically outsource just one application and integrate it with internal systems. In short, WAH offers top-tier enterprise applications quickly and inexpensively to meet the internal needs of growing companies.

This scenario, however, is at the beginning of the evolutionary curve. Over the next five years and beyond, the focus of WAH will change from delivering applications to delivering solutions. When considering service providers, customers will be less interested in software applications, hardware platforms, and other enabling technologies. Instead, they will focus on the business values that the service provider offers. How can you help me reduce my inventory levels? How can you help me reduce procurement costs? How can you help me optimize my supply chain? How can you help me attract and retain customers? These will be the questions potential customers will ask.

Enabling technologies, such as software, will not be the primary selling point. The service provider’s name and reputation will be the dominant brand. In some ways, this is similar to the PC industry. A consumer does not buy a computer solely based on memory capacity or the microprocessor. The purchasing decision is based on the value of the total package, taking into account price, warranty, the ability to upgrade, and other factors. Since suppliers typically produce systems with similar configurations, the manufacturer’s name and reputation become the driving factors. Similarly, a company will sign a contract with a service provider based on the total business value it will receive. The software will become the “microprocessor” of the service firm–an important component of the solution, but not the overriding decision factor.

In order to meet customer expectations, service firms cannot simply provide horizontal solutions. A service firm must specialize in solving the needs of a particular vertical industry. To accomplish this, the software applications that are implemented must also be vertically focused. In addition, industry experts should be on staff to help customers optimize their business processes.

Web Application Hosting Market, 1999-2004: The scope of the Web Application Hosting Study includes five application types: ERP, CRM, SCP, WMS, and TMS. The market size only reflects revenues generated by the ISVs, and does not include revenues generated by third-party ASPs, system integrators, and others. The growth represents a CAGR of 153 percent.

E-business is forcing companies to look beyond their four walls. The focus has shifted from optimizing the enterprise to optimizing the entire supply chain. By having a vertical strategy, a service provider can establish a community where manufacturers and suppliers can collaborate. The service provider becomes, in a sense, a value-added portal for the industry. It can facilitate the procurement of raw materials, the sharing of forecasts and plans, the request-for-quote (RFQ) process, and other business functions. In short, today’s application service providers will eventually transform into next-generation business-to-business (B2B) market makers.

Wireless access to the Internet is another factor that will impact the WAH market. In general, users today need a wired connection to access applications and data, typically using a desktop computer or laptop. However, the emergence of pervasive computing devices such as Personal Digital Assistants (PDAs) and cellular phones are changing the landscape. The phenomenal success of the Palm Pilot is a testament to this trend. Although wireless Internet access is just emerging, it will become a dominant technology in the years to come, driven in part by the Wireless Access Protocol (WAP) standard being endorsed by industry leaders. In short, users in the future will not be at the mercy of wires. They will demand access to real-time information from their cars, at the beach, or anywhere else. Service providers need to prepare for this shift, while software providers need to design their products to comply with WAP standards.

In summary, as with everything involving e-business, change will be a dominant force over the next five years. The Web Application Hosting market will be different than what is emerging today. There will be more emphasis on solutions instead of applications, an increased desire among users to collaborate and exchange information, and a continued push to improve supply chain efficiencies and customer relationships.

Adrian Gonzalez is a Senior Analyst with ARC Advisory Group, a leading E-Business consulting firm based in Boston. He can be reached at adriang@arcweb.com.