Countdown To ASP Survival

With all the current reality TV programs, it seems that "survival" is the popular theme this year. Whether it's surviving challenges of skill and endurance on Survivor or conquering sexual temptation on Temptation Island, high ratings prove we like the whole survival theme.

It makes good sense, then, knowing that life imitates art (or is it the other way around?), that we like to see this same theme in the real world. Nowhere is this theme better displayed than in the world of ASPs (application service providers). According to Gartner, ASPs are part of a $3.6 billion industry which is predicted to grow to over $25.3 billion in 2004. The downside to this prediction is that of the nearly 500 ASPs vying for their piece of the pie, only 5% will still be in business by 2004. Thus, the stage is set: survival of the fittest.

When asked what will be the determining factor as to who flourishes and who flounders, ASPs have more answers than Temptation Island has "connections." According to Mike Share, director of business development at theSupplyChain.com, "New applications are the key to an ASP's survival as opposed to just taking the same old client/server applications that are out there and running them in a hosted environment. That kind of solution does not take advantage of all the cost-savings of an ASP model. Companies that have unique products or can partner with companies with unique products will stand a better chance of survival." When the competition heats up, so do the requirements for being a successful ASP. Tom Scott, executive VP for ebudgets.com, has a similar view on ASP survival. "Successful ASPs need to offer their customers multiple options that are synergistic," says Scott. ebudgets.com, for instance, also offers its Web-centric product in the traditional in-house model deployed over a company's intranet. The goal of this ASP is to give customers the option to migrate their data over to the service provider after they feel comfortable using the software in the traditional environment. Another key to survival in the ASP arena deals with a theme near and dear to our magazine's heart: integration. "The key is making sure that whatever application an ASP offers, it can be integrated with as many other applications as possible," says Asif Khan, VP of business development and cofounder for whodunet inc. By offering an open platform solution, ASPs stand a better chance to help customers migrate more enterprise solutions over to the service provider. "Some customers may start out by outsourcing a few specific systems such as procurement or finance over to an ASP," says Khan. "Once the ASP's service and reliability are more trusted, though, companies can consider turning their CRM (customer relationship management) and WMS (warehouse management system) needs over to the ASP as well." Khan's point is a reminder that it is 10 times easier to keep a customer than to get a new one; therefore, it is good business sense to create or acquire more solutions to offer to one's customers.

Before Signing On The Dotted Line...
In addition to looking at the aforementioned signs of an ASP's strength, companies are encouraged to look at the SLA (service level agreement) as well. It is here, in black and white, where the details of the relationship are spelled out. Once each party's expectations are clarified, the customer and the ASP can have peace of mind.

So what are the keys to look for in a good SLA? For ebudgets.com's Scott, the name of the game is flexibility. "Our philosophy is, 'Let's give you an out if this is not a good solution for you,'" says Scott. "We've lowered the term of our contract from the traditional 24 months to six months." ebudgets.com feels that by building this kind of flexibility into its SLA, skeptical customers will be less likely to hesitate than if they are required to commit to renting an application for a year or more.

In addition to flexibility, a very important provision the contract needs to address is a contingency plan in the event the agreement is broken - either by the customer or by the ASP. In a traditional leasing situation, such as a car lease, if the lease is broken, the car is returned to the dealer and the lessor pays some kind of penalty. In the ASP model, the product is the customer's data, and how to deal with this intellectual property and any related penalties need to be spelled out in writing. "The way whodunet does it is we set up an in-house server system that does a data pulling exercise at certain times of the day," says Khan. If whodunet goes out of business or is acquired, its customers have the assurance that their data is already in house. "Even though they no longer have access to the software solution they were once renting, the customers would at least have access to their data," says Khan. In addition to the concern about the ASP breaking the SLA, ASP consumers should be aware of the penalties that they would face if they broke the contract. It all needs to be spelled out in the SLA.

Besides these important factors in an SLA, analyst Traver Gruen Kennedy from the ASP Industry Consortium feels there is an equally important, often overlooked, aspect to the service level agreement. "A contract is only as good as its ability to be enforced," says Kennedy. "The SLA should not be based on state law, U.S. law, or national law. It should be based on the ASP Industry Consortium Mediation and Arbitration Rules as drafted by the World Intellectual Property Organization (WIPO) in Geneva. These ASP rules are now accepted around the world, and they're binding in 175 countries." The ASP rules include a dispute mediation avoidance mechanism, a mediation mechanism, and even an arbitration mechanism if things would ever get to that level. An ASP may be based in the United States, but its applications may be owned by a company in another country. Additionally, it may rent hardware owned by a company in a third country. "It's possible to have more than a dozen nationalities and countries represented if a breakdown in the service level agreement were to happen," says Kennedy. "The ASP Industry Consortium's rules are made for smaller companies that can't afford to go to litigation in four countries. It is designed to help companies resolve any disputes in a timely fashion and get back to business. This is something every ASP customer should demand."

Final ASP Points To Ponder
The final checkpoints that companies considering partnering with an ASP should consider are threefold:

• How many customers does the ASP have?
• What is the quality of the ASP's Web site?
• What kind of funding does the ASP receive?

"An ASP that is backed by a great deal of venture funding should be a concern to anyone considering that ASP," says Rob Rennie, CEO of theSupplyChain.com. "ASPs that have shown growth by making their own investments versus receiving heavy investments are a more solid choice." Kennedy sums up this thought even further when he says, "No matter how cool your technology is, it still matters how your business generates cash. For people to ignore that is not good business."

No matter what kinds of acquisitions, mergers, and bankruptcies we see by the end of the year, ASPs are not going away. In fact, "By 2003 the ASP model will be much more mainstream," says Kennedy. This outcome is fairly quick, considering that it took the Internet about 10 years to reach the same level of adoption. The term ASP sprang up in spring of 1999 and became hip in less than half the time it took for the Internet. "By the spring of 2004 everyone will say, 'ASP is such a great idea; why didn't we do it sooner?'" says Kennedy.