What Does an ASP Do? Let Me Count The Ways

What exactly is an ASP and what does it do?

International Data Corporation (IDC) in Framingham, Massachusetts completed a year-end study to determine the breadth of knowledge about application service providers. Half the executives interviewed had heard of the term ASP but only 6 percent had a detailed knowledge of what an application service provider does, reports Jessica Goepfert, senior ASP analyst for IDC.

This confusion stems from the fact that application service providers are creating a new business model. “The challenges of this new model, like education, are holding the ASP market back,” says Goepfert.

In 1999, the ASP market grew to $300 million, a 92 percent annual increase over 1998. IDC predicts the market will grow to $7.8 billion in 2004. But even with this growth, ASPs still occupy a tiny share of the outsourcing market. According to IDC, they accounted for 1 percent of total IT spending in 1999.

“Companies are calling themselves ASPs because it’s a hot term,” says the analyst. However, a much smaller number actually fit IDC’s very detailed criteria.

In the world according to IDC, an application service provider has five defining characters. They include:

1. Operating an application center. The core value of an ASP is hosting and managing a commercially available application.
2. Managing data at a site other than the customer’s.
3. Offering a one to many solution. ASPs have standard offerings with little customization.
4. Owning the application license or having an agreement to use the application.
5. Having total responsibility for delivering on all elements of the contract.

Marketing to Bigger Buyers

This confusion about ASPs hasn’t helped traffic to ASP Web sites. “At first, ASPs had the idea: if they build a Web site, the customers will come,” says Goepfert. But that “Field of Dreams” attitude didn’t work.

Hiring a sales staff was too expensive for most ASPs. So Goepfert says the vendors used their channel partners to get the word out. A good example is the strategic alliance between Corio and Cap Gemini Ernst & Young. One of the pillars of the partnership is that the consulting firm is marketing Corio’s services to its client base. Another example is the alliance Andersen Consulting formed with Jamcracker.

Today’s ASPs are targeting larger customers, observes Goepfert. Originally, the ASPs owned the small and medium sized market. These buyers couldn’t afford the application and didn’t have the requisite infrastructure in place, making it a natural fit.

Now the big companies are interested. Enlarging their market share gives ASPs the opportunity to learn how to work with the big boys. These corporations typically have legacy systems and “aren’t willing to give up their customization piece,” reports Goepfert. ASPs lose some of their scalability when they agree to increased customization.

Partnering to Round Out the Offerings

2000 saw a “proliferation” of ASPs in the market. This year the analyst expects a consolidation. Vendors in trouble will have to merge or be acquired. In addition, one ASP may merge with another to round out its offerings. Goepfert says being an ASP is “a tall order” because the company must be an applications expert, a network expert and a service expert.

This year the service component of that equation will become more important, predicts Goepfert. In years past, an ASP differentiated itself by the application it hosted. Now there are quite a few ASPs offering PeopleSoft, for example. So buyers will push for more support, better security or higher service level agreement (SLA) levels from their vendors, she adds.

For the network part, ASPs may begin partnering with network companies. This allows the ASP to focus on the application and any development. Goepfert says these “management service providers” will play a more important role on the ASP scene this year.

Lessons from the Outsourcing Primer:

• Very few business executives understand what an ASP actually does.
• ASPs are using their channel partners to gain new business.
• ASPs account for just 1 percent of the IT outsourcing market.
• Consolidation will occur this year in the ASP market.
• ASPs will partner with other companies to round out their offerings.