InformationWeek: The Business Value of Technology

Analysts expect more infrastructure vendors to offer their wares to ASPs, which, in turn, should improve ASPs' ability to offer value-added software services to customers. "There will be two players in this market--the actual ASPs that deal with the customer and the commodity provider that concentrates on the data center, infrastructure, and metering and monitoring services," says Reda Terdiman, VP and research director for Gartner Group. "The latter providers, such as HP, will be seamless to the end user, but will allow the ASP to concentrate on developing more and better solutions for their customers."

The emergence of large vendors in the ASP space could have a dramatic impact on how the market shakes out, analysts say. Vendors of outsourcing services, including IBM and EDS, are tailoring their new ASP services for the budgets and IT needs of small to midsize companies. Also, as is happening in the conventional IT services market, there will most likely be significant consolidation. In a study last month, the Meta Group predicted that most ASP startup companies will be bought by larger companies within five years.

Apparently, that's why some companies would prefer to go with a large vendor for ASP services. Henry Wurst Inc., a privately held $100 million catalog printing company, turned to EDS for SAP applications. "We wanted a company with a good reputation and an established practice that could give us better service levels than we could provide ourselves," says Steven Harrison, director of IT at Henry Wurst. "The fact that we could rent the application from EDS and eventually own it after a three-year period also made it attractive to us." In the InformationWeek survey, about 77% of respondents said they rented or leased applications because of the expertise offered by their service provider.

Hirsh Industries Inc., a maker of home-office furniture and supplies in Des Moines, Iowa, also turned to EDS for SAP applications after its own ERP efforts fell short. "We were in the middle of a failed ERP implementation," says Brandt McKey, ERP team project leader for Hirsh. "We didn't have the expertise, the right project leaders, and the software wasn't robust enough for our needs."

EDS has offered application hosting through its outsourcing services for 36 years, but began to woo midsize companies with ASP-like services in February when it formed its EDS E.solutions unit. "We now offer a prepackaged and prepriced set of services, which makes it easier and more affordable for middle-market companies to turn to EDS for hosting needs," says Mike Ahern, director of application hosting and management at EDS E.solutions.

EDS says that it can provide a company with a price quote for hosted, rent-to-own SAP software and services within an hour. When it launched, EDS E.solutions was quoting a price of $425 to $660 per user per month. But Ahern says those estimates were too low, and prices now are higher. In addition, customers pay an implementation fee, which varies according to the customization work required, as well as migration and systems integration fees.

Other large vendors are building up their own ASP strategies. IBM Global Services last year began to offer J.D. Edwards ERP software on a rental basis, and has since added Great Plains' software for financial management, SalesLogix's sales-force automation software, and Ultimate Software's human-resources and payroll applications. Customers typically prefer to access financial apps over a secure virtual private network, while less-strategic applications, such as human resources, are usually accessed over the Internet, says IBM's Dodsworth-Rugani. IBM's pricing varies according to the number of users and the integration, customization, and migration requirements, she says. IBM will also remotely manage applications running at customer sites.

Still, some companies say they prefer to work with smaller ASPs, because they're concerned traditional outsourcing vendors will dedicate most of their time and effort to their larger, more lucrative customers. "A large outsourcer would have been overkill for us," says Bob Peck, senior VP of information systems at Alliaz Insurance Co. in Burbank, Calif., which uses Lotus Notes hosted by Interliant Corp. Peck says his company never considered a large vendor: "We're a small fish compared with their other customers."

McKey of Hirsh Industries says large outsourcing vendors may be getting a bad rap in the ASP market. "People are confusing the old EDS with this particular line of business," McKey says. "EDS provides us with greater resources and expertise than a niche provider or ASP startup would be capable of." EDS says it's working to gain the trust of smaller businesses, and provides services for about 10 midsize companies. "We're overcoming this stigma by getting the message out that we're focusing on the small and medium-size enterprise," Ahern says. EDS expects to add more software offerings to its rent-to-own service by year's end.

Meanwhile, most of the smaller ASPs are building their expertise any way they can. Corio, for example, says it recently lured consultants and integrators from PeopleSoft. That kind of expertise will go a long way toward making small ASPs a viable choice. "The fact that they have PeopleSoft experts was a big factor in my decision to enlist them and go for an ASP model," says Clarent's Blumhorst.

Will the ASP market be dominated by a plethora of small service providers or a close-knit family of large ones? Will ASPs compete for the emerging-enterprise market or find ways to win the interest of larger companies? However it plays out, ASPs have already had a significant impact on the way users think about software.

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Illustration by Chris Gould
Photo of Russell by Alan Blaustein