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March 27, 2000

Solution Series: Vendor Strategies
Biggest Challenge? Find The Right Niche
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Meanwhile, other ASPs are taking a broader vertical approach. Learning Station Inc. CEO Craig Larsen is targeting K-12 schools, because most of them don't have an IT staff or the infrastructure to provide technology training for their students. The company offers Microsoft Excel, PowerPoint, and Word applications, and other educational software to 10,000 users in 60 schools. Unlike ASPs that offer enterprise-class software licenses financed over a three-year period, Learning Station charges a sub-scription fee of $40 to $50 per user.

Jonathan Lee, Corio's founder and chief strategy officer, is betting that a vertical push will strike the right chord with users. Corio offers integrated enterprise application packages to manufacturing, high-tech, and dot-com companies. Corio pre-integrates leading apps such as financials and human-resources applications from PeopleSoft, manufacturing from SAP, Siebel Systems' customer-relationship management package, and E-commerce applications from Commerce One, saving customers expensive integration costs. Corio's ap- plications are "templated" to serve each market sector, and the company will provide front-end customization to change the look and feel of an application for a customer. The price is $695 to $895 per user, including integration between offerings.

"Customization is one of the most overgeneralized and misunderstood topics in the ASP industry--by both the customer and the provider," Lee says. Corio provides personalization tools to modify screen layouts for customers, along with automatic upgrades and report-writing functionality. "These are all things customers will need and we will provide," he says. What Corio won't do is change core application code or create custom-built applications from the ground up.

Qwest Cyber.Solutions CEO and president John Charters says his company makes its money from highly customized outsourced applications. Like Corio, Qwest focuses on areas such as manufacturing, retail, and the service-provider market, but the company is going after customers that are larger then Corio's. That's why "we need to offer more-specialized services," Charters says. Qwest has some templated solutions as a result of its partnership with KPMG Consulting and says it can offer lower prices than a traditional outsourcer. Charters says there's not a lot of difference between ASPs and traditional outsourcers.

According to Qwest, a narrow ASP model doesn't provide high enough profit margins to sustain itself. Yet, "profitability isn't what most ASPs are going for right now," says Lauri McCabe, an analyst for Summit Strategies. "Building customer mass is what's most important, and many are forgoing profit in order to build their infrastructures and customer base." She says ASPs will have to show a profit next year to prove to the market that the business is viable.

bar chart To achieve this, some companies may have to delve deep into core code, but it won't be with the co-operation of most software vendors. No less than Larry Ellison, chairman and CEO of Oracle, in a news conference about Oracle's ASP business plans last fall, made his position clear: "No company, no matter how large or small, needs to change core code."

EbaseOne Corp. CEO Charles Skamser says changing core code is more a matter of perception than a necessity. "Large enterprises want to change the core code because they want to feel as though what they have is very different from what everyone else has. It's just a matter of comfort."

Changes in the whole E-services market are inevitable once customers start asking for more functional ASP offerings. For one thing, prices will rise well beyond the $400 to $895 per user that many ASPs offer for enterprise-class applications. And the prospect of higher margins may be attracting software vendors to enter the fray. PeopleSoft this month launched its own ASP model to attract new customers and to mine its installed base for additional revenue. PeopleSoft wants existing customers to pay a monthly fee to host its software; it also wants new customers to purchase a PeopleSoft license and pay a hosting fee on top of that. The vendor is reluctant to change the core code, but will do some minimal changes if requested. The company will not focus on vertical markets as it tries not to overlap too much with its 11 ASP partners. "We have enough partners focusing on specific verticals so we don't feel we need to provide that service," says Deepak Gupta, general manager of PeopleSoft eCenter.

Given the number of players and the amount of overlap, many see consolidation as inevitable. "Vertical ASPs will look to acquire other vertical ASPs to expand their customer reach and expertise," says Corio's Lee. At the same time, some niche providers will fade or be taken over by more-aggressive competitors. To protect itself, ebaseOne is looking to make acquisitions. "We hope to acquire four to five companies over the next three months," Skamser says. "If we don't grow quickly, we'll become an acquisition target."

Revenue alone won't necessarily determine the winners, though; customer satisfaction will--and that's where the real maturity is needed.

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