February 19, 2001

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On Shaky Ground

After offering complex services at low prices, some ASPs are at risk of faltering. What does that mean for their customers?

By Jennifer Maselli   (jmaselli@cmp.com)

More on ASP's:

TechWeb: Microsoft Preps Thorium, Casbah For .Net (1/19/01) TechWeb Finance: Financial Firms Turn To Outsourced CRM (1/11/01) TechWeb: ASPs Strive For Wider Acceptance (12/12/00)

ll was quiet last week at the headquarters of application service provider HostLogic Inc., located on the otherwise bustling campus of Florida Atlantic University in Boca Raton. An oversized receptionist's desk in the lobby didn't even hold a telephone, and in the parking lot, the spot reserved for CEO Herbert Goertz's black BMW sat empty. One state away, at a PSINet Inc. co-location facility in Atlanta, IBM employees were hauling away five server racks of computer hardware HostLogic had leased to run SAP enterprise resource planning applications.

HostLogic, which has filed for bankruptcy, shut its doors early this month. Its six customers learned the hard way that trusting critical applications to small ASPs can be risky business. The U.S. operation of Belgian manufacturer the Prayon Group, a HostLogic customer, was able to quickly sign a contract to move its apps to a Qwest Cyber.Solutions Inc. hosting center, but it may be weeks before the transition begins. Manufacturing company Tyco International Ltd. had worked with HostLogic for months planning an SAP implementation for several units in its $4 billion Tyco Flow Control division. A sign trumpeting the Tyco win still hangs in HostLogic's deserted offices, but the deal died when HostLogic closed down.

It's unlikely HostLogic's former customers will be the only ones to see their businesses disrupted by the failure of an ASP. Customers of AppliCast, an ASP offering low-cost Siebel Systems Inc. applications, worried they'd be in trouble before Agilera Inc. acquired the reportedly cash-strapped company late last year. There are dozens of startup ASPs offering low prices for hosting complex, labor-intensive applications, hoping to quickly build a reputation and lure more clients. But the business model is hard to sustain, and analysts expect to see more ASPs running out of cash soon. "Any company offering to take on all the hardware, software, and data center costs while charging a low price is going to be in trouble," says Merrill Lynch financial analyst Bob Stimson.

IT advisory firm Gartner expects 60% of the approximately 500 ASPs in existence to fail this year. In the current economic climate, ASPs can't count on additional venture funding to keep their operations going, and their prospects for getting acquired aren't much better. Goertz understands the new rules all too well, having come close to getting the second round of funding HostLogic needed to stay afloat. "Every time we were about to sign a deal, something would happen in the stock market, and the investor would pull out," he says.

Tyco, which stopped short of buying SAP applications from HostLogic, is feeling the repercussions. "We've lost a lot of time. I don't want to be in this situation again," says Brad McGee, Tyco's chief strategy officer. He had cited the low cost of HostLogic's services as a selling point when the two companies disclosed their relationship in July. Money remains an important issue as Tyco plans its next step. "I still think the ASP model is a good model," he says, "and we may use another one--only this time we'll look at their financials." Candidates will have to demonstrate that they have enough cash to reach profitability without requiring more funding.

Few ASPs can meet that criterion, so Tyco may turn to one of its own divisions to handle the job. Tyco Electronics, a $13 billion unit that has already deployed SAP applications internally, could be an ASP for its sister companies, McGee says.

Corio Inc., an ASP that has lost bids because it charges more than some of its rivals, may be one hosting provider that makes it. Merrill Lynch's Stimson says Corio is expected to break even by year's end. This week, Corio will add Oracle ERP apps to a lineup that includes PeopleSoft, SAP, and Siebel.

Ingersoll-Rand Co. may outsource Oracle and Siebel applications to Corio. "Many ASPs charge less, but companies like Corio are pushing for the right infrastructure and services," says Robert Orshaw, VP of E-commerce at the Woodcliff Lake, N.J., manufacturer. For instance, Corio maintains redundant systems for its applications.

For companies that already have cast their lots with cash-strapped service providers, contingency plans are in order. Adidas America went live last month with retail software implemented and monitored by Cutsey Business Systems Ltd., a well-established, 20-year-old vendor. Cutsey partnered with Allegrix Inc., a 1-1/2-year-old managed service provider, to monitor Adidas' infrastructure.

Adidas won't have problems if Allegrix can't stay in the game, says Cutsey president and founder John Cutsey. Although Allegrix hasn't received any funding since it got $5.6 million in first-round financing last February, CEO Chris Clabaugh says his 28-person operation is aggressively pursuing a second round of financing. "I think by the second or third quarter of this year, we'll be able to make a robust case to strategic investors," he says. "We're hoping winning Adidas as a client will help us with that, too." If that doesn't happen, Cutsey says he can get Exodus Communications Inc.--which acts as the co-location provider for Allegrix--to take over, or use internal staff to manage the job.

At J.P. Morgan Mortgage Capital Inc. in Atlanta, chief administrative officer Rob Wojciechowicz says he's been thinking of how to best protect the project the commercial mortgage company undertook last fall when it contracted with Capital Thinking Inc., an ASP, to implement an online automated commercial-loan-processing system. The Federal Reserve requires that Morgan Mortgage maintain redundant site facilities, and Wojciechowicz wants to mirror some of the functionality it gets from Capital Thinking on its own systems, just in case. He may never have to use it: Capital Thinking last week secured an additional $15 million in funding and signed up its fourth customer.

That's no comfort, of course, for a HostLogic customer in Florida who says the ASP never delivered the applications it promised. "I'm still getting bills [for consulting work] sent in envelopes with no return address," says the president of the company.

Meanwhile, HostLogic's former president, Chris Terry, seems to have put the company's troubles behind him. These days, if he's flying by night, it's as a full-time pilot with TWA--the job he held before getting into the ASP business.

with Larry Greenemeier

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