ASPs Aim To Survive...And Thrive

The rumors of the death of the application service provider market may be greatly exaggerated. But no one questions the fact that many ASPs are in precarious health.

One prescription for survival is for ASPs to rethink their model of catering to startups and small businesses. "ASPs that can't penetrate the Global 2000 won't survive," says Bob Stimson, a senior analyst with Merrill Lynch.

ASPs emerged a few years ago offering hosted enterprise applications, primarily to dot-coms. The demise of so many of these companies has deflated the market, and once-promising ventures, such as Collabria, HostLogic, and Pandesic have folded. Luckier ASPs have been acquired; AppliCast was bought by fellow ASP Agilera, and Allegrix by the Progress Co. Last week, service provider Interpath Communications Inc.completed its acquisition of ASP Interliant Inc.'s enterprise resource planning hosting and related consulting services business.

Other ASPs, including Corio, USinternetworking, and Qwest Cyber.Solutions, are trying to sell their services to larger, more-established clients and offering accompanying systems-integration services. It's not a new approach (see "ASPs Gain Ground," Oct. 9, 2000; informationweek.com/807/asp.htm), but one that's being pursued more aggressively as ASPs' customer base shrinks.

As they expand their offerings, successful ASPs will be those that carefully walk the line between diversity and dilution, says Lars Rabbe, CIO of RedBack Networks Inc., a $278 million networking systems provider. "An ASP needs to provide the skill on some particular application or in some specific industry," Rabbe says. "If it tries to extend itself too far, it dilutes its offering and can't live up to its end of the bargain."

Qwest Cyber.Solutions has the right balance for RedBack, which last year awarded the service provider a five-year, $18 million contract to host Oracle enterprise resource planning and Siebel Systems Inc. customer-relationship man-agement applications for 800 employees. "We wanted stability, and Qwest Cyber.Solutions had that, thanks in part to backing from Qwest Communications International Inc.," Rabbe says.

But even Qwest Cyber.Solutions, one of the larger ASPs, has had its problems. KPMG Consulting Inc., which formed the ASP two years ago with Qwest Communications, sold its $63.3 million, 49% stake back to Qwest in December after Qwest Cyber.Solutions racked up $65 million in losses in the first three quarters of last year.

Despite these difficulties, the economic slowdown may be giving ASPs an edge. Businesses that want to cut costs and get a rapid return on IT investments see advantages to outsourced application hosting: minimal up-front investment in equipment and application licenses, Web-based access to apps, fixed monthly billing, and smaller IT staffs.

For Maxicare Health Plans Inc., a health-care provider with 370,000 members in California and Indiana, the biggest attraction in using an ASP is not having to spend nearly $50 million to upgrade its core transaction system next year. "Instead, we spent a few million dollars to upgrade our desktops, and can pay for the applications on a per-member, per-month basis," says Maxicare chief operating officer and executive VP Susan Blais of TriZetto Group Inc., the ASP Maxicare hired.

The ASP market's strengths lead research firm Aberdeen Group to predict that worldwide spending on ASPs will grow from $3 billion this year to $16 billion in 2005. Research and analysis firm International Data Corp. says global spending on ASP offerings, including application hosting and management, will reach $13 billion annually by 2005, compared with $693.5 million last year.

But money spent on application hosting services is luring competition. Large IT service providers such as IBM Global Services and EDS are pushing to both host and manage applications. Some software vendors are getting more aggressive, too. Oracle, for example, is expanding deployment options for its E-Business Suite Online, a hosting service for ERP, CRM, and E-business applications.

Ingersoll-Rand Co. likes the ASP model so much that it recently tapped Corio to host new Siebel CRM applications. The $9 billion Woodcliff Lake, N.J., industrial-equipment maker is considering hiring an ASP for an Oracle ERP system it will roll out later this year. The Siebel apps, launched this month, will help Ingersoll-Rand sell and support a new vehicle in its Club Car Inc. golf, transportation, and utility vehicles division. Club Car staff will use Siebel to access customer data and link online to their 2,000 distributors and dealers. With Corio, Ingersoll-Rand will save 27% over three years on Club Car's CRM support applications, says Robert Orshaw, Ingersoll-Rand's VP for E-business.

Corio, which reported a loss of $83.7 million on $43.6 million in revenue for 2000, says its revenue from application hosting is growing faster than revenue from systems integration and consulting. By year's end, Corio expects application hosting to be half to three-quarters of its revenue, up from a quarter at the end of last year. The subscription-based fee model ensures recurring monthly revenue for the ASP.

The key to Corio's survival will be its ability to package services around its core hosting business, analyst Stimson says. In general, ASPs must offer managed services or partner to provide them. They must support standardized directories and directory services and a single sign-on for all applications.

USinternetworking Inc., in which Microsoft invested $50 million last year, will succeed as long as it retains the software vendor's support, Stimson says. This partnership gives Microsoft an application-hosting partner and may prove useful to both parties as Microsoft moves forward with deploying Internet-ready HailStorm services.

While Corio has chosen to rent space from Exodus Communications Inc., USi hosts applications from its own data centers. This large investment has been troublesome for USi in recent quarters. With about 1,100 employees and 170 clients, the ASP reported a net loss of $175 million on revenue of $109.5 million for 2000. The company says it signed $43 million in new contracts in the first quarter, including Air Cargo, the Arthritis Foundation, and Coors Brewing. USi expects to save $35 million this year by cutting its head count by about 25%.

Qwest Cyber.Solutions is privately held and insists that clients are most interested in outsourcing prepackaged sets of applications that address specific business functions, such as manufacturing or human resources, rather than customized E-business applications. "Time-to-benefit is still one of the biggest sales points for Qwest Cyber.Solutions," says John Charters, president and CEO of the company, which has 185 clients.

Expanets Inc., a privately held provider of voice and data services, signed Qwest Cyber.Solutions to a five-year, $22 million contract earlier this year to host, back up, and manage Expanets' IT environment, including Oracle ERP and Siebel CRM applications. Joe Bologna, Expanets' director of IT infrastructure and services says he chose Qwest Cyber.Solutions because the ASP's operations run atop a reliable IT backbone provided by Qwest Communications. "If that system goes down, it could cost us millions of dollars today," he says.

The application-hosting market has seen much transition in the past few years, starting with the third-party ASPs who brought the notion of software rental to the public's attention. The market may expand to include software developers, hardware makers, and telecom providers, but the mantra is the same, says Ingersoll-Rand's Orshaw: Regardless of who's hosting the app, it's in the service provider's best interest to get its clients up and running quickly, with ongoing support so it continues to earn revenue. Adds Orshaw, "That's the thing I love about the ASP model."