The ASP Model: Still A Profitable Alternative

A lot has happened in the ASP (application service provider) market since Business Solutions covered its first "ASP Voyager" nearly three years ago. (See the December 1999 feature story) In the period that followed, enthusiasm for the new business model and healthy doses of venture capital created new ASPs faster than we could write about them. They came in all shapes, sizes, and vertical markets, but what many of them have in common is that they aren't around anymore, at least not in the form they once were. Some ASPs felt VARs would simply sell subscriptions to their services and be happy with the recurring residual income. While some resellers have found this model appealing, there appears to be greater success among those VARs who have become ASPs using a Web-native software solution from an ISV (independent software vendor).

Address Budgetary Objections, Provide Vertical Expertise
"It's a numbers game," admits James Smith, president of Octigon, LLC (Birmingham, AL), a Web content management vendor with partners who deploy its software via ASP. "On the lowest end, some of our partners have subscription rates that start at as little as $125 a month per user and go up from there. The goal is to get enough users to set up an annuity that provides your business with a reliable revenue stream." Smith emphasizes that, for some customers, the relatively inexpensive, predictable rates for a hosted solution may be the only way to get them in the door. While it may not be a great deal of money, it's money a VAR could be leaving on the table if he doesn't offer an inexpensive alternative. It is also a chance to build a lasting relationship with a customer who may one day choose to bring the solution in-house, complete with hardware, software, and network upgrades.

However, Steve Jorgenson, director of managed services at integrator SJ Technologies, Inc. (Phoenix), states that offering hosted services can generate consulting revenue. While Jorgenson agrees that some small or medium organizations have found it beneficial to outsource, many larger organizations have found it appealing, too. SJ Technologies drives these opportunities by advising customers on infrastructure issues, transition resources, and cultural change, but its vertical expertise is also a tremendous advantage. By specializing in regulatory compliance issues, SJ Technologies addresses a pain point for many organizations that fear the repercussions of failing an audit, but don't necessarily have the IT staff to research and implement a solution. "When firms understand that they don't lose compliance by outsourcing and realize the potential economic benefits of doing so, it becomes clear they need to consider our services," says Ian Singer, president and CEO of SJ Technologies.

Consulting opportunities are also increased when hosted services aren't viewed as an all-or-nothing solution. "Even for a large company with a data center, a VAR can offer an extension of the system with a service such as e-mail archiving," notes Jorgenson. Such a hybrid system could overcome the customer's fear of losing control of its data or address a specific issue that is difficult to manage.

ASP Can Grow Your Customer Base, Reduce Your Support Headaches
"One of our biggest challenges as an integrator is the ability to create a national reach," says Singer. With browser-based applications that require no installation at the individual desktops, an integrator can manage an application from a central location and deploy it to users anywhere in the world. For example, if a customer acquires a new company, those employees can be included in the centralized system in a relatively short period of time.

Even the best solutions will eventually encounter some performance issues. Hosting the application allows the integrator to address these quickly and possibly even prevent them. "Many times we have to take ownership of a solution anyway," notes Singer. "So hosting makes sense for the integrator as well as the end user." Jorgenson adds that hosting an application also allows the VAR to dictate some of the maintenance and proactive/preventive measures that keep an application running at peak performance.

ASP Meets ISP
"When it comes to hosting, consumers are well-informed," says Smith. "A guarantee of 99% uptime is no longer acceptable, but the massive infrastructure to support 99.999% uptime is an enormous capital investment." At one time, VARs who were considering setting up ASPs were advised to outsource the infrastructure from a hosting provider, but even that segment of the market has been affected by volatility. As a result, both Singer and Smith advise VARs to consider co-locating at an existing ISP (Internet service provider) instead, a solution that combines individual control with the stability of an established site.

"Many hosting companies spent their capital on building an infrastructure, and when they didn't get enough people to sign on, they didn't have the resources to support it," says Singer. "That's why it's so important to pick a stable partner." SJ Technologies chose to partner with big-name provider AT&T because of the credibility it provides to customers and the ability to take advantage of a sizable network of data centers across the country.

While co-locating won't cost the millions of dollars it takes to build a redundant data center, it's still an investment. "It could cost several hundred thousand even to do co-location," says Jorgenson. "It's also an investment of time to research the market and negotiate the SLA [service level agreement]." Smith also reminds integrators that co-location still leaves the responsibility for security on the VAR. A strategy for preventing possible breaches of customer data, such as upload scripts that allow directories to be searched, is imperative.

Given these challenges, Singer and Jorgenson advise smaller VARs or those who would like to test the ASP waters to consider partnering with other VARs. Negotiating a discounting arrangement would still require a time commitment to prepare an SLA that would protect both parties and conduct due diligence.

Just in case you're wondering if the vision of that first "ASP Voyager" featured in our magazine paid off, you'll be glad to know that it has. As the president and CEO of Magellan Software, Ron Vangell had developed his own document management applications for ASP deployments. Magellan later merged with a German company that developed complementary content management technologies. Vangell served as the president and CEO of the U.S. operations until earlier this year, when he was named president and CEO of the entire 300-employee, international company, Gauss Interprise AG.