One of the biggest challenges for many companies these days isn’t deciding if they should use an application service provider, but which ASP they should turn to.

As in any decision-making situation where there are a number of possibilities, the process by which a choice is made is as important as the final decision itself.

“Because of the hype surrounding the ASP market, it is quite important that prospective customers have a useful set of evaluation criteria,” according to Rita Terdiman, an analyst with Stamford, CT-based research group Gartner. (TechRepublic is a subsidiary of Gartner.)

The decision-making process should:

  • Establish the evaluation criteria.
  • Examine the market strategy of vendors.
  • Determine the extent of the service level agreement (SLA).
  • Consider the value in total cost of ownership.

Remove the hype from the evaluation
Gartner predicts that through 2004, 50 percent of companies that contract with ASPs will be dissatisfied with their results due to a lack of appropriate planning and implementation.

You don’t want to be in the half that failed to get out of an ASP what you wanted, and the place to begin avoiding that situation is in the evaluation process.

Among the vendor evaluation criteria that Terdiman listed for an April 2000 symposium are these questions:

  • Do they use the desired applications?
  • Do they have industry-specific templates?
  • What are their systems integration and applications management skills?
  • Does the ASP have a proven track record?
  • How robust is its network infrastructure?
  • Does it have a secure, scalable, and reliable data center?
  • Does it provide real-time, Web-based reporting?
  • Does it have a stable business model?
  • Does the ASP provide cost-effective pricing models?
  • Are there end-to-end service level agreements?

It may seem obvious, but Terdiman wrote that companies need to evaluate the proposed application to determine if it actually meets the needs of the enterprise.

“The first thing to look for is experience,” Terdiman stated. “In a new market like this, no one really has much experience per se, but there can be some good tangential experience.”

When you are looking at experience, consider ASPs that have targeted your particular industry, said Amy Mizoras, an IDC analyst.

Even though many ASPs are offering applications that can be used in a variety of industries, they often cut their corporate teeth on a specific vertical market where they have built a customer base.

Then there are those ASPs that are geared specifically for a certain vertical market, Mizoras said. Healthcare is a useful example.

“For the most part, healthcare industries tend to have a lot of tech infrastructure already installed that they probably want to leverage. They will want to leverage that with a healthcare-specific ASP,” she said.

Once you’ve tackled the experience level, then you need to look at such things as network and platform architectures, application features and functionality, management and data center operational skills, and the other criteria, Terdiman wrote.

What does the ASP think it is?
Terdiman said it helps to look at how the multiple players in the ASP space present themselves to the market.

Some ASPs are targeting specific types of customers, she wrote. They may be aiming toward companies that are small, aggressive-growth companies with no established infrastructure, or maybe they are geared toward more established mid-market companies. You should be what they are aiming for.

Other ASPs offer a variety of solutions.

“Many ASPs are now struggling with whether they should concentrate on a few select packages or eventually offer expertise on a wide variety of packages,” Terdiman wrote.

Another thing to keep in mind is the range of services the ASP is offering. How does it operate and host and implement its applications? Does it function as a general contractor? What about support, customization, and business processes?

Service level agreements play a critical role
Without a true end-to-end SLA, with significant penalties for nonperformance, companies should only test ASP services through 2000, according to Gartner.

“An effective SLA for hosting services must cover three areas: performance, procedures, and reporting,” Terdiman wrote. “Each must contain penalties for nonperformance.”

Penalties should be either minor or major, she stated, and each should have a monetary value. There should also be an established threshold for where a minor penalty becomes a major penalty.

Terdiman suggests, based on a monthly contract:

  • A minor penalty should be worth the cost of one day’s service, or 1/30th the monthly cost.
  • A major penalty should be 5 to 10 percent of the monthly cost for each occurrence.
  • A full month’s credit should be issued if there are between 5 and 10 major infractions or more than 15 minor infractions in a month.
  • More than 10 major infractions during any time frame should be cause to quit the contract.

There’s more to life than TCO
When considering the total cost of ownership in the ASP equation, businesses should think about other business and technology drivers in the decision, according to Terdiman.

For example, small and midsize enterprises may not be able to afford “enterprise class” applications, and their functionality, in any way but through an ASP, she said.

High-growth companies may need an ASP’s speed of deployment and the cash that they would have left from a monthly payment vs. a large up-front capital expense.

“For generic, repeatable ASP systems [like messaging outsourcing], an ASP offering’s TCO can be demonstrably lower for an ASP-like provisioning of the application,” according to Terdiman. “In more complex environments, the analysis must include customization, integration, and management that may be add-ons to the basic ASP offering.”
Has your company been evaluating ASPs? Are you using some sort of process to make the decision? If you’re using an ASP now, did you have a process for deciding which ASP vendor to use? Post a comment below or send us a note.