In the September 2000 issue of Consulting Magazine, Alan Radding wrote about the increasing threat of application service providers (ASPs) to consultants peddling packaged application implementations. “It is the hassles of such packaged application implementations that drive many customers to consulting firms in the first place. Now, the ASP promises to take those hassles away, all for a fixed monthly fee. So who needs the consulting firm?”

Ironically, since the downturn of the economy, it’s ASPs that need consultants as partners to help sell their services to stay afloat. But are ASPs a good gamble for your clients in the current market? We asked Gartner analyst Ted Chamberlin for advice on evaluating ASP vendors before turning over any business functions to them, whether you set up direct customer-vendor service level agreements for your clients or use ASPs to fulfill subcontracting needs for your firm. He advised that consulting firms take these three steps before signing a contract with an ASP:

  1. Make sure the ASP has solid partners.
  2. Research its overall financial situation.
  3. Investigate its partner program and treatment of consultants.

In this article, we’ll discuss each of these steps and pass on Chamberlin’s advice for working with an ASP.
Ted Chamberlin will present two workshops—“ASP Hosting and Outsourcing: Definitions and Positioning” and “Web Hosting and ASP Infrastructure: More Than Pipe, Power and Ping”—at Gartner’s Spring Symposium ITXpo in Denver from May 7–10, 2001. For complete coverage of IT issues and trends that will be addressed at the event, visit our Gartner Symposium/ITXpo Center.
Why are ASPs struggling?
The softening economy has dealt ASPs a hard blow because they occupy a still-new market segment and lack rock-solid business processes, Chamberlin said. “The ASP model was really built on some good theories, but the fundamentals and the brick and mortar behind these theories have not been executed well. The ASP market is going to consolidate—60 percent of the guys who are out there today are going to be gone next year.”

For example, Chamberlin said many ASPs don’t really know their cost of doing business. Instead, the companies set prices based on what the market will bear.

“They say, ‘My competitor is charging $500 per user per month for the HR module, so I’ll charge $475 per month,’” he explained. “A lot of them don’t know what their internal cost curves are. They don’t know what it physically costs them to deliver this service to a client.”

Below are explanations of the three steps he advises that consultants take to evaluate an ASP before recommending it to a client.

Step one: Make sure the ASP has solid partners
Many ASPs have spread themselves too thin by trying to be all things to all people. For example, Gartner has identified six distinct layers in the ASP model. (See Figure A.)

“There’s the actual platform, the network, the physical applications, operations, end services/business integration, and the prime contractor—the person who owns the relationship with the customer, or ‘the one neck to wring,’” Chamberlin said. “At Gartner, we say, ‘If you try to own all these levels of the pie, it’s not a sound theory because you have to be an expert in six different areas.’ [ASPs] who try to own all of these…are the business models that usually abjectly fail.”

Figure A

For this reason, Chamberlin suggests that you find out about the partner relationships an ASP has cultivated to create top-of-the-line services. He also points out that the financial well being of these partners is as important an indicator of the ASP’s overall soundness as the stability of the ASP itself.

“Partnering is definitely a strategy for success in the ASP market, so consultants should look for ASPs who have solid partners,” Chamberlin said. “Make sure they’re partnering with the best-of-breed service providers, network providers, and end-service guys.”

Step two: Research the company’s overall financial situation
Chamberlin said it’s important to have a clear picture of the ASP’s financial situation before you consider signing a deal. If the ASP is a publicly traded company, you can easily obtain reliable financial information by simply visiting the company Web site, where you will likely find its earnings reports posted. If not, earnings reports can be obtained through the company’s Investor or Financial Relations department.

However, most ASPs are private companies, so if that is the case, the only avenue you have to find out about a company’s standing is to ask the company itself.

“Some will be pretty straightforward with you and some won’t. It’s a tough area,” Chamberlin said. But it is important to ask the right questions.

“You can ask…what their burn rate is, how much cash they’re going through, what round of funding they’re at, and how much money they have before they have to go after funding again,” Chamberlin said. “In this market, it’s very hard to get second and third rounds of funding.”

Step three: Investigate the ASP’s partner program for consultants
ASP services are most popular with small to midsize companies, so Chamberlin said that “smart” ASPs have come to realize that consultants are extremely valuable partners for landing new accounts.

“[Consultants] should be very important to the ASPs because [consultants] have their feet in the streets—they’re in a lot of accounts already,” Chamberlin said. “A smart ASP will realize that consultants…have influential contacts with a wide spread of industries.”

To ensure a good partner relationship with a consultant, Chamberlin said that ASPs might offer consultants financial incentives for landing clients. They may also grant consultants “access to application developers so [the consultant] can give input when they’re developing some of the code if any of [the applications] are going to have any customization. [The ASPs should] really want to make the consultant feel like he’s part of the whole value chain.”

Chamberlin suggested that before you begin a relationship with an ASP, you find out how they’ve treated consultants they’ve dealt with in the past.

“When you approach the ASP, you say, ‘I want to know what your partner program is. I am a potential channel into business, so what rewards do I get when I bring you business?’” he said.

Proceed with caution
Once you’ve taken the appropriate steps to evaluate an ASP, Chamberlin still suggests using prudence before you proceed into any contractual agreements.

“I don’t want to say, ‘Don’t use the ASP market,’ but be very careful,” Chamberlin said. “Use it tactically for certain instances and not strategically for a total deployment. You might want to test the waters now.”

He also advised that to “test the waters,” you might want to have your clients use the ASP for a “non-mission-critical application” such as sales-force automation. If they pass that test, you can then allow them to handle more significant applications.

“There are some ASPs that are on somewhat steady ground,” Chamberlin said. “If what they’re offering really makes sense to you and really meets your needs—yes, take a look at them.

“Be very careful, do your due diligence, use a lot of time in scrutinizing their value propositions. Then if you do sign a contract with them, make sure you have out clauses and performance clauses just in case they do go under, so you will be saved.”
Have you set up service level agreements (SLAs) with ASPs for your clients, only to have them turn sour? Had you thoroughly researched the ASP first? Send us a note and tell us about your experience, or post your comments below.