At the end of 2001, it appeared as if the application services provider (ASP) bubble had finally burst. Major ASPs had either already gone under (FutureLink) or were on the verge of being acquired and subsumed into other companies (USinternetworking).

The success stories have been few and far between. For every company like Salesforce.com, there are a thousand that failed. Yet, no matter if you intend to use an ASP or not, I believe that within the next five years, most CIOs will have to figure out how to help their companies evolve into one.

To help you prepare for the transition, I’ll examine the lessons learned from the ASP adventure and give you a quick glimpse of the companies putting that knowledge into action.

Lesson 1: Specialize or die
The only successful pure-play ASPs are those that grabbed a specific function and chose to automate it using the ASP model as the distribution model.

Look at Salesforce.com as an example. It chose to take a traditional CRM implementation and optimize it. While a traditional in-house CRM project would require months of installation, configuration, training, and deployment, Salesforce.com’s technology allows companies of all sizes to begin using CRM systems immediately. It built its software on a hosted model from the start, making it difficult for classic software companies, like Siebel and PeopleSoft, to compete by simply offering their systems in a hosted environment. In just two years, Salesforce.com has become the second largest CRM provider (by number of seats)—clearly threatening Siebel’s dominance in the CRM space.

Lesson 2: ASP is a distribution paradigm
What Salesforce.com and its successful brethren have proven is that the real lure of the ASP is not the ability to have generic applications managed in a central location, but for software manufacturers to provide applications in a distribution format that germinates rapid deployment.

In other words, Salesforce.com isn’t really an ASP at all. It’s a software company that distributes its software via a hosted model rather than through the traditional distribution channel. Hosted software becomes the third distribution paradigm, joining the direct-to-enterprise and the indirect-through-VARs paradigms.

Other software manufacturers are taking notice. Microsoft began distributing a version of Great Plains through its bCentral subsidiary late in 2001. Oracle recently announced plans to take over a company’s entire IT operations if the company would agree to a five-year contract. The cost? That company’s entire annual IT budget, paid on a yearly basis less 5 percent. As other software manufacturers begin providing solutions on a hosted basis, CIOs will have to seriously evaluate whether purchasing a managed service is more cost effective than trying to provide it themselves.

Lesson 3: Purchase from ASPs that have a simple approach
Lack of integration is the single most common complaint that causes ASPs to lose potential sales, resulting in closed businesses. If you choose to have your CRM, ERP, e-mail, or other core system managed off-site by another company, then you must have a way to integrate the systems’ functions.

Part of a CRM system’s value is its ability to move information gathered during the prospecting process into the sales-order and accounts-receivable systems. If Salesforce.com provides your CRM functions, and Oracle provides your general accounting functions, then someone has to figure out how to integrate the two systems.

In the near term, clients—not manufacturers—will likely handle integration. That means that it’s even more important to research the kinds of data and process integration capabilities that exist within systems slated to be hosted. Where possible, CIOs should insist on process integration (Web services interfaces) rather than simple data integration (file import/export). Going forward, any hosted application provider will have to deal with integration issues as one of its top five priorities.

Lesson 4: You are likely to become an ASP
Don’t laugh—becoming an ASP isn’t that unlikely. If you buy into the premise that development companies use the ASP model to deliver software, then look at the development assets of your own enterprise and investigate how you could deliver those assets to customers and partners.

Today, most companies use a Web site to deliver information from internal systems to a customer’s desk. In the future, however, companies will expose internal systems using Web services technology.

In other words, rather than displaying an HTML page with a list of orders that have shipped, customers will be allowed to tie inventory management systems directly into a company’s shipping system to retrieve information about shipments and update their own internal systems automatically.

In order to do this, you’ll have to become an ASP—you’ll provide your partners hosted access to your applications. Given this scenario, it makes sense to begin investigating hosted application technologies now. Knowing what worked and what failed for first-generation ASPs will enable you to be more successful when you start providing access to your systems.