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The ABCs of ASPs
Not since the chicken vs. the egg quandary has there been a more perplexing question than: “What is an ASP?” Like the dot coms (now known as dot bombs) before them, everyone is now touting their Internet-enabled offerings as the next ASP venture. Of course, this phenomenon is happening at the same time that Gartner (and others) are predicting that more than half of these ASPs will be out of business by the end of 2001.

Before trying to define and segment the types of ASP players, we need to have a set of qualifying characteristics. I find it helpful to evaluate and subdivide companies in this space by defining where they live in the value chain.

I define the hosted services value chain as the complete set of functions required to deliver an application from a hosting center to a consumer. Let’s look at each of these services in detail.

  • Internet connectivity: This includes high-speed, redundant, manageable, and reliable connections to the Internet. This connectivity is used not only for outbound connections from the application servers but also to allow Web connectivity and tunneled connections (PPTP or IPSEC) by trusted users.
  • Data center: In order to be a real player, this requires a hardened facility that can provide the three P’s (Ping, Power, and Pipe) in a fully redundant and secure manner.
  • Hardware infrastructure: Inside the data center, there are typically hundreds of cabinets or cages that contain companies’ servers, routers, switches, and other hardware devices that make up the hosted configuration.
  • Operating systems management: Once the hardware’s in place, the operating systems have to be initially installed and configured as well as efficiently managed and provisioned on an ongoing basis. Many companies have developed intellectual property that makes these tasks easier and more cost-effective.
  • Applications management: Most people assume that the ongoing management of the applications is the primary function of the ASP. In fact, many ASPs still do a majority of the actual application provisioning and management manually. Efficient application management is one of the keys to an ASP’s ability to offer its services profitably.
  • Sales organization: Not all ASPs are attempting to build their own sales forces. Many choose partnering arrangements with consultants or value-added resellers (VARs) and focus instead solely on service delivery.
  • Business processes: ASPs or their partners ultimately add value for customers not by delivering hosted applications but by delivering the business processes that utilize the applications properly.
  • Last-mile connectivity: In addition to remote accessibility provided by the Internet connectivity layer, many customers also require full-time, high-speed access provided by dedicated Frame Relay, T1, or DSL technology.
  • On-site equipment: The final layer in the ASP value chain is the end device used to access the applications. Some ASPs want to own or manage the endpoint equipment, whereas others are satisfied to have the company or a VAR assume the responsibility.

These are the different layers of the total ASP value chain. Next, let’s take a look at how people choose an ASP.

The ASP customer paradox
In a recent Gartner report, “What do users want from ASPs?” the key factor that influenced an end user’s decision to outsource applications management was whether the ASP had a proven track record. Other factors played into the decision, including reliability, the financial viability of the ASP, the ASP’s ability to adapt to the customer’s needs, the quality of the support staff, and the overall size of the ASP. But the number one factor—by a wide margin—was concern about a proven track record and customer base.

In the grand scheme of things, I guess this shouldn’t be that surprising. It’s not uncommon for any new business or technology to go through a phase in which no one will buy unless someone else buys first. But the problem is amplified in the ASP’s case. Traditional consulting businesses can build their customer bases slowly with short-term, low-risk engagements. Over time, the engagements grow in length and the contracts grow in size until their track records are well documented.

New product businesses have a similar growth path, as long as consumers don’t perceive the products as needing long-term maintenance or support and their prices are relatively low. But ASPs are in a more difficult position. They generally need long-term contracts with relatively large contract values to help offset the investments they’ve made in infrastructure and staffing. So getting someone to be “first in the water” is more problematic.

So how does an ASP build a track record without a track record? There are two fundamental models playing out now: partnering and pricing. The first model involves partnering with someone whose track record the ASP can claim. These potential partners include hardware vendors who supply the ASP’s server or client hardware, VARs that move their customers to the ASP’s platform in exchange for an ongoing residual, or independent software vendors that want to move their applications and customers to a hosted environment. This is a difficult sell to the partner because the partner wants to protect its customers, generate revenue, and maintain the prime customer contact role. ASPs have only been moderately successful with this style of partnering.

The second model entails building a track record by giving the service away, either forever or for a limited, introductory period. This is a slippery slope that’s buried many an ASP. Giving the service away removes the price objection for lower-end customers but actually exacerbates the track-record issue. Customers ask themselves whether the ASP can be in business for long if it gives the service away to everyone. It also provides no useful marketing information about price points, service expectations, etc., since the customer’s expectation has already been lowered. But using price to build a user base will certainly result—over time—in a proven track record of customer engagement.

A year from now, these issues will have disappeared. ASPs whose value propositions and funding have allowed them to survive will have proven track records and customers. Over the next 12 months, however, potential customers will have to rely on their instincts and other intangibles to determine if an ASP is worth the risk.

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