Down but Not Out

There may be a second act for ASPs, who say they've figured out how to make software services work.

Of all the Big Ideas spawned during the Internet boom, perhaps none blossomed so promisingly yet wilted so quickly as that of renting enterprise software over the Web. By some accounts, upward of 1,000 self-proclaimed application service providers, or ASPs, were launched during 1999 and 2000, with venture capitalists betting more than $1 billion on the seemingly foolproof but unproven business model. Within two years, the great majority of those start-ups fell victim to their own hype, leaving investors in shock and the ASP model widely repudiated as an inherent loser. In many minds, the term ASP came to mean “a stupid proposition.”

Lately, though, the notion of handing over the installation, administration, maintenance, and delivery of large-scale, mission-critical software to specialist outsourcers has been showing surprising signs of life. Tweaking their business models and acquiring smaller rivals to build mass, several of the original ASPs have emerged from the gloom as promising and even profitable outfits.

Surebridge, for instance, has been in the black since mid-2002 and, with help from two acquisitions, saw its first-quarter 2003 revenues leap 87 percent above those of a year earlier. Leading suppliers of enterprise software, such as IBM, Oracle, and J.D. Edwards, have been enjoying considerable success with captive ASP efforts. And such major corporations as Kinko’s, NBC, and Rohm and Haas have turned to ASPs for help with vital applications like financial accounting, messaging, and human resources.

“Choosing to use an ASP is no longer as much of a mental hurdle for CIOs or CFOs,” says Amy Mizoras, a program manager who tracks the resurgent ASP sector at market researcher International Data Corp. “The ROI and payback are [now] proven.”

Just ask RiverBend Medical Group, a western Massachusetts group practice with 85 physicians. It did away with most of its in-house IT staff and now relies on two ASPs: Surebridge for a set of Microsoft’s financial applications and The TriZetto Group for medical-practice software. “The capital investment to do all this ourselves would be very high,” says Michael Callahan, RiverBend’s CFO. Using ASPs “gives us a huge advantage because we have many other things we can use that capital for.”

IDC estimates that worldwide spending for software deployed as a service is currently growing at a compound annual rate of about 30 percent, from $2.3 billion in 2002 to an estimated $8 billion in 2007. IDC’s calculations cover not only the hosting by ASPs of traditional applications but also Web-native applications (software created specifically to be sold in an ASP model — see story below) and the emerging genre of so-called hosted Web services applications, which typically entail the provision of isolated software functions that augment or are combined into full-blown applications.

While the past few years have been tumultuous, there is now a solid case to be made for ASPs. According to Mizoras, a study of 52 companies well along in their use of ASP services found that they were attaining an average five-year ROI of 404 percent. A good deal of that sizable return derives from substantially improved business processes in both IT and the firms’ core activities. The average total cost savings over five years, measured solely in terms of hard-dollar IT expenses such as hardware purchases, software maintenance, and training, works out to a solid 19 percent.

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