Users slow to adopt ASP model

The hosted software industry is alive and well despite the financial pain felt by companies delivering that model, a group of industry experts said Tuesday. But the slow adoption by business customers cautious about choosing the right partner in this precarious industry has made its success difficult.

ASPs (application service providers), telecommunication companies and outsourcing firms as big as IBM Global Services have created a range of options for corporations looking to farm out different operations of their companies – from contract management to Web site hosting. While many of the companies delivering those options are likely to offer businesses of all sizes a low-cost option for outsourcing, the long-term viability of companies providing those services is less clear.

“The fundamentals (of the ASP model) are solid,” said John Charters, CEO of Qwest Cyber.Solutions LLC, the hosted software provider backed by telecommunications giant Qwest Communications International Inc., speaking Tuesday at a conference on the future of ASPs. “The question is can we deliver a business proposition that is compelling enough to convince a customer to make the transition.”

Customers attending the ITAA (Information Technology Association of America) ASP Leadership Summit in Santa Clara, Calif., said the value proposition is there. What is missing is the urgency among corporations to break from the tradition of running IT operations with an in-house team and begin to trust third party vendors with their key corporate data.

“The model makes sense to us at this time,” said Maggie Riggins, manager of corporate procurement at financial software firm Intuit Inc., whose contract management division outsources software from DiCarta Inc. “Because we are in the software business, Intuit recognizes that the ASP model is terrific.”

In fact, Riggins said, the company is preparing to migrate two more of its administrative operations to an ASP model, but picking through the long list of potential vendors is an ongoing challenge.

“There have been a lot of disasters and there have been a lot of companies changing their strategy,” said Phil Wainwright, an analyst with ASPnews, who hosted a panel discussion with industry CEOs. Echoing similar comments during the event, Wainwright said that the most important step for corporate customers eyeing an ASP is to research the financial stability of a vendor.

Hershey Direct, the small on-line division of Hershey Foods Corp., built its on-line sales catalog with the help of USInternetworking Inc., one of the first major ASPs to emerge in the dotcom economy. Carey Eisenhauer, Internet marketing manager of Hershey Direct, said that researching potential vendors was top priority for the food industry giant.

“(Hershey) doesn’t want to get into the technology business and they don’t have the resources anyway,” Carey said, noting that his corporate parent has taken a hands-off approach with the creation of the $15 million online division. “We were looking for a long-term partner, and we didn’t want to have to turn around a year from now and look for a new vendor.”

With the recent economic downturn and the valuation of companies plunging, the history of a number of ASPs has made it difficult for customers to predict the long-term viability of such a service provider. At its peak, USInternetworking was valued at about $6 billion on the stock market, Charters said. While it has remained a stable competitor, analysts and customers note, its market capitalization has declined to about $215 million, based on its closing stock price (USIX) Monday.

With unstable financial markets, many customers from small businesses to large corporations, such as Hershey, are turning to the big name players. There is also a push by the Big Five consulting firms, including Accenture Ltd., and major outsourcing firms such as Electronic Data Systems Corp., to move into the market selling applications and services from partner vendors. There is also a trend by the telecommunication providers to offer hosted applications, such as e-mail, adding value to customer deals.

Still Gartner analyst Rita Terdiman notes, “There will be far more supply than there ever will be demand.”

While vendors far outnumbered customers at the ITAA event, the industry is poised for success, analysts say, now that a shakeout has commenced. Gartner Group Inc. analysts said Tuesday they see corporations spending about $18 billion on hosted applications by 2005, growing at an annual compound rate of about 54 per cent per year. Aberdeen predicted a much lower figure, about $5 billion in the next three years.

Carl Kelly, senior vice-president of online services and ASP solutions at Oracle Corp. said while moderating a question-answer panel with industry analysts that even a $5 billion market is a healthy one.

“I know Oracle would be interested in 25 per cent of that market,” Kelly said. “Even those small numbers are encouraging enough for us to keep going in this industry.”