Extinction Thwarted

ASPs to survive the shakeout likely those that streamline operations-while keeping customers satisfied.

While the shakeout among ASPs is hardly over, growth may be slowly returning as survivors hone their services and value proposition messages to reflect the times and the desires of todays customers.

Among the early leaders appear to be those that streamlined operations without sacrificing customer satisfaction, according to industry insiders. Those that absorbed mergers and acquisitions or partnered with better-known peers also made the cut. The key element appears to be focus—a concentration on specific applications and a strong ability to address business and technical problems that are crucial pain points for customers, according to analysts.

Streamlining a services operation is more than just reducing head count and shuttering unused data center capacity. As growth slowly returns to the application service provider market, the ability to get the most out of talent and infrastructure comes more from automation, providers say.

"Our cost basis [is] directly correlated to our ability to automate delivery," said Michael Harper, chief marketing officer for USinternetworking Inc., in Annapolis, Md. USi, which just emerged from Chapter 11 restructuring with $81.25 million in additional funding and a merger with Interpath Communications Inc., has already automated its provisioning, monitoring and trouble management systems. It is now working to automate load balancing and performance optimization for its servers.

Also key when demand picks up is an ASPs ability to get the most out of its infrastructure investment. "When youre looking at amortizing equipment and trying to recoup investment in hardware, it all goes back to cost per user," said Colin Durham, director of technical services at Electronic Healthcare Systems Inc., in Birmingham, Ala. "If I can only get 20 users on a server, it may take a year and a half before we start realizing some profit. If I can get 100 users on that server, itll be that much faster."

Durham is using a server optimization tool from startup KevSoft Corp. to boost the number of users per terminal server without sacrificing performance. The TScale tool, which automatically observes a servers use of cache and memory and then automates changes to improve an applications use of page files, allowed Durham to boost the number of concurrent users per terminal server from 35 to nearly 70. At the same time, the optimization software allowed EHS to avoid spending $182,000 on 13 new servers.

Users have not seen a difference in performance as the servers become more populated. "Its the most effective optimization weve done to the application servers/terminal servers," Durham said.

Still, it is a delicate balancing act to add more users without impacting customer satisfaction. "You have to look hard at that trade-off," USis Harper said. "A lot of clients on a server increases restore time in a disaster, and clients may be more willing to pay more to be on a less-shared environment."

Putting administrative tools in the hands of end users is another way to streamline subscription services. "[We] figure out ways to do provisioning of new [e-mail] accounts to minimize human interface in account setup," said Dave Castellani, CEO at Mi8 Corp., a New York-based ASP specializing in Microsoft Corp.s Exchange. "We have a Web tool [to] add users, create accounts and delete accounts without touching them. You cut down drastically on help desk costs, and clients get more control."

Operational efficiencies can also be gained through a narrower focus achieved by trimming the number of applications supported. USi at its height offered as many as nine applications on a subscription basis but now provides only four. And it is not alone among pure-play ASPs. "They will be more strategic around a smaller set of applications and more strategic around specific buyers," said Chris Ambrose, an analyst at Gartner Inc., in Rockville, Md. "That will get them the control of their costs and improve efficiencies."

Focusing on specific buyers or taking a vertical-industry approach to offering subscription application services will likely emerge as the dominant approach, said Kneko Burney, an analyst at In-Stat/MDR, in Scottsdale, Ariz.

"This year, we will see ASPs focus on addressing specific business problems or the needs of specific customers by vertical industry," Burney said.

"It is the vertical markets that can make ASPs mainstream," said EHS Durham. "It has to be the targeted vendors that really take ownership of their product and know the customers very well. Those that do PeopleSoft or Microsoft Office—theres no specialization there."