Going Vertical on Main St.

Vertical service providers are gaining mainstream acceptance.

The application service provider model is doing more than just taking form. It now can be plotted along an x and y axis. In addition to generalized ASP distribution, the market is starting to define itself by vertical industries and horizontal infrastructure. That means the future for integrators and consultants may become far more complicated as they aggregate an increasingly fragmented and specialized litany of services for their customers.

On the vertical service provider, or VSP, side of the equation are independent software vendors that once sold either through distribution or direct to customers. Distributing software electronically for a monthly fee, or on a pay-as-you-go basis, can open up huge opportunities for these developers, particularly if their wares are sold as part of a broader solution.

Thats exactly what Achieve Online Services is trying to accomplish. The Minnesota-based VSP started out writing software for the long-term health care market based on the Citrix multi-user platform. Two years ago, however, it realized that its clinical and financial operations applications could easily be modified to sell over the Internet and that it was missing a huge opportunity.

"Our market has always been nationwide," says Bob Harris, the companys general manager. "What the Internet did was allow us to hit a price point for remote service so that it could become a reality for smaller organizations. Since we introduced this in 2000, 48 percent of our sales used the outsourced model."

In a down market, Harris says the VSP model has helped Achieve keep its head above water. On top of those services, hosting aggregators like Agiliti and Exodus are adding a host of other services. Agiliti, for example, offers Achieves online customers e-mail, storage, Web-hosting and lifecycle services.

Bill Anderson, general manager for Web services market development in Microsofts U.S. application services group, says whats happening is that selling vertical applications over the Web is finally going mainstream.

"The first phase of the ASP market occurred four years ago, largely as a recognition that you could do it," says Anderson. "Now its spreading horizontally into the managed services space, and vertically with companies like Healtheon and Great Plains."

But while many vendors believe this will turn out to be a lucrative model for ISVs, most developers arent giving up their traditional sales model. It appears that two means of distribution are safer than one.

On the horizontal side, a slew of companies like Aventail are starting to jump into a market that so far has been dominated by managed services providers. The Seattle-based company started out writing extranet software, but in mid-1999 it decided to change its model over to a services business. It told investors that it would be able to maintain revenues at current levels despite a shift to services—and actually delivered on its promise.

"Until January 2000 we had no services revenue," says Evan Kaplan, Aventails CEO. "Weve since gone to an all services model and our contract value has shot up. This year, we expect our revenue to grow three times."

Still, the move wasnt without a big risk. But Kaplan believed that risk would be minimized by several factors. First, its harder to get rid of a service provider once theyve taken over a companys data. Second, the services strategy would greatly increase Aventails visibility among customers. And finally, it would create a deeper relationship with customers than the company would get selling software.

Kaplan calls Aventail a platform service provider. The company offers extranets, proxy services and public key infrastructure for a monthly fee, and has begun signing up partners to help sell its services.

While no one expects most companies to outsource most of their data operations, vendors do expect a large number of companies to outsource at least some of their operations. It appears there will be no shortage of service providers willing to accept their business.