Primed to Grow Again

Studies point to renewed interest in Application Service Providers.

The dust around the shake-out of ASPs and managed services providers appears to be settling, and interest in this particular form of outsourcing is again on the rise. But the hesitant recovery could be derailed by price increases.

International Data Corp. this week will release a report that projects a 26 percent annual growth rate for the software-as-a-service market, from $1.8 billion in 2002 to $5.7 billion by 2007.

"The term ASP has a black eye, but there is quiet progress going on behind the scenes. It is still one of the faster-growing segments of the IT service industry," said Amy Mizoras, an analyst and author of the study for IDC, in Framingham, Mass.

Another recent study, conducted by Summit Strategies Inc., found that 55 percent of respondents were already using some kind of hosted applications and management or planning to use it in the next year, according to Laurie McCabe, an analyst at the Boston research and consulting company.

McCabe and others contend the application service provider shakeout is largely over. "Those that were probably doomed from the beginning are already out of business. The survivors had to reformulate what they were offering and how they were offering it to be more attuned to what customers want. Now we have a sturdier stock," McCabe said.

Among that stock are ASPs or managed service providers that began as software companies selling their products by subscription, such as Inc. That company is reporting significant growth, Mizoras said. Others include the services arms of developers, such as PeopleSoft Inc. and Oracle Corp. IT services companies such as IBM Global Services and Electronic Data Systems Corp. are also significant players today, she said. Only a handful of independent ASPs that manage packaged applications, such as USinternetworking Inc. and Corio Inc., survived the shakeout.

Unlike earlier boom times in the ASP market, users today are much more cautious about engagements and take more time building a business case before taking the plunge.

"ASPs may see more leads popping up and more opportunities in the market, but the cycle of the decision is being stretched out further," said Chris Ambrose, an analyst at Gartner Inc., in Gaithersburg, Md. "That means being able to prove the [return on investment] becomes much more important."

At PeopleSoft, for example, sales cycles for its ASP services typically take about six months but can stretch out to nine months, according to Bill Parsons, vice president of channels at the Pleasanton, Calif., company.

And the imminent threat of war has had a hand in stretching out those decisions even further, according to Mike Harper, senior vice president at USi, in Annapolis, Md. "People are hesitant to sign a bottom line for any product or service," Harper said.

For those that do finally close the deal, service providers that demonstrate ROI typically win the business. "Were focused on demonstrating a minimum of 20 percent savings in actual checks going out the door that they dont have to pay by going to our service," Harper said.

Established ASPs often cite specific savings from current customers. AlphaSmart Inc., for example, outsources some 70 percent of its applications to ASPs—Oracle in particular—and is saving $200,000 to $300,000 annually through reduced labor and hardware costs, according to Ketan Kohari, CEO of the Los Gatos, Calif., company.

The Arthritis Foundation, in Atlanta, working with USi, is saving $700,000 annually and reduced its overhead by 17 percent, according to CIO Marla Davidson.

Synchronicity Inc., working with Atlanta-based ASP Employease Inc.s human resources software, is saving $125,000 a year, according to Eugene Connolly, chief operating officer for the Marlboro, Mass., company. "It lets us avoid having to hire administrative-type HR people to maintain our internal systems as we grow and lets us focus on the core competency of what an HR department really is," Connolly said.

Given the emphasis on cost savings, however, this revival in interest in ASP services could quickly evaporate with price increases.

At least one ASP user has already seen prices hiked. "For applications support and hardware and infrastructure, those costs are going up," said John Stamm, director of corporate applications at TIBCO Software Inc., in Palo Alto, Calif.

TIBCO, which also uses PeopleSofts managed services, has not seen a similar price increase among application providers that offer subscription services. "Theyre probably losing money, too, but if you are Oracle or PeopleSoft and you own your site, you can lose money on it and attract customers because you have other applications out there and you can upsell customers on other things," Stamm said.

For AlphaSmart, which develops technology products for the education market, an increase in prices would "significantly change the model for us," said Kohari. "We are starting to get requests from Oracle to upgrade the software. We dont see any need to upgrade. That might be an indirect method to raise the price," he said.