When ASPs Go Sour

As more providers falter, customers mull their options.

If anyone is entitled to harbor a sour-grapes attitude about ASPs dying on the vine, its Michael Osborn. After all, the founder of online retailer eVineyard Inc. has twice been left high and dry after application service providers kicked the bucket, leaving him scrambling for alternatives.

The bad news started in September, when Pandesic LLC, the much-touted SAP AG and Intel Corp. joint venture, announced it was cutting its losses and ending its e-commerce ASP services. Osborn was worried. eVineyard had built its business, starting in 1999, on Pandesic. The ASP provided eVineyards core distribution, order and inventory management, and accounts receivable applications built on SAPs R/3 ERP (enterprise resource planning) system.

As if such a disruption werent bad enough—it forced eVineyard to hire more IT staff and rush the purchase and implementation of an ERP system—history repeated itself last month. Much to Osborns dismay, ShopTok Inc., of San Francisco—an ASP eVineyard had been relying on to provide a live online chat application for customer service—went belly up after it couldnt find enough investors.

"Its a nuisance, and its a project you dont expect to be having to spend time on," said Osborn, in Portland, Ore. "Im just a wee bit skeptical about this ASP issue. The ASP model to me has been unpredictable."

Hes not alone. A growing number of ASP customers are learning that when a provider fails, they have to make tough choices about whether to take over management of the technology themselves or investigate new ASPs. They often face short deadlines under which to make a switch to avoid downtime and lost productivity. All the while, they must navigate new ASP contracts and the migration of data and application setups in-house or to another ASP.

The lesson for companies using or considering ASPs is clear: More upfront due diligence and the inclusion of contract provisions that ensure migration of data and software licenses are critical to avert an ASP disaster.

A good year for dead ASPs

Pandesics announcement last year was the first of what came to be a crop of ASP consolidations. Since then, smaller providers that had developed niche applications specifically for the Web have been hit hard. Such ASPs as intranet provider HotOffice.com Inc., recruiting human resources application provider iSearch, and time and expense application provider Red Gorilla have closed shop. Others, such as FutureLink Corp. and Interliant Inc., have refocused their application offerings. Even the larger ASP pioneers focused on enterprise applications, such as USinternetworking Inc. and Corio Inc., are battling tanking stock prices.

The worst may lie ahead. Gartner Inc. predicted in August that as many as 60 percent of the then 480 ASPs operating could fail by the end of this year. By 2004, the number of viable ASPs will shrink further, with about 20 focusing on enterprise-class applications such as ERP and 100 more offering single-function applications, according to Gartner, in Stamford, Conn.

At least for eVineyard, the sting of Pandesics death wasnt fatal. Within two months of the ASPs September announcement, and before the service ended completely, Osborn finally could raise a toast to successfully transitioning from the providers service. In November, eVineyard completed implementation of Epicor Software Corp.s eDistribution software to replace the ERP functionality it was losing from Pandesic. This time, eVineyard bought the application the old-fashioned way, in a client/server license, and opted to manage it with internal resources.

eVineyards bad luck was enough reason for Osborn to ditch the ASP model in favor of the Epicor software, but it wasnt the only one. Choosing Epicor made sense because eVineyard had already completed—in August—the implementation of the ERP vendors eFinancial suite for accounts payable and general ledger applications in conjunction with integrator CTR Inc., also of Portland.

Not surprisingly after all this, Osborn isnt interested in pursuing any future ASP deals. While eVineyard had only 35 minutes of downtime throughout the entire transition from Pandesic, the move came with extra costs. The e-tailer had to purchase additional components of the ERP system and rush the implementation. It also increased its IT staff by three, mainly to manage the applications. Osborn declined to give details on how much the changes cost. What matters is that eVineyard is now in charge of its technological destiny.

"You just have to know the risk is that theres another organization, another board, another set of constituencies thats not going to be looking after your own best interests," Osborn said. "Whereas my own team, theyre clearly focused on selling wine every day."

But one ASPs failure doesnt always turn customers off to using the model. Especially when dealing with applications less mission-critical than ERP, companies may turn to surviving ASP competitors, and those providers are more than happy to oblige. Many ASPs have even begun to target customers of failed competitors as a way of garnering more business (see story, below).

Sometimes, a failing ASP works out details in advance for customers, partnering with a competitor to take over service and migrate customers. HotOffice.com, for one, contacted Intranets.com Inc. in November when it realized it was running out of funding and would cease operations, said Intranets.com CEO Steve Crummey, in Woburn, Mass. The two companies agreed that HotOffice.com will refer customers to Intranets.com, which paid an undisclosed amount in the deal. Intranets.com also set up part of its site for transferring HotOffice.com customers.

Working out such details ahead of time can smooth the path for customers. Mark Hill, principal at Regency Capital Partners LLC, in Sausalito, Calif., and a former HotOffice customer, was impressed that HotOffice.com worked out the kinks before its demise. "It was classy because typically guys who shut their doors just walk away," Hill said.

HotOffice.com and Intranets.com both provided a set of collaboration tools over the Internet for free, so customers such as Regency didnt have much at stake financially. Hills biggest problem was with the 10-person companys business cards. He had just had them printed with the HotOffice.com e-mail address for sharing documents when the provider closed in December. Otherwise, the move to another provider didnt require many changes, since only three employees had begun using HotOffice.com, Hill said. The changes mainly involved setting up a new account and using tools on the Intranets.com Web site to transfer data from the HotOffice.com system.

But sometimes customers are left to tumble through the rubble alone. That was the case for customers of iSearch, which announced its demise in a message to customers in mid-February that appeared when they logged on to the companys Web-based HR recruiting system, said Susan Fine, senior director of executive recruitment at Sears, Roebuck and Co., in Hoffman Estates, Ill.

Fines first concern was keeping the application running. Not only had iSearch provided an application for 25 Sears recruiters to internally track résumés and search its candidate database, it had also hosted the employment section of the Sears.com Web site. Downtime could have damaged Sears professional recruitment efforts.

"We put pedal to the metal," Fine said. "We were all in crisis mode to identify new interim solutions and prioritize time to make sure that when [candidates] came to Sears.com, they werent just looking at an empty site."

Time was running out. Sears had two and a half weeks to find an alternative before iSearch went dark. That left little time for in-depth due diligence, so Sears strategy was to find an interim solution and then to continue searching for a long-term provider.

While iSearch didnt help Sears find a new provider, fellow customers did. Fine connected with other iSearch customers, who offered opinions about other potential ASPs. At the same time, she was receiving daily phone calls from competitors seeking Sears business.

One of the calls came from BrassRing Systems, a division of BrassRing Inc., of Waltham, Mass. Sears decided to use BrassRings résumé-tracking applications and job site hosting services because of positive customer feedback and BrassRings willingness to customize its offerings to meet the needs of displaced customers such as Sears.

BrassRing waived its usual one-year contract for former iSearch customers, allowing them to use the service on a month-to-month basis. The ASP also committed to getting the most basic functions, such as hosting job sites, up and running within 48 hours. That helped Sears keep its job postings online without any downtime.

Looking back, Sears had seen signs of iSearchs impending shutdown. The ASP had warned in January that customer service could be affected by an upcoming acquisition of the company, Fine said. Long before that hint of trouble, Sears was already dissatisfied with iSearchs service, which Sears started using in November 1999, and had begun considering moving to another provider. Along with poor customer service, Fine couldnt find some candidates when she searched the résumé database.

Paying attention to hints such as those can help prevent the hassle and costs of recovering from an ASP that has begun to sour. But not all ASPs give out such obvious warnings as deteriorating customer service. Current and potential customers need to delve into a providers financial situation, said Laurie McCabe, a vice president at Summit Strategies Inc., in Boston. If the provider is public, that means reviewing recent quarterly reports and finding out how much cash it has left. If its private, it means grilling the ASP about its financial performance.

Another thing to keep in mind is that ASPs offering enterprise applications often struggle to scale to support a large number of customers, said Tom Mangan, a managing partner in global enterprise technology solutions at Arthur Andersen LLC, in Chicago. Too often, the cost of adding a new customer can exceed what providers can reasonably charge if their models require deployment of dedicated servers and customized applications for each customer, Mangan said.

Rather than wait for the worst, IT managers at Eagle Family Foods Inc. picked up and left their ASP of two years last summer before it foundered.

The $250 million company had decided to use an ASP when it was formed as an independent company in 1997 from former Borden Food Corp. brands. Eagle Family Foods needed an ERP system and chose in early 1998 to implement PeopleSoft Inc.s software on a hosted basis, said Robert Marshak, director of IS infrastructure at the Tarrytown, N.Y., company. Marshak declined to name the ASP.

Within the first year, though, problems arose. Customer support was spotty, and the ASP was reluctant to update its network and software. Even Lotus Notes e-mail, which the provider also hosted, wasnt being protected against viruses until Marshak questioned the ASP about the issue. On top of it all, the ASP seemed financially shaky and was losing, rather than gaining, customers, according to Marshak.

So Eagle Family Foods went on a search for a new ASP starting in mid-1999. It decided to use Surebridge Inc., of Lexington, Mass. This time, however, Eagle Family Foods tried to protect itself. The company decided to buy the licenses to the PeopleSoft and Notes applications itself, along with the hardware. That made leaving easier, especially since its yearly contract had already expired.

And then there are those times when warnings never come.

At eVineyard, Osborn had little reason to believe Pandesic would end its service because the company was backed by two of the worlds largest technology companies. But it did.

The painful lesson? Consider the possibility of an ASPs failure from the beginning of the relationship, however unlikely it seems.

"Contemplate what happens when that phone call comes," Osborn said. "Be prepared, and dont have rose-colored glasses."