Is the ASP Model Defining the Future of IT?

It may be some time away, but there’s probably an ASP on your horizon

Over the last several years, the Internet has changed the landscape of both the computer industry and in lesser terms, the entire U.S. economy. Sometimes overlooked is the fact that the Internet was around as a commercially viable entity for about seven years before it actually moved into the mainstream.

A similar scenario is taking place in the Application Service Provider (ASP) market. In varying degrees, the ASP model has been around since 1995, but only in the last year or so has it begun to build momentum.

There are two main reasons why ASPs are expected to move into the mainstream. First and foremost, they eliminate the capital needed to purchase the hardware and software to run an operation. There are up-front costs for signing an agreement with an ASP and the companies need PCs and the Internet to access the applications, but they pale in comparison to running an in-house data center.

For this reason, many ASPs are targeting small to medium businesses without the means to purchase the necessary equipment to operate their organization. Of particular interest are the .com companies, which are usually built from scratch and may not have the capital to run a successful e-business.

The other main reason for the growth of ASPs is the continued shortage of qualified IT personnel. A recent study by the Information Technology Association of America (ITAA) shows more than 325,000 IS-related positions open in U.S. corporations today, roughly equivalent to 10 percent of the total U.S. IT workforce. GartnerGroup (Stamford, Conn.) estimates that 20 percent of permanent IT positions will remain open through 2003. By using an ASP, the issue of retaining and filling spots in the IT department is no longer the company’s problem, it’s the ASP’s.

Industry analysts expect the ASP market to explode over the next few years. They do, however, disagree on the extent, with various educated estimates placing the market anywhere from $2 billion up to $6 billion by 2003.

One thing seems clear though—the ASP model is having a trickle down effect on the rest of the IT industry. An International Data Corp. (Framingham, Mass.) study entitled “The ASPs’ Impact on the IT Industry: An IDC-Wide Opinion,” says “IDC believes the ASP model will function like a ‘disruptive innovation,’ threatening to encroach upon and displace existing ways of doing business for all sorts of IT vendors.”

Hardware vendors, whether they are in the server, storage, or network equipment areas, will be crucial to an ASP’s ability to leverage a one-to-many delivery model. Therefore, the competition to sell to the ASPs will be fierce.

The ASP model will also largely affect the entire software industry—applications, tools and systems infrastructures. IDC’s report also states, “Generally, we recommend that the tools and infrastructure vendors target the ASPs as their customer.” In these cases, the software vendors who provide the infrastructure tools are targeting the application vendors to help them ASP-enable their products. Progress Software (Bedford, Mass.) has adopted this model with a program called ASPEN. The program is designed to Web-enable applications and specifically targets ISVs that are going to sell their products to ASPs.

Application vendors planning their marketing strategies are faced with a rather difficult scenario: do they just try to sell their applications to ASPs, or do they become an ASP themselves?

On the AS/400 front, one ISV, Infinium Software (Hyannis, Mass.), recently decided to add the ASP approach to its product mix, building an AS/400-based data center to host its service. Rick Bernard, an Infinium VP, says there are three main reasons why Infinium decided to become an ASP: customer input; past experience in hosting; and fear that if they didn’t become an ASP, they would lose customers. “We see a very big market out there and we feel that in the future, a very large percentage of software will be delivered in the ASP model,” he adds.

Unlike some ASPs, Infinium is a one-stop source and is targeting the vertical markets that comprise 60 percent of its customers: hospitality and gaming; transportation; manufacturing; health care; and retail.

While most ASPs are targeting small to medium businesses, Infinium is taking a different approach, targeting medium to large corporations while still keeping an eye on small businesses. “Large organizations are attracted by the staffing, lack of capital—all of the things the smaller organizations are attracted to,” says Bernard.

And there are other reasons why large corporations might turn to the ASP model. “Applications like payroll and HR are necessary, but they don’t offer any competitive advantages,” says Bernard. “If they can outsource these types of applications, then they can focus their attention on strategic initiatives that will bring them more money.”

In the beginning, Infinium will only offer its own products, but will host products that prospective companies have and do not want to get rid of. Bernard also says there are strategic relationships with other vendors in the works to bring various non-Infinium products to the portfolio.

While many ASPs will likely try to carve out their own niche by focusing only on specific markets or by only offering applications in areas such as ERP, there will be myriad general purpose players in the market. “Pure-play” ASPs, such as Infinium, are one-stop, meaning they can run the entire operation in-house. In other cases, newly formed ASPs will likely have a flow chart that will make heads spin. These will encompass various partnerships with ISVs, hardware vendors, service firms, network providers, and distributors and resellers.

The ASP market is still in its formative stages. But, no matter the form it takes or the numbers it reaches, there’s no denying the impact that the ASP model will have on future IT initiatives.

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