Outsourcing - The ASP Model Grows Up



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The ASP Model Grows Up

rollercoaster Roller coasters climb an incline at a slow and steady pace, underscoring the fact that a wild ride will follow. Once the coaster reaches the peak, it plunges at dizzying speed before reaching a level equilibrium.

A roller coaster ride is an apt description for today's ASP world.

I see the ASP market largely driven by a deluge of venture capital. Starting in 1999, venture capitalist firms wrote checks to start up firms, banking on the fact that the ASP model would prove to be a viable business method. These generous infusions created an explosion of ASP vendors.

In addition, established players like EDS did not want to be left out of the Web-enabled gold rush. They scrambled to launch their ASP-like offerings. The fact that the larger vendors are adopting the ASP model further underscores its importance in the new economy. I'd say this is definitive proof the ASP model is here to stay.

However, there is still some risk in outsourcing to an ASP. In my opinion, that risk has hampered the growth of the ASP market. So far, many ASPs have folded and others appear to be in trouble. Buyers are correct in worrying that their supplier may go out of business and disappear before the contract end date.

Consolidation is a Given

This year will be the year of vendor consolidation. ASPs will combine to gain strengths they don't have in-house or to improve their market share. Others will just disappear. ASPs specializing in infrastructure are in a crowded field where consolidation is certain. Next year at this time there will be fewer but stronger ASPs in the marketplace.

The vendors that survive the shake out will do very well, thank you. After analyzing ASPs for the last two years, it's clear two avenues will ensure an ASP's success. ASPs who focus on point solutions like email will do well. So will ASPs who host enterprise resource planning (ERP) applications. These applications, which have taken on point solution characteristics, require minimal integration with other software systems and have a controlled number of interfaces.

The more highly integrated offerings appear to be the ones that are struggling. Is the ASP module the right vehicle for these types of offerings? Maybe we'll be able to answer that question definitively next year at this time.

ASP Prices Will Rise

This year my staff at the Outsourcing-Center and I expect ASP prices to rise. Last year ASPs ignited intense competition and offered extremely favorable entry level prices to populate their client rosters. The shake out survivors, however, can't remain survivors unless they raise prices on their offerings. Sound economic models will take over from the initial 'come hither' pricing.

Raising prices will allow ASPs to become profitable in 2001. The ASPs charging appropriate fees will be the eventual winners. Higher prices, however, may slow down the adoption cycle because the value proposition has become more expensive.

This year buyers will be demanding more of their ASPs. Last year most ASPs did not provide significant service level guarantees. Now, especially at a higher price point, buyers are demanding service level agreements (SLA). In addition, buyers are paying more attention to disaster recovery.

Buyer emphasis on accountability is one of the major reasons for the move to business service providers (BSPs). This new vendor is the result of the merger of the ASP business model with business process outsourcers (BPO.) I define BSP as a service provider that offers scalable BPO services through the Internet.

Amalgamating the two different types of outsourcing providers was embryonic last year. Early entrants like Portera, which provides services to the professional services industry, have their roots in ASP soil. But the big BPO players have taken notice. Hewitt Associates, for example, is offering BSP services to the mid-sized market through its subsidiary, Sergio.

I anticipate buyer acceptance for BSPs will follow the same pattern as ASPs. First, small and mid-sized companies will test the offerings and demonstrate the value of the service. Then the larger organizations will follow the path the smaller companies have blazed.

Lessons from the Outsourcing Primer:

Many ASPs found themselves on an economic roller coaster this year. Some will disappear. Others will have to join hands with other ASPs to survive.
ASPs will have to charge more for their services, replacing the initial lower prices they needed to entice customers to try their new way of doing business.
BSPs will become more accepted this year.
Buyers are demanding more accountability from their ASPs.

Publish Date: January 2001

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