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ASP model still has wings

Despite recent forecasts that the application service provider market is struggling, a new survey finds that the sector is far from sounding its death knell.

Despite recent forecasts that the application service provider market is struggling, a new survey finds that the sector is far from sounding its death knell.

Jupiter Media Metrix is expected to release a report on Tuesday that finds that the ASP model still has a successful future as Web-enabled software becomes increasingly common and more business data and information is automated online through industry-focused transaction and communication systems.

"Earlier ASP companies made sense on paper, but had problems when they tried to outsource existing software that wasn't originally developed for that purpose and had to be customized to fit a customer's needs," said Preston Dodd, an analyst at Jupiter Media Metrix. "Now companies are realizing that the broader the application the better. If you have to customize, why do it at all?"

ASPs gained early popularity based on a simple idea: Customers would prefer not to install or manage software--a process that is time-consuming, expensive and complicated. ASPs would host the applications that customers could access from any desktop for a fee.

The new report, which is based on surveys of executives from over 40 companies, shows that more than one in three companies will shift at least 20 percent of their Web development budgets to ASPs in the next two years. Though there have been some questions raised about the viability of certain ASPs, the survey found a belief by businesses in the model that ASPs will positively affect their business processes.

In addition, the study found that one in four companies will shift at least 20 percent of their budgets from information technology expenditures to ASP costs.

"Though some critics have questioned the viability of many ASPs, Jupiter expects these budgetary shifts to continue," Dodd said. "I was surprised to see the numbers of budget shifts despite some of the headline problems ASPs have had. It shows that companies still believe in the ASP model."

Other analysts agree that the ASP sector has brighter days ahead.

"We have been predicting consolidation in the market for the last six months," said Jessica Goepfert, an analyst at IDC. The sector has struggled lately "because of oversupply in the market and poorly thought-out business models."

However, she believes a little cost saving these days could go a long way: "Value propositions will ring truer with companies looking to outsource applications if the economic downturn continues."

Shifting and shrinking
The new report comes as the ASP market is in a state of change and consolidation, with many players rushing to fine-tune their business models and crystallize plans to achieve profitability.

Though technology giants, from Oracle to IBM to AT&T, have been pushing their ASP strategies for some time, a number of start-ups have had a difficult time increasing customer adoption of the novel service. And while services have gotten a big push from many technology providers, customers have been slow to latch on to the concept, causing several companies to pay a heavy toll.

Some ASPs have even gone out of business. Upstart Red Gorilla abruptly abandoned its clients last fall after it failed to secure additional funding to stay afloat. In December, went out of business because of harsh market conditions. Struggling business-management software maker J.D. Edwards also recently left the ASP game, not even a year after it launched its own ASP division.

ASP success isn't guaranteed. While implementation time will always remain important, Jupiter believes the success of individual ASPs and their stability in customer relationships will hinge on their ability to integrate and scale with existing systems effectively.

In addition, as more companies look to automate their business processes online for doing business with other companies, ASPs will see a greater demand from customers for their Web expertise and software, the survey said.

As reported earlier, some ASPs are already finding fertile revenue streams by tapping business-to-business marketplaces.

A number of marketplaces, including Covisint, Elemica and ForestExpress, have looked to ASPs to host applications, or whole marketplaces, in an effort to free them from the high costs and labor necessary to manage software internally, and to add value to their sites beyond just procurement, analysts say.

ASPs: The next generation
The survey found a greater acceptance and understanding inside company boardrooms for the model than was the case a year ago.

"There has been a battle in IT departments between those who believed in the model and those who believed in doing things internally," Dodd said. "I think we're starting to see more companies willing have applications managed outside of the firewall. There is a greater acceptance of that belief."

For the model to be successful, a more complex understanding of the benefits of using an ASP needs to be realized by companies.

In its report, Jupiter maintains that focusing on price savings, as indicated by many executives surveyed, shouldn't be the main reason for outsourcing software. Instead, companies should concentrate on swifter implementation time and increased application expertise as their primary criteria when outsourcing to an ASP.

Although the ASP model may have a bright future, the same may not be true for those outsourcing companies still doing business the same old way.

"A lot of the good ASPs don't exist yet," Dodd said. "I think we are seeing the demise of the first generation of ASPs and the rise of the second generation that learned from the others' earlier mistakes."