Defunct ASPs leave customers in the lurch

A year later, clients trying to tap into their time and expense software programs got error messages instead: Red Gorilla had abruptly ditched the application service provider (ASP) jungle in October, leaving its clients hanging.

"Our billing cycle was coming to a close...I sent an email to (Red Gorilla) user support, and it bounced back," said former Red Gorilla customer Pam LaFollette of Kinetic. "That's when everyone got real pale."

Red Gorilla, which handed off its clients to another ASP, is not the only company in the new and volatile ASP market to shut its doors. On Thursday, HotOffice.com announced that it would close down December 19 because of the harsh market conditions and referred customers to another ASP. In July, Pandesic, an older ASP formed between technology giants Intel and SAP, closed because it was not on a timely road to profitability.

While analysts predict some consolidation in the market, they say ASPs remain a promising and intriguing business model. Customers benefit by having their ASPs run everything from complicated enterprise software installations to more common desktop applications, which are often difficult to maintain. Corio and USinternetworking, which got into the market early, offer customers applications-for-rent from a wide range of giant software makers including Commerce One, PeopleSoft and SAP.

Market research group Gartner has predicted that the worldwide ASP market will reach more than $25.3 billion by 2004.

But most ASPs are still fine-tuning their business models and crystallizing their pricing plans, making it an uncertain market for clients looking for a reliable and steady service provider, analysts say.

Red Gorilla, for example, beefed up its client list by giving away Palms to new clients--winding up with "clients" who were really just individuals looking to get the handheld, not actual ASP services. Red Gorilla also offered clients no-cost service, hoping to make money by luring them to other subscription-based applications. All the while, the company was burning through their venture capital and could not secure additional funds.

"Virtually none of them are showing a profit," said Joshua Greenbaum, an analyst who heads Enterprise Applications Consulting, who added that he is doubtful that many ASPs will be able to turn profits anytime soon.

ASPs "either have solid debt or investors that are desperate to make" back their money, Greenbaum said.

The shutdowns of many ASPs have left clients scrambling. Red Gorilla had 33,000 active clients, mostly small companies with a handful of employees. And although those clients were handed off to San Diego-based OfficeTool.com, which bought Red Gorilla's assets, many people said they did not know what was happening.

"Sadly, it wasn't any nice PR job; it just all of a sudden wasn't there," said Benjamin Young, who heads Web design firm BigBlueHat. "The week it went down was the same time I was getting ready to bill a client."

Because of the shutdowns and some ASP customers' experiences, people will be increasingly cautious, analysts say.

"The ASP market is starting to look grim," Greenbaum said. "If (customers) have any sense at all, they're going to be looking very seriously at a more old-line outsourcing services company in order to deal with the long-term viability issue, if nothing else."

Customers should pick carefully, looking for company longevity, history and reputation, rather than signing on, no questions asked, for a no-cost service, analysts said.

"Customers should continue to be leery about choosing a young ASP," said David Boulanger, an analyst at Boston-based AMR Research, who anticipates a rocky future for ASPs in general. "If (start-ups) can get past the (first) 24 months, then they probably have a pretty good business model."

But most ASPs are still in that critical period--as old as 12 months to 15 months, which makes it likely a number of them will not make it.

Some of Red Gorilla's customers jumped to a new ASP faster than OfficeTool could contact them. OfficeTool chief executive Scott Yale said his company's first priority was reviving the Red Gorilla Web site and contacting customers by email.

But LaFollette, who had signed up for Red Gorilla's most popular service, a free time-tracking and invoice application, said she never heard from Red Gorilla or OfficeTool.

"We couldn't wait for (Red Gorilla) to get back to us," said LaFollette, who learned of the company's downfall through published reports. "We already waited three days where we were unable to access the site. We immediately set up another billing system" and also had a paper-based system in place as a backup, she said.

While some analysts have said losing access to a time and expense system may not be as crucial to businesses as losing their complete SAP business management system, for example, it is still, at best, a headache.

"For the customers, the impact on their business could range from disaster to extremely inconvenienced," Greenbaum said. "It can't be any better than that."