Playing with ASPs
Playing with ASPs
By Donna Fluss
Customer Interface Magazine
Application Service Providers (ASPs), a product of the dot.com era, burst into the technology market place in 1998, but are no different from outsourcers, in spite of all claims to the contrary by vendors. There’s nothing wrong with changing a name, but there is something very wrong with telling people a product or service is special or different just because they changed its name. Now, it’s true that buyers should know better and we shouldn’t hold a successful marketing campaign against an industry, but given the fall of Enron, it’s hard not to wonder about the cost of marketing hype.
The fact that so many ASPs failed during the past two years, the most recent and well known being Exodus, doesn’t mean that ASPs can’t add value to an enterprise. It does mean that once the hype died down and the market realized that not all businesses were going to offload the bulk of their IT functions to ASPs (an important assumption fueling the funding of ASPs), most of the ASP vendors should have quietly and gracefully closed their doors. Unfortunately, many ASPs weren’t kind, so they ended up damaging the companies they were supporting when they did close.
The Problem with ASPs
The problem with ASPs is that most were founded upon the false assumption that enterprises were willing to outsource … oops….. I mean “host” many of their IT functions and applications at an external organization. Of interest, the financial and business justifications supporting this fundamental assumption are accurate, yet irrelevant because companies of all sizes have not been willing to move their IT and application support out-of-house (See Figure 1 for a list of ASP benefits).
“There was an idea that ASPs, outsourcers and hosters had different business models. In reality, there was little to differentiate the three” (Bern Elliot, Research Director, Gartner). ASPs were supposed to be technology oriented; hosting companies process oriented; and outsourcers focused on managing people. Prior to the dot.com era, outsourcers handled people, process and technology for their customers. In an attempt to create a new opportunity, the ASPs split the outsourcing market too thinly and claimed the technology component. Unfortunately for the ASPs, many enterprises looking for external third party support needed to address more than just their technology. By 2000, ASPs started to evolve into BSPs, business service providers, who were willing to do anything outsourcers were already doing to attract business. The BSP term never caught on, but the majority of Customer Relationship Management (CRM) ASPs who remain today are willing to address technology, people and process.
The eService market (e-mail response management, chat and collaboration software) clearly shows the flaws in the classic ASP business model. The unfortunate reality is that the eService market place has not yet fully materialized and isn’t expected to within the next two years, according to a January report from AMR (See Figure 2). Nevertheless, the business model for eService ASPs called for these vendors to make money by processing transactions for a large number of enterprises. The business model was faulty for a few reasons:
- eService was not important enough on a stand-alone basis for most enterprises to invest in heavily and when they did, hosting the function was not their first choice, except in the case of the dot.com vendors, many of whom failed.
- Enterprises looking for a partner to handle their eService transactions often needed more in a company than just a host for their technology. Many prospects were searching for domain expertise and experience in addressing e-mails and chat sessions, needed consulting services to assist with system integrations and even wanted the ASP to provide customer service agents to handle inquiries that couldn’t be fully addressed with technology alone.
Even more alarming than the lack of customers were the low prices being charged by many ASPs to attract business. As the market flooded with new ASPs in many areas of CRM, these vendors very nearly gave away their services to win customers. They claimed they would make up their revenue in volume. No accounting trick can hide the fact that if you lose money on every transaction, you simply lose more as the volume increases.
There can be real benefits from hosting or outsourcing with a third party processor, but for many organizations the costs and concerns involved in hosting at an ASP are far greater than the benefits. The potential risks include:
Security: Perceived inability to protect important customer information. Enterprises are concerned about sharing “customer jewels” with an external organization.
Risk Management: Many enterprises are not comfortable processing transactions outside their own organization.
Standardized Handling: Enterprises are not willing to sacrifice their service differentiators and move to a standardized application to gain potential financial benefits. (The basic ASP model assumes that companies are willing to use the same application for the benefit of reduced cost.) Even BSPs who “partner” more closely with the enterprises and provide resources to customize applications have not attracted many companies to their offerings. In an era when products and most services are perceived as “commodities,” customer service is an important differentiator and companies have not been willing to give up their unique service features for the potential savings and speed to market.
Volume: Many companies with low transaction volume believe that the investment and effort involved in outsourcing or hosting a function are just not worth it. Enterprises often believe that they can perform low volume activities less expensively in-house with existing resources. Given the low transaction cost of many ASP offerings, however, this assumption is often wrong, but “perception is reality.”
Integration: As time consuming and costly as it is to integrate applications in-house, it’s even harder to integrate with an external enterprise, particularly when an ASP lacks trained and/or experienced resources to assist with the integration effort. Many enterprises look at ASPs as a short-term solution so they don’t want to waste time or money in “throw-away” integrations.
CRM: Enterprises are increasingly eager to integrate multiple disparate applications and databases in order to have a more complete and actionable profile of their customers. Hosting applications outside the organization is often perceived as adding unnecessary complexity.
Unstable Hosting Companies: Many early entrants in the ASP market failed, leaving their customers stranded and without support. Early adopters got burned and turned off others who would otherwise have followed in their footsteps.
ASPs: Not Inherently Bad
Unfortunately, the initial ASP business model was poorly conceived and executed. While the majority of ASPs failed within three years of coming to market, there are some successful exceptions and there are many outsourcers who provide similar services. “Outsourcing” doesn’t sound as exciting as “hosting,” but there is a reason why EDS, IBM and Teletech, for example, are very successful and viable businesses. These companies have proven business models and a great deal of experience and expertise in delivering the services they offer. This makes them profitable.
The ill-conceived and poorly executed ASPs did a disservice to the market by failing to deliver on lofty promises and losing a great deal of money for a lot of people. The concept of “ASPing,” “hosting” or “outsourcing” isn’t inherently bad and can work well for CRM applications and other functional areas. There are many circumstances when hosting a solution with an external service bureau, outsourcer or an ASP company can be beneficial for an enterprise. As with all potential investments, a careful assessment of market opportunities, competitive offerings and financial benefits (return on investment) should be undertaken before finalizing an investment decision.
When to ASP, Host or Outsource
- When there are established and financially viable ASPs, hosters or outsourcers with experience in supporting the functions or activities your company wants to handle outside the organization. (It’s risky to be the first one to do anything with a vendor because the vendor will lack the expertise and your company will pay the vendor to learn on your time and dime.) According to David Daniels, Senior Analyst, Jupiter Media Metrix, prospects should “look for ASPs who develop their own technology and own the intellectual property. Additionally, prospects should seek out vendors that have domain expertise in your industry, as these ASP’s will be more familiar with integrating back to legacy systems that are common within a given industry.”
- When the vendor has expertise and a proven track record of success with other customers and has several referenceable accounts that are willing to speak to prospects. According to Daniels, “if the ASP is successful they should be able to provide you with five or six reference accounts not one or two.” There are benefits to being an early adopter, but in this market the risks exceed the benefits. If the ASP or outsourcer doesn’t have 20 or more established customers and five to 10 referenceable customers, it’s not a safe investment.
- When the vendor has a proven track record of successful implementations and a well-established and documented support team and methodology.
- When a competitive study indicates that the ASP/outsourcer option is the best alternative for your company.
- When the financial benefits (ROI) of hosting and/or outsourcing are greater than the alternative options.
- When the vendor doesn’t tie you into a long-term contract and has contractual terms that make it easy for you to bring the activity back in-house, as necessary.
- When the vendor doesn’t require large up-front investments.
- When the vendor has good security, risk management, back-up and contingency plans.
- When the vendor can scale up or down.
- When the application or function being hosted or outsourced does not require significant integration with other applications.
Beating the Odds
Once the decision is made to host or outsource an activity, follow these guidelines to improve your chances for a successful relationship with your ASP/outsourcing company:
- Know your cost structure before outsourcing or hosting an activity or application. If you don’t know what it costs, you will not know if the price is fair. Additionally, if a vendor’s price seems too good to be true, it probably is! A vendor charging too low a price will likely fail – the idea of “making it up on volume” doesn’t hold.
- Avoid outsourcing or hosting a problem application or activity; if you couldn’t make a function work well when you owned all of the resources, it’s unlikely to be any more successful with a partner. There are exceptions to this rule – if a vendor is a respected leader in an area where your company is struggling, the vendor can add a great deal of value to your process.
- Look for a partner who understands your business, market and customers. You don’t want to waste time or money training your new partner.
- Establish service level agreements and a process for measuring adherence to the service levels. To minimize misunderstandings between the organizations, every aspect of the relationship must have its own measurable service level. Establish standard reporting processes.
- Sign the agreement only after all service level issues have been documented. Be sure the agreement includes remedies when service levels are not met and rewards when they are exceeded.
- Establish an “informal” working team, involving members from both organizations, that is empowered to resolve problems as they arise. Make it easy for each partner to identify and fix problems. Formal communication and reporting are critical not only for appreciating the impact of service on the end customer, but also to enable each organization to be proactive in identifying, preventing and fixing problems.
- Set up an individual or team to oversee the activity at the third party processor. All functions are ultimately the responsibility of your organization, regardless of where they’re being handled. Your customers will blame you if their transactions are not handled properly and you will lose their business.
- Address pricing and volume changes prior to signing the agreement. Keep in mind that volume can increase or decrease and ASPs/outsourcers may not be pleased if the volume decreases. As these discussions often become contentious and too often result in ruining good relationships, avoid the problem by addressing them up front.
- Document in the agreement the responsibilities and costs associated with “insourcing” the activity, in the event that the function or activity is moved “in-house” at a later date. Keep in mind that the vendor is unlikely to be cooperative later if they are losing your business, so it’s important to get their agreement on this process before signing the contract.
- As all relationships have rocky periods, it’s realistic to expect differences and problems to arise with an external partner. Establish a formal process for addressing and remedying differences, such as establishing an oversight board.
Even though many of the early ASPs tainted market perception, ASPs are not all bad and some are building viable business models. There are many business situations where it’s beneficial for both parties to handle a function outside of its primary organization. But if an opportunity looks too good to be real, it’s because it is and taking advantage of a vendor’s short sightedness (ridiculously low prices, for example) will only hurt your company in the long-term as you will have to move your business elsewhere on short notice when the ASP fails.
The name of a service is not as important as the quality of services provided. Whether a third party processor calls itself an ASP, BSP, hosting company or outsourcer, address all financial, technical and process issues with due diligence before making any decisions. Regardless of the business or service being outsourced or hosted, it’s critical to find a true partner who wants your business, has a history of consistently delivering outstanding service, is financially stable, has domain expertise and is professional yet flexible. Price is important when selecting a partner but shouldn’t be the only selection criterion.
Figure 1: ASP Benefits
- Reduced start-up time
- Reduced start-up cost
- Time to market
- Limited need to invest in hardware
- Limited software maintenance costs
- Minimal software upgrade costs and time
- Minimal internal technical support
- Domain expertise
- Ability to expense the cost
Figure 2: Breakdown by Communication Channel Now and in 2003