If anyone is entitled to harbour a sour-grapes attitude about ASPs dying on the vine, it's Michael Osborn. After all, the founder of online retailer eVineyard has twice been left high and dry after application service providers kicked the bucket, leaving him scrambling for alternatives.

The bad news started in September, when Pandesic LLC, the much-touted SAP AG and Intel joint venture, announced it was cutting its losses and ending its e-commerce ASP services. Osborn was worried. eVineyard had built its business, starting in 1999, on Pandesic. The ASP provided eVineyard's core distribution, order and inventory management, and accounts receivable applications built on SAP's R/3 ERP (enterprise resource planning) system.

As if such a disruption weren't bad enough, it forced eVineyard to hire more IT staff and rush the purchase and implementation of an ERP system, history repeated itself last month. Much to Osborn's dismay, ShopTok [an ASP eVineyard had been relying on to provide a live online chat application for customer service] went belly up after it couldn't find enough investors.

"It's a nuisance, and it's a project you don't expect to be having to spend time on," said Osborn. "I'm just a wee bit sceptical about this ASP issue. The ASP model to me has been unpredictable."

He's not alone. A growing number of ASP customers are learning that when a provider fails, they have to make tough choices about whether to take over management of the technology themselves or investigate new ASPs. They often face short deadlines under which to make a switch to avoid downtime and lost productivity. All the while, they must navigate new ASP contracts and the migration of data and application set ups in-house or to another ASP.

The lesson for companies using or considering ASPs is clear: More upfront due diligence and the inclusion of contract provisions that ensure migration of data and software licenses are critical to avert an ASP disaster.

A good year for dead ASPs
Pandesic's announcement last year was the first of what came to be a crop of ASP consolidations. Since then, smaller providers that had developed niche applications specifically for the Web have been hit hard. Such ASPs as intranet provider HotOffice.com, recruiting human resources application provider iSearch, and time and expense application provider Red Gorilla have closed shop. Others, such as FutureLink and Interliant, have refocused their application offerings. Even the larger ASP pioneers focused on enterprise applications, such as USinternetworking and Corio, are battling tanking stock prices.

The worst may lie ahead. Gartner predicted in August that as many as 60 percent of the then 480 ASPs operating could fail by the end of this year. By 2004, the number of viable ASPs will shrink further, with about 20 focusing on enterprise-class applications such as ERP and 100 more offering single-function applications, according to Gartner.

At least for eVineyard, the sting of Pandesic's death wasn't fatal. Within two months of the ASP's September announcement, and before the service ended completely, Osborn finally could raise a toast to successfully transitioning from the provider's service. In November, eVineyard completed implementation of Epicor Software's eDistribution software to replace the ERP functionality it was losing from Pandesic. This time, eVineyard bought the application the old-fashioned way, in a client/server license, and opted to manage it with internal resources.

eVineyard's bad luck was enough reason for Osborn to ditch the ASP model in favour of the Epicor software, but it wasn't the only one. Choosing Epicor made sense because eVineyard had already completed the implementation of the ERP vendor's eFinancial suite for accounts payable and general ledger applications in conjunction with integrator CTR.

Not surprisingly after all this, Osborn isn't interested in pursuing any future ASP deals. While eVineyard had only 35 minutes of downtime throughout the entire transition from Pandesic, the move came with extra costs. The e-tailer had to purchase additional components of the ERP system and rush the implementation. It also increased its IT staff by three, mainly to manage the applications. Osborn declined to give details on how much the changes cost. What matters is that eVineyard is now in charge of its technological destiny.

"You just have to know the risk is that there's another organisation, another board, another set of constituencies that's not going to be looking after your own best interests," Osborn said. "Whereas my own team, they're clearly focused on selling wine every day."

But one ASP's failure doesn't always turn customers off to using the model. Especially when dealing with applications less mission-critical than ERP, companies may turn to surviving ASP competitors, and those providers are more than happy to oblige. Many ASPs have even begun to target customers of failed competitors as a way of garnering more business.

Prepare for the worst

Prepare for the worst

As the ASP market consolidates, it's better for customers to be safe than sorry. Here are some ways to prevent an ASP disaster: Crunch the numbers Check an ASP's financials and delve into its business model. If the ASP is offering an advertising-supported free service, for instance, be leery. Meet the customers Analyse an ASP's customer mix to avoid those relying too heavily on dot-coms. Find out a provider's retention rates if it's been around long enough to have contract renewals or its rate of sign-ups if it is new. Own the data Maintain ownership of data in a contract with an ASP and formulate a procedure for obtaining, backing up and transferring that data. Have a buyout plan Many ASPs own the software license themselves or amortise the cost for the customers over time. Either way, make sure the contract contains a way to purchase the license outright.

Source: eWEEK reporting

Sometimes, a failing ASP works out details in advance for customers, partnering with a competitor to take over service and migrate customers. Hot Office.com, for one, contacted Intranets.com in November when it realised it was running out of funding and would cease operations, said Intra nets.com CEO Steve Crummey. The two companies agreed that HotOffice.com will refer customers to Intranets.com, which paid an undisclosed amount in the deal. Intranets.com also set up part of its site for transferring HotOffice.com customers.

Working out such details ahead of time can smooth the path for customers. Mark Hill, principal at Regency Capital Partners, and a former HotOffice customer, was impressed that HotOffice.com worked out the kinks before its demise. "It was classy because typically guys who shut their doors just walk away," Hill said.

HotOffice.com and Intranets.com both provided a set of collaboration tools over the Internet for free, so customers such as Regency didn't have much at stake financially. Hill's biggest problem was with the 10-person company's business cards. He had just had them printed with the HotOffice.com email address for sharing documents when the provider closed in December. Otherwise, the move to another provider didn't require many changes, since only three employees had begun using HotOffice.com, Hill said. The changes mainly involved setting up a new account and using tools on the Intranets.com Web site to transfer data from the HotOffice.com system.

But sometimes customers are left to tumble through the rubble alone. That was the case for customers of iSearch, which announced its demise in a message to customers in mid-February that appeared when they logged on to the company's Web-based HR recruiting system, said Susan Fine, senior director of executive recruitment at Sears, Roebuck and Co.

Fine's first concern was keeping the application running. Not only had iSearch provided an application for 25 Sears recruiters to internally track resumes and search its candidate database, it had also hosted the employment section of the Sears.com Web site. Downtime could have damaged Sears' professional recruitment efforts.

"We put pedal to the metal," Fine said. "We were all in crisis mode to identify new interim solutions and prioritise time to make sure that when [candidates] came to Sears.com, they weren't just looking at an empty site."

Time was running out. Sears had two and a half weeks to find an alternative before iSearch went dark. That left little time for in-depth due diligence, so Sears' strategy was to find an interim solution and then to continue searching for a long-term provider.

While iSearch didn't help Sears find a new provider, fellow customers did. Fine connected with other iSearch customers, who offered opinions about other potential ASPs. At the same time, she was receiving daily phone calls from competitors seeking Sears' business.

Grabbing the BrassRing

One of the calls came from BrassRing Systems, a division of BrassRing. Sears decided to use BrassRing's resumes tracking applications and job site hosting services because of positive customer feedback and BrassRing's willingness to customise its offerings to meet the needs of displaced customers such as Sears.

BrassRing waived its usual one-year contract for former iSearch customers, allowing them to use the service on a month-to-month basis. The ASP also committed to getting the most basic functions, such as hosting job sites, up and running within 48 hours. That helped Sears keep its job postings online without any downtime.

Looking back, Sears had seen signs of iSearch's impending shutdown. The ASP had warned in January that customer service could be affected by an upcoming acquisition of the company, Fine said. Long before that hint of trouble, Sears was already dissatisfied with iSearch's service, which Sears started using in November 1999, and had begun considering moving to another provider. Along with poor customer service, Fine couldn't find some candidates when she searched the resume database.

Paying attention to hints such as those can help prevent the hassle and costs of recovering from an ASP that has begun to sour. But not all ASPs give out such obvious warnings as deteriorating customer service. Current and potential customers need to delve into a provider's financial situation, said Laurie McCabe, a vice president at Summit Strategies. If the provider is public, that means reviewing recent quarterly reports and finding out how much cash it has left. If it's private, it means grilling the ASP about its financial performance.

Another thing to keep in mind is that ASPs offering enterprise applications often struggle to scale to support a large number of customers, said Tom Mangan, a managing partner in global enterprise technology solutions at Arthur Andersen. Too often, the cost of adding a new customer can exceed what providers can reasonably charge if their models require deployment of dedicated servers and customised applications for each customer, Mangan said.

Rather than wait for the worst, IT managers at Eagle Family Foods picked up and left their ASP of two years last summer before it floundered.

The US$250 million company had decided to use an ASP when it was formed as an independent company in 1997 from former Borden Food brands. Eagle Family Foods needed an ERP system and chose in early 1998 to implement PeopleSoft's software on a hosted basis, said Robert Marshak, director of IS infrastructure. Marshak declined to name the ASP.

Within the first year, though, problems arose. Customer support was spotty, and the ASP was reluctant to update its network and software. Even Lotus Notes email, which the provider also hosted, wasn't being protected against viruses until Marshak questioned the ASP about the issue. On top of it all, the ASP seemed financially shaky and was losing, rather than gaining, customers, according to Marshak.

So Eagle Family Foods went on a search for a new ASP starting in mid-1999. It decided to use Surebridge. This time, however, Eagle Family Foods tried to protect itself. The company decided to buy the licenses to the PeopleSoft and Notes applications itself, along with the hardware. That made leaving easier, especially since its yearly contract had already expired.

And then there are those times when warnings never come.

At eVineyard, Osborn had little reason to believe Pandesic would end its service because the company was backed by two of the world's largest technology companies. But it did.

The painful lesson? Consider the possibility of an ASP's failure from the beginning of the relationship, however unlikely it seems.

"Contemplate what happens when that phone call comes," Osborn said. "Be prepared, and don't have rose-colored glasses."

Death of the ASPs

ASPs struggle to survive

The roster of wounded ASPs is growing. Here's a current tally of both the dearly departed and those at death's door: Out of business — HostLogic. Shut down in December after funding ran out — HotOffice.com Unable to raise funding; shut down in December — iSearch Ended service in March after a failed buyout — Pandesic Announced in July it was ceasing operations due to a lack of profitability — Red Gorilla Abruptly closed in October, blaming a falloff in funding — ShopTok Called it quits in March after funding failures Critical condition — Agillion. Went up for sale in March and laid off 25 of its 45 employees — Breakaway Solutions. Faced CEO shake-up and two rounds of layoffs since December — FutureLink Moving away from ASP model after reported US$205.1 million fourth-quarter loss — Interliant Stopped selling ASP model this month to focus on messaging

Source: eWEEK reporting

Prime pickings for ASP survivors

Reading rumors of dot-com doom can pay off with easy pickings for competitors of ailing companies, as Mark Goldin learned in October. One of Goldin's co-workers at application service provider Elite.com, spread the news of competitor Red Gorilla's falling fortunes. Both offered a Web-based time and expense application. Goldin, Elite.com's president, jumped at the chance to pluck new customers from his competitor's ashes. "They were an annoyance to us, and we were wanting them to go out of business," said Goldin, who disliked that Red Gorilla offered a free service. "So we said, 'Why don't we get in touch with Red Gorilla and see if we can migrate people to Elite?'"

It almost worked, until Red Gorilla decided to turn to another ASP for help. Ironically, by December Red Gorilla's erstwhile partner, after having trouble with the migration, was calling Elite.com to take over the former Red Gorilla customers. So far, Goldin estimates that Elite.com has added 1,000 new customers paying at least US$9.95 per month per user.

It just goes to show: One ASP's failure can be another's business opportunity. A range of ASPs have found new customers in the ruins of competitors, either by seeking out the stranded customers or striking deals with competitors.

Intranets.com gained about 11,000â€"-or 35 percentâ€"-of the customers from failed competitor HotOffice.com after the companies worked out a deal when HotOffice.com closed in November.

For enterprise-application ASPs such as Qwest Cyber Solutions though, just any competitor's customers won't do. While Qwest hasn't struck any deals with failed competitors, CEO John Charters does see an opportunity to reach out to customers from struggling ASPs. But for Qwest, the target will be Fortune 2000 companies or their divisions rather than startups or dot-coms.

Qwest found one such match after the January demise of competitor HostLogic an ASP that had hosted SAP AG enterprise resource planning software. The US subsidiary of chemical processor Prayon Group turned to Qwest to host and manage the SAP software, which it will begin doing in May.

The interest for surviving ASPs, though, is more than just gaining more business. They also hope to prove to orphaned customers that the ASP model is viable and that strong providers remain. When BrassRing Systems, a division of BrassRing developed a transition for customers of failed human resources ASP competitor iSearch, it also emphasised the stability of its financial backing.

"An ASP can be a risky bet," said Tom Kramer, BrassRing's vice president of marketing. "It's still a good idea, but just be very certain that the company you pick is going to be there month after month and year after year."

Copyright © 2009 CBS Interactive, a CBS Company. All Rights Reserved.
ZDNET is a registered service mark of CBS Interactive. ZDNET Logo is a service mark of CBS Interactive.