The ASP Trap
When HostLogic, an application service provider, failed to secure a second round of US$40 million in financing in mid-December, it started handing pink slips to its 100 employees. But signs of trouble came months earlier, when Alan Yuster, president of Invicta Vision (formerly EyeAmerica), says he began receiving invoices for promised consulting and training services HostLogic had never delivered. "They never installed the system," Yuster says. "We never received the hardware or software, but we were receiving so much documentation for money that we knew something was amiss." In November he cut his ties with the ASP.
Herbert Goertz, HostLogic's founder and CEO, calls the allegations untrue. In fact, he says, Invicta never signed a contract with HostLogic. "They fired their whole management team and almost went into bankruptcy," Goertz says. "We ended it with them. We were the hosting partner-to-be but never hosted them since they got new management."
Yuster responds, with irony: "I find it wonderful that he's given you this response. I'll take that as an official release of any possible claims."
HostLogic filed for Chapter 7 bankruptcy on February 28â€"and it remains to be seen whether its creditors will go after Invicta to help pay HostLogic's bills.
Such nasty finger-pointing has become all too common with outsourcing partnerships. Like many technology sectors, the ASP industry is in perpetual turmoil. And for far too many companies it has become a pit of deception, exaggerated claims, and unfulfilled promises.
Still, the strategic benefits of using an ASP are irresistibleâ€"to companies large and small. Why pay software companies every year for the privilege of installing and supporting their applications on an arsenal of PCs when you can hire out, accessing the same programs across the Net? Your company gets best-of-breed applications as soon as they're available. ASPs have reduced client companies' IT costs in some cases by as much as 20 percent. And you gain speed to market. What's more, you can focus on your core business, rather than on the Byzantine art of building your own IT shop.
Even companies that have been burned by ASPs typically haven't lost their faith in outsourcing. According to Greg Blatnik, a vice president at Zona Research, which published a study on ASPs in January, 65 percent of the businesses Zona surveyed use ASPs, with most renting between two and six applications. And most of these companies plan to add more applications in the future.
So why the sour grapes? The industry is young, and it's still got a lot of kinks. You can't always tell when you're about to be bamboozled or marooned. But some common traps have doomed a disproportionate number of partnerships. Here's how to avoid getting burned.
