One hot day last July, US-based application service provider (ASP) Pandesic put out a startling statement: The supposedly solid company announced it was shutting down because it couldn't find "a timely road to profitability due to slower than anticipated market acceptance of business-to-consumer e-commerce solutions."
"It hit me like a cold shower," says Dieter Schoenegger, chief technology officer at Adidas America, a Pandesic customer. "It was really awful. With other dot-coms starting to die, we asked ourselves whether we should just shut the sites down."
The retailer wasn't left disconnected by some small-time ASP. Pandesic was a joint venture backed by Intel and German software firm SAP. The two had committed US$50 million up front and veteran executives from both parents. "These were two dinosaur giants," Schoenegger says. "Nobody expected that they wouldn't last."
Adidas was not alone. Other Pandesic customers, including eHobbies.com, clothier OshKosh B'Gosh, the San Francisco Giants and The Children's Place Retail Stores were all scrambling. Over the past few months, several other ASPs shut down. Red Gorilla, which offered an online time billing and time service ceased operation in October. HotOffice.com, a virtual office services company, shut down in December. So did iSearch, which marketed Web-based recruiting applications. HostLogic closed in early February, leaving customers like Tyco International in the lurch.
Their customers had chosen to employ ASPs because they didn't want the everyday headaches of operating applications. But the ASP carnage left many customers with massive migraines.
Take Ben Young, owner of small Web design firm BigBlueHat. He relied on Red Gorilla for billing clients. One day last fall, "when I was ready to bill my client, the system was gone," Young says. "There was nothing there but a blank white space."
End of the Beginning
This year is what research firm IDC calls "the end of the beginning," when many of the 2,000 or so companies that call themselves ASPs fail. Gartner Group analysts estimate that by year's end, 60 percent of the ASPs that were running in 2000 will have left the race. Other analysts put the failure rate even higher. "I see eight out of 10 companies failing in the first year," says Lew Hollerbach, managing director at Aberdeen Group. "It is the same as the early dynamics in any other industry. But for ASPs, there were unrealistic expectations, and now we're facing a hype hangover."
Despite the hangover, most analysts and customers say the ASP market will emerge stronger. Gartner predicts that the worldwide ASP market will reach more than US$25.3 billion by 2004. The reason: The early appeal of the ASP market still holds. By using ASPs, companies can reduce their labour and capital spending by as much as 30 percent, roll out new apps more quickly and, perhaps most importantly, focus on their core competencies.
"We offer lower, predictable costs and take away the pain of companies trying to manage by themselves," says Mitch Kristofferson, vice president of marketing at Corio. "We can deliver major projects successfully, on time and on budget."
That's what customers want. "We were able to get full-blown e-commerce two to two-and-half years faster than if we'd done it ourselves," says Gordon Craig, director of marketing and e-commerce at Sterngold. The maker of dental products, a subsidiary of London's Cookson Group, tapped Surebridge to deploy a Sterngold Web site that includes frequently asked questions and product, technical and safety information for 4,000 products. "We wanted to be a first-mover within our industry," Craig says. "We didn't want to waste precious time putting something together and losing ground."
Many customers have no desire to learn new skills. "There are very hard barriers to entry for broadband networking, and it is not our expertise," says Mitch Gordon, vice president of business development at LessonLab, provider of professional development applications for teachers. LessonLab uses ASP Connectria to host the Lotus Development Domino platform that runs its applications. "We're education and software development experts, not broadband hosting experts. We need people there 24 by 7 who can provide scalability and bandwidth."
In fact, even those that have been burned by failed ASPs are still looking at the model. "They still have the same issues that they did before: 'Do I have the capabilities to manage the application? Do I have the plans to build this application?' " says Christine Ferrusi Ross, a services analyst at Forrester Research.
In fact, it is very rare that a company that has outsourced an application will take it back in-house, Ross says. "They'll switch providers. They'll say, 'We picked the wrong ASP, but that doesn't mean it was the wrong thing to do.' In fact, I interviewed one customer who kept trashing his ASP, but when I asked him if he plans to do more outsourcing, he said 'Oh yes.' "
Former Pandesic customer Adidas is sticking with the ASP model. "I was still a strong believer in the knowledge and know-how of the ASPs to manage Web infrastructure and components," Schoenegger says. "We wouldn't even suggest building up infrastructure or insourcing ourselves."
