ASP's cant seem to catch a break...

An application service provider (ASP) is defined as a company that offers individuals or enterprises access over the Internet to application programs and related services that would otherwise have to be located in their own personal or enterprise computers/servers.

I worked for one of the first Application Service Providers  6 years ago. Man, those were the days... we were young, pumped up with cash and stock options *sigh*. Anyway, I digress...apart from being young and enthusiastic, we were genuinely excited about this new channel of software delivery. We saw the future and it spelled "software on demand".

Why (we wondered) would any medium sized company ever want to go through the drama and hassle of implementing PeopleSoft or Siebel etc in their own datacenters? Why would they want to pay for integrators to come and "help" them execute yearlong ERP projects? We were going to provide "software on demand" for a fraction of the price of what they were willing to pay. We had the perfect plan, we were going to be RICH!

Umm... not quite. It didn't quite work that way. For some reason, the market has always been cool towards ASP's. Sure, some ASP's have done well (Salesforce.com etc) but by and large there has been no revolutionary excitement about this potentially lucrative channel.

Having seen the ASP model evolve, here are some of my observations about some of the problems ASP's faced in general.

Security: It's hard enough for one company to secure their own data. Imagine being tasked with securing data that belongs to 200 different organizations. Companies are very nervous about having a third party be responsible for their data. No matter how many NDA's are signed, it's still unnerving to not have direct control over your data. Hackers are continually a threat to data repositories and ASP's have to be more vigilant than most companies.

Outsourcing: A few high profile cases of data being disseminated in India and companies started to freak out even more. Once again, no matter what your partnership/NDA agreement is, the fact of the matter is, what would you do if your data was being spread all over another country? Even though this happened in only a handful of cases, companies had to factor that in and loss of control didn't seem as appealing anymore...

Rigidity:  A company that implements it's own software is free to modify the heck out of it. ASP's locked customers into pretty restrictive contracts re: customizations. This was necessary because ASP's work on an economies of scale basis. The only way to automate tasks for hundreds of clients is to have environments that are similar. The way to keep environments similar is to ......avoid customization. As a result, there is always going to be friction between ASP's and clients as they each attempt to get what they want.

Jack of all trades syndrome:  The ASP business is one that requires discipline. A successful ASP will find a niche, master it and stick with it despite the urge to expand. If they must expand, a wise ASP will branch out slowly to avoid making a mess. The problem is, in the beginning, ASP's always are looking for a lot of cash to expand. When the current market seems to be leveling off, ASP's will inevitably seek to add new software vendors to their catalog. I believe this is almost always a mistake. If you are a PeopleSoft ASP, learn new ways to streamline the delivery of PeopleSoft, ways to cut down on implementation times, ways to mass customize and make the current offering more efficient before you think of adding Siebel to your roster. As a result of this syndrome, clients could sense that they were not getting the best service all around.

Shortened implementation times: Yet another challenge. There was the impulse to slam that baby home and turn on the switch! This will always be the challenge for the consulting arms of Application Service Providers: how to aggressively but responsibly implement an ERP project in 3 to 6 months. It's difficult. Project management is an art form that quite frankly, in my experience, very few have mastered. It takes a lot of skill to manage a regular project. Having to accelerate the process of business requirement gathering, functional and technical spec creation etc is challenging to say the least.

I have quite a few more but you get the point. I will say this though, conversely, when an ASP does execute successfully, it is a thing of beauty. Clients rent software they normally couldn't afford,  they don't have to worry about support and are free to focus on their core businesses.

The ASP business is a challenging one. I'm still baffled by why it never really took off. I believe as consolidation in the software vendor market continues, there will be three to five major ERP ASP's left. I also think that there are a few kinks to be worked out in the model (I cant discuss those here for NDA reasons). I am however quite optimistic that this model is the way for medium sized companies to go.

There is in my mind, one last step. I believe that companies like Oracle need to really focus on the ASP model and perfect it. I also believe they need to roll out new releases of their software in parallel with ASP versions. This is one of the few remaining ways to squeeze more market share out of the small to mid market. Clients will trust large companies with their data. Clients will trust a reputable software vendor with their data. PeopleSoft (halfheartedly in my opinion) tried this with their E-Center ASP a while ago. Clients never really knew what to make of E-Center as there was not ever a big marketing push for it. It always felt like it was not a serious effort. In the next few years, I believe those software companies that think out of the box and make bold moves will reap the rewards. Those who continue business as usual will be forced aside.

No matter what happens, it'll be fun for the consumer to watch.