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The Second Coming of ASPs?
By Kevin Newcomb

May 5, 2004

When ASPs first came on the scene in the late 1990s, they were billed as the future of software. Has that future arrived?

Opinions on the ASP model have ranged widely over the past few years — from being touted as the future of software, to being considered an outdated concept. As in most cases, the truth lies somewhere in the middle. Those companies in the industry who have stuck with the model through thick and thin are now starting to reap their rewards, as public opinion of the industry has taken a swing back toward the positive, and more companies are looking to software service providers to fulfill their IT needs.

“It certainly appears that business in general has gotten stronger,” says NetSuite CEO Zach Nelson. “The rate of growth of software delivered as a service is exponentially higher than that of software delivered on a CD. I think that it’s a sea change that starting to happen last year, and is continuing forward. I have not met a single CEO of a software company that isn’t building their software as a service, first and foremost.”

Investors are beginning to come knocking on the doors of ASPs as well, according to many of their CEOs, and the impending initial public offering (IPO) of, coinciding with the recovering tech market, may signal a new era for the ASP industry.

ASP: An Idea Whose Time Has Come?
“I don’t want to overheat the market, but there’s a really interesting confluence of events right now,” says Rand Schulman, WebSideStory Chief Marketing Officer. “With the macro-economy changing to people starting to buy again, and now starting to buy the ASP solutions and not the software solutions, we’re at a very interesting space in time with ASPs.”

“There’s always evolutionary change, where leaders in one decade are laggards in another. Now’s the time for the leadership of the industry to change from those who have this installed base of software to those who are creating on-demand products,” he says.

You may not find the term “ASP” at the forefront of many sales pitches, but whether it’s called “software-as-a-service”, “on-demand computing”, “utility computing” or something else entirely, the premise today is the same as it was in 1998 when application service providers first hit the scene — online provision of computing.

Some of the leaders from the early days are still around, like USi and Corio. Others have disappeared or been consumed, like Futurelink, Exodus Communications, Breakaway Systems, and many more whose colorful names have long since been forgotten after the dot-com crash eliminated their primary markets.

The first wave of ASPs were mostly application outsourcers, and many continue to find success today. Companies like USi, Corio, Appshop, eOnline (now BlueStar Solutions), Surebridge, TeleComputing have carved out their niche and are still relevant in today’s ASP landscape.

Many traditional software vendors have dipped their toes into the ASP pool to varying degrees. Companies like Oracle, PeopleSoft, SAP and Siebel have all tested the waters, and found varying success. Siebel’s recent acquisition of UpShot and a renewed focus on an ASP strategy by Oracle and PeopleSoft show that the old-timers are taking notice.

Perfecting the Dream
But the true leaders of the industry today and in the future come from the second-generation of service providers. The ones who moved beyond simply hosting legacy applications and making them available online to actually developing a product from the ground up to be delivered as a service. These are the companies that fill our Top 25 Providers list —, NetSuite, RightNow, Salesnet, Atomz, CrownPeak, WebSideStory and many more.

“The kind of questions they’d have three years ago about financial stability and such are really gone,” says Steve Kusmer, Atomz CEO. “People realize it’s like anything else they do on a subscription basis, whether it’s renting phone service or power — they need to develop partners they trust, whose employees are serving their employees. It’s really changed a lot. The ASP industry is much more respectable these days.”

These companies have had several years now to develop their products to match — and often exceed — the functionality found in traditional client-server applications. They have built up their customer bases steadily, so that now the true rewards of a subscription-based model can be reaped.

They have also used the unique attributes of the model to their advantage, creating applications that are highly customizable, quickly and seamlessly upgradeable, and quickly implementable. New features that take a year to get into the development cycle of packaged software can be deployed in an ASP product in a matter of months.

The result is that there is now a core group of service providers who have proven their long-term stability, who have a mature product, and who can deliver features that the traditional vendors cannot, and they can do it for less.

In fact, the nature of the subscription-based model makes it more customer-friendly than an installed software model. Once a traditional software vendor sells the product and cashes its large up-front check, it has a minimal incentive to satisfy that customer. There are ongoing maintenance revenues to consider, but the big payoff has already come and gone, and the software company has moved on to new targets.

“Software companies have a conflict of interest — it’s their job to make sure the customer is NOT happy, so they can sell them an upgrade in two years,” WebSideStory’s Schulman says.

By contrast, an ASP generally uses a subscription model, with one- or two-year contracts. This gives the ASP a huge incentive to satisfy its customers. Successful ASPs understand this, and use it to their advantage.

“We typically sell our solution on a 2-year term agreement, which is good for our customers because they don’t pay for the software for eternity. It also means we’re able to invest in the relationship to earn the renewal at the end of the term period,” says RightNow CEO Greg Gianforte.

RightNow has implemented a process it calls “tune-ups“, which are basically 90-minute phone calls every few months with RightNow’s dedicated team of consultants to “tune up” the application and customer service best practices — for free.

RightNow’s Tune-Ups are in part a reaction to the ‘drive-by’ software installations of other vendors, where they dump the software off, provide a month or two of consulting, and then disappear, never to be seen again. “Unfortunately, CRM software is not an event, it’s an iterative process. It’s a lifecycle relationship,” Gianforte says.

The program benefits customers, who get more use from RightNow’s software, and RightNow, which gets a more satisfied customer who is more likely to not only renew its contract, but to expand it as well.

“Everyone knows it’s much easier for us to further a relationship with an existing customer than it is for us to acquire a new one. Once we fight hard to win them, we do everything in our power to make sure we can keep them — not through any form of coercion, but through loving them and serving them so they don’t want to break the relationship,” Gianforte says.

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