Who Will Survive the ASP Evolution?

META Group has always advocated that the ASP industry was not a unique market segment, but rather a derivative (or side effect) of the commoditization of application outsourcing services. We believe that by 2004, the services industry will use new terms and that the phrase ASP will no longer be in vogue.

Words for Thought

"Survivors of the ASP fallout (companies such as Agilera) have resolved basic problems and most have sufficient momentum (and cash) to succeed, although none are yet operationally profitable." Give us your feedback on the future of ASPs in ASPnews Discussion Forum

The services that remain will be subscription or consumption-based pricing models (e.g., per seat pricing for applications). Successful vendors will focus on integrated, end-to-end industry solutions (e.g., retail inventory management) or providing business process outsourcing (BPO) solutions.

We believe that by 2005, pure-play ASPs (such as Corio) will modify their business models to look similar to current outsourcing vendors. Indeed, since the inception of ASPs in 1998, most startups have built substantial consulting teams to provide the implementation and integration originally touted as unnecessary. Moreover, startup vendors are emerging that provide outsourcing services for small- and medium-size enterprises (SMEs) while carefully avoiding the term ASP in sales and marketing initiatives.

2002 and Beyond
During 2002, we believe all large services vendors will offer infrastructure services with subscription or consumption-based pricing — EDS and Compaq, for example, announced offerings in mid-2001. In 2003, pure-play ASPs will transition into full-service vendors targeting SMEs, forcing greater investment in application integration and further taxing troubled business models.

By 2004-2005, the term ASP will disappear as vendors focus on infrastructure services (e.g., Bluestar Solutions), integrated application solutions (e.g., Jamcracker), or industry/BPO solutions. Large outsourcing vendors will dabble in various markets focused primarily on Global 2000 IT organizations (ITOs). META Group does not believe that smaller vendors will penetrate more than 20 percent of G2000 ITOs or, conversely, that large vendors will widely penetrate SMEs. Rather, different vendors will service mainstream G2000 and SME markets.

Examples of Vendors & Segments
	Global 2000	SMEs
Systems integration	Accenture, KPMG	Avalanche
Business Process Outsourcing	PwC	Outtask
Offshore	TCS, Infosys	MindTree
Applications	Keane	Corio, USi
Infrastructure	CSC	BlueStar Solutions

A Focus on Gaining Customers
Market maturation will end the blind involvement of vendors in industry consortia, which have primarily focused on vendor partnerships rather than assessing and understanding customer requirements. For example, in the early days of the ASP Industry Consortium, many vendors indicated that they did not know what they would get by participating, but that they were afraid to not be there. Among ASPs, it has taken two to three years for industry groups to ask what customers want or need rather than what innovative products could they jointly produce and market. (See ASP Trade Group Joins CompTIA.)

This myopic approach caused ASPs to focus on technology offerings rather than understanding and meeting the product and operational requirements of customers. Most vendors were unable to offer sufficient application customization, could not integrate into the client's environment, and lacked skills in security, systems monitoring, change management and problem resolution. In short, ASPs failed to recognize that the Internet economy (i.e., the allure of powerful new technologies) does not shorten the technology adoption curve.

Survivors of the ASP fallout (companies such as Agilera) have resolved basic problems and most have sufficient momentum (and cash) to succeed, although none are yet operationally profitable.

Successful vendor business models will mirror services provider segments for G2000 ITOs (see text box). While larger outsourcing vendors will develop consumption-based pricing for infrastructure services, we do not believe they will effectively reach into the SME marketplace — large vendors will be hindered by high-touch sales channels that cannot cost effectively target smaller companies. While these vendors (most notably EDS) are developing in-direct channel approaches, these alternative channels are too immature to provide significant value during the 2002-2003 timeframe.

Vendors targeting SMEs must develop full-scale operational expertise and will typically limit core competencies to select horizontal (such as PeopleSoft or performance monitoring) or vertical (e.g., insurance, healthcare, financial services and so on) markets. In addition to targeting SMEs, these vendors will provide division, regional or project support for some G2000 companies.

More Diverse Outsourcing Options
As IT organizations consider outsourcing alternatives, the maturation and evolution of ASPs will create additional options rather than the all-or-nothing outsourcing decisions from the mid-1990s. Indeed, IT organizations must carefully assess computing and performance requirements and determine where external augmentation is needed. While many IT organizations have already applied this IT strategy model, the emergence of smaller, capable vendors further compounds this complexity, including startups that combine systems integration with offshore development.

Previous META Group Columns

» Managed Web Hosting — The New Selection Criteria » Was That a Managed or a Management Service? » ASPs and the Case of the Customer Disconnect » Was That a Managed or a Management Service? » Management Service Providers: The Evolution Continues » ASPs: Many Today, Some Tomorrow

As a rule of thumb, META Group recommends that G2000 ITOs focus on top-tier vendors for enterprise-wide initiatives, especially for services that span global markets. Our research shows that large companies can use smaller vendors for enterprise projects, but that the risk exposure is greater and the cost of fixing problems (which arise with all vendors in all contracts) is higher. On the other hand, we observe large IT organizations using niche vendors for specific projects or services as a more cost-effective and more nimble mode of outsourcing.

SME IT organizations have had few positive experiences with top-tier outsourcing vendors. Large vendors repeatedly refuse to engage in serious negotiations or attempt to dictate the terms by which they will do business with smaller companies. The emergence of vendors targeting this market has exploded and mid-market vendors are growing 30-40 percent annually — twice the rate of the market generally. In fact, some G2000 ITOs have cancelled contracts with top-tier vendors and contracted with an SME vendor to improve service delivery and the responsiveness/attentiveness of the vendor when problems do arise.

METAGroup believes that the success of SME vendors will provide sufficient gravitational pull for current ASP vendors — that are still attempting to become profitable — to redefine themselves into a more viable market segment.

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