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October 9, 2000

Full service provider Breakaway Solutions Inc became the latest high-profile ASP to lay off staff this week. It unveiled plans for a nine-percent cut in its workforce at the same time as warning of a higher-than-expected loss this quarter — news that led to its stock price more than halving in two days to close Friday at a new low of $3.38. See related story on boston.internet.com, Bad Days for Breakaway, Oct 6th, 2000.

Like so many of its dot-com industry brethren in recent months, the application service provider industry is going through its own round of layoffs due to investor jitters, market acceptance problems and consolidation.

The bad news started at the end of July with the sudden demise of e-commerce ASP Pandesic Inc. Started as a joint venture between chip maker Intel Corp and German software giant SAP AG in August 1997, it announced July 28th it would cease operations due to poor market acceptance of its services and a time-to-profitability curve that did not meet expectations. See related ASPnews.com story, Pandesic Gives Up the Struggle, Jul 29th, 2000.

"There's a belief (among) customers that you need to have your own systems in-house because that's what they're used to," Paula Stout, Pandesic's director of corporate communications, told ASPNews.

"We're winding down operations because it was not a timely factor to profitability," she added — even though the company had nearly 100 clients at the time of its closing, three times as many as its nearest direct competitor.

Four hundred employees were let go. The company retained enough staff to close up operations, said Stout.

Less remarked was the closure at the same time of ASP hopeful eBaseOne Inc, based in Houston TX. It announced it was closing its doors July 28th following the last-minute collapse of a funding round. "After negotiations broke down, the board of directors evaluated the company's financial condition, determined to cease operations, and is attempting to pay its creditors and maximize remaining shareholder value, if any," the company said in a statement.

Restructuring pain

In a more recent round of lay-offs, Purchase, NY-based Interliant Inc announced September 20 that 300 employees will lose their jobs in the coming months due to a restructuring plan intended to save the ASP $12 million per year.

Interpath Communications, a former Carolina Power & Light subsidiary located in Morrisville, NC, announced Aug 12th it will slash 80 employees from its payroll. The company has eliminated 480 jobs since January.

The trend has not been limited to pureplay ASPs. Software vendors transitioning to the ASP model have also had to trim their spending by terminating staff contracts. In July, Concur Technologies Inc, a Redmond, WA-based vendor-turned-ASP, announced that 68 of its managers and staff would be let go in order to "bring expenses in line with the shift in the company's revenue model," said CEO Steve Singh. See related ASPnews.com story, Concur Stays Optimistic Despite ASP Transition Pains, Jul 4th, 2000.

Another ISV on an ASP path, Infocure Corp — the largest supplier of dental practice management software in the US — announced in August it would be shedding 400 jobs. See related story Infocure Announces Spin-Off, Aug 22nd, 2000.

Likewise, Hyannis NH-based vendor Infinium Software let go a fifth of its workforce - 126 staff - in early August. "We have not exactly prospered relative to our hopes for the growth of the ASP and our new software offerings," said chief operating officer John Whyte. See related story on boston.internet.com, Infinium Axes 126 Workers, Aug 8th, 2000.

Part of the problem lies in customers' acceptance of this emerging industry, Bill Dering, managing director of ASP research for Wall St firm CE Unterberg, Towbin, told ASPnews.com. Because most companies that call themselves ASPs are not and because there is so much industry hype, potential clients are leery about signing up.

"You've seen a lot of marketing and it's still unclear to the customer what an ASP is and what it does," he said. "With any new market you're always going to have some shake-out. All of this is a natural evolution of any young market."

Investor jitters

Another root cause is traceable to investor wariness, said Traver Gruen-Kennedy, chairman of the ASP Industry Consortium and director of internetworking strategy for infrastructure software vendor Citrix Systems  in Ft Lauderdale FL. "Most (of the funding) has dried up over the past couple of months," Gruen-Kennedy told ASPnews.com.

Peet Rapp, a senior research analyst with Gartner Group, also sees investor jitters as a problem for young ASPs. "The people on Wall Street are saying we've got to see some cash flow right now," he said. "It's also a lot of hesitancy on Wall Street with e-Anything."

Since the market has been primarily vendor driven not customer driven since its inception, there has been a lack of sales and marketing that pushes back industry hype, added Gruen-Kennedy.

"We're going through a time where there is a fair amount of back-lash ... following what amounted to a lot of noise about ASPs," he said.

Acquisitions and partnerships have also played a role in recent lay-offs, he said. Dering pointed out that Interliant has absorbed 20 companies in the last three years and now needs to eliminate redundant personnel.

"The big thing is Interliant is not saying it is having lower revenue numbers," he said. "It was a very positive sign what it did."

This is unlike Telecomputing Inc.in Ft Lauderdale FL, which shed around 30 staff in June "to lower the burn rate and effectively manage the business to the size of the U.S. market place," according to a company statement. Together with some rationalisation of office space, the cuts were expected to reduce the ASP's running costs by around $400,000 a month.

As with any emerging market there are bound to be fits and starts as customers and their suppliers figure out the best way to do things, most market watchers agreed. Unfortunately for ASPs, this newly emerging industry is coming to life in a time of great technological change and few, if anyone, really knows when, where or how it will all shake out.

This story updated Oct 13th to amend and clarify information relating to Telecomputing.

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