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Does the Struggling Economy Mean New Life for ASPs?

A few years ago, the ASP (application service provider) model burst onto the infotech scene and made quite a splash in an industry that was already awash in splash. Getting software via an ASP, aka "Web application hosting," allowed a user to "rent" a particular application instead of purchasing it. Among the touted benefits were low-cost access to high-end applications and a minimal level of integration and configuration. Sometimes these promises actually did materialize, but we will get to that part of the story in a moment.

ASPs traditionally have appealed to smaller companies with tight budgets, although firms of every size have incorporated hosted applications into their IT infrastructure. Now, though, as the economy slows, companies that once dismissed ASPs are giving such models second and third looks -- especially if they are in the market for a CRM application.

"It makes a lot of sense to at least evaluate an ASP opportunity," Aberdeen Group research director Denis Pombriant told Pombriant is the author of a major Aberdeen report set to be released shortly, called "What's Next in CRM."

"Obviously, these days everyone is looking for return on investment [ROI]. An ASP can get you a positive return that much quicker," he said.

Just about any application can be and has been hosted, ranging from ERP to supply chain management to Microsoft Office to e-mail. CRM has always been part of the mix. But a new trend is emerging among CRM ASP vendors, Pombriant said. In a white paper released earlier this year, Aberdeen called this trend "the Enterprise Subscription Service (ESS)-CRM model."

Bifurcating Market

"The ASP market is bifurcating," Pombriant said. On one side are conventional CRM vendors that license their software in addition to offering it as a hosted application. These vendors include Oracle, Onyx, PeopleSoft, Pivotal and Siebel.

ESS-CRM vendors, however, usually do not offer their products through a traditional license -- they are provided as a service through a Web site, according to the Aberdeen report. Also, while a user can configure an ESS-CRM Web site, it cannot be modified at the source code level and thus cannot be customized.

ESS-CRM applications "tend to be installed in a matter of weeks and have a lower price point and lower cost of ownership than a conventional hosted application," Pombriant said. "If a company really has to watch its pennies, these applications are worth a look." Indeed, per-seat prices can be as low as US$30 per month, Aberdeen reported.

Among the companies cited in Aberdeen's report are Agillion,, Neteos,, Salesnet, and Until recently, many, if not most, of them were very limited in their functionality, concentrating on sales force or marketing automation. However, Pombriant said a lot of these vendors now are repositioning themselves for a broader market.

"Some of them are releasing other customer service modules. Others, like, are repositioning themselves to encompass more CRM functions," he said.

The Catch

The benefit of accessing an IT application at a price that is lower than many consumers' monthly cable bill is inarguable. However, there are reasons why most companies still install enterprise software instead of hosting it with a software provider or a third-party ASP vendor.

One reason is that costs may be lower, but they often are not as low as companies initially expect. Total cost of ownership actually can be much higher, and, in some cases, less clear at the beginning. Some ASP vendors might offer an application for, say, $100 per month, but they might not include hardware, telecom fees or configuration costs in that price. Indeed, some ASP vendors do not offer any connectivity, leaving companies to negotiate separate agreements with their telecom providers.

Then there are consulting and implementation costs. Many times these can actually eclipse subscription fees. As for the easy and quick installation benefits of ASPs, they are just myths. If an application -- for example, a sophisticated ERP or supply chain product -- requires a long time to be implemented in the traditional manner, it will take just as long in an ASP environment.

What To Look For

But, ultimately, an ASP is still a bargain. "At the end of the day, an ASP is a good deal for a company that doesn't have as many resources to draw upon as it did a year ago," Pombriant said.

This is especially true at a time when new applications enter the market one day and become de rigueur business functions practically the next. "An ASP allows an organization to get into the CRM game and be competitive at that level," Pombriant added.

At the same time, the latest generation of ASP users can benefit from lessons learned by early adopters. Service-level agreements, for example, are very important, especially if more than one company is involved in providing services. SLAs define who is responsible for what, when and at which cost, ideally in every possible circumstance. Some of the earliest adopters paid little more than cursory attention to these contracts. Now, we know better.

Scrutinizing SLAs

Following are some of the elements users should expect to find in a good ASP agreement:

Provisions for guaranteed online availability and a set number of consulting hours should be available.

The contract should include detailed implementation procedures, including time frames, downtime and a plan for rollback in case of failure.

There should be defined acceptable levels of service, such as a certain percentage of permissible downtime every month. Wording can be tricky here. Most vendors promise 99 percent network uptime. But some maintain that if the software crashes but the network is still operational, the vendor has met its obligation even though the application itself was not available.

A policy on upgrades should be articulated. Software suppliers release an upgrade every 18 months. If you sign a contract for longer than that, make sure it includes upgrades.

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