The ASP market starts to grow up

US customers spent only $300m last year on paying application service providers (ASPs) to host their packages online, according to research firm IDC, despite there being about 500 such vendors touting their wares.

Even so, IDC is still sticking to its forecast that the ASP market will be worth $7.8bn by 2004. The researcher surveyed 1000 top-level executives and IT managers and found that most are exploring whether to adopt the model because of its potential for providing them with affordable access to technology, the ability to simplify IT budgets and improve the time it takes to get products to market.

But Clare Gillan, IDC's group vice president of application research, said the biggest driver behind the trend is the current lack of available IT skills.

She explained at the ASPWorld conference in San Jose, California: "The ones that will have the most difficulty finding talent are the customers in this audience [that is, high-growth companies and large organisations], which makes the ASP model a compelling alternative."

And it is this sector rather than small to medium-sized enterprises (SME) that are expected to generate most business for ASPs over the next few years. About half of the senior executives at large corporations that IDC spoke to said they were looking at adopting the ASP model. This compared with about 36 per cent of executives in SMEs.

Terrence Ozan, group managing director at Cap Gemini Ernst & Young, said: "They want to wait it out to see if this model works and if individual ASPs will deliver on what they promise to deliver."

Taking the high road
High-growth companies are the best bet for many ASPs, he added, because they can grow in line with customer requirements.

But large corporations are also starting to show interest in the application hosting model, although they need an ASP that can provide what Ozan describes as "transformation services".

Pasporte is one UK ASP that hopes to do just that. It intends to partner with value-added resellers (Vars) to provide companies not only with applications, but also with an in-depth understanding of their business needs too.

Gary Woodward, Pasporte's managing director, used to work at IBM reseller Panacea and said it had initially intended to create an internal ASP arm. But after some thought, it set up a separate company in April with £1m of venture capital backing. Pasporte has since secured a further £5m in financing.

Woodward believes that the only way Pasporte can succeed as an ASP is to work with the channel, but added that most resellers could not afford the infrastructure and start-up costs of providing a hosting environment and so they are forced to partner with service providers.

"We can't create a field sales team with the experience and relationship that the channel can provide, so we are partnering with ISVs [independent software vendors], Vars and system integrators."

Challenging issues
Woodward said Pasporte was currently working with Panacea, in which he holds a stake, to demonstrate to other Vars what can be achieved. "People might think that using Panacea in this example would be a soft touch, but it is the opposite. It has thrown up a number of issues we have been working hard to resolve," he said.

The ASP intends to buy rather than rent application licences from ISVs, and says it plans to pay its Vars a quarter of the recurring revenues generated by any deal they are involved with. Its staff will initially go in to customer sites with Vars to provide pre-sales consultancy services, but it ultimately hopes that they will do this by themselves over time.

But, Woodward claimed, there is still some ignorance in the market about what benefits ASPs provide and that perception needs to be addressed.

"Most resellers live for today and not for tomorrow. But with an ASP model, which has a reoccurring revenue stream, resellers have an opportunity to plan much further ahead," he said.