ASP Success Factors

I. Introduction

The advantage to the customer is clear: they do not have to hire, train, and retain expensive IT staff to implement and support the application, they are not forced to purchase expensive software upgrades, and they do not have to provide help desk services to their internal users.

The basic premise of application hosting is not new, however. Similar services came into existence in the 1960s with the advent of time-sharing systems for mainframe computer systems. In fact, the original business of well-known outsourcer EDS was renting time on their mainframe computers to customers who could not afford a mainframe, did not have enough usage to justify the purchase of a dedicated mainframe, or did not wish to hire the staff to support a mainframe in-house.

II. The Opportunity/The Danger

The danger is also obvious. The ASP market is just beginning to blossom. It has yet to bear fruit, in the form of profits, on a significant scale. Many players have entered or signaled their intent to enter the market, including all the major players in the IT outsourcing industry. The shortage of talented prospective employees also affects ASPs, as they struggle to fill positions. Furthermore, there are no established business and pricing models, so it may be easy to underprice ones services, causing significant negative pressure on profit margins.

Nevertheless, it seems clear that a tightly focused ASP can carve out a niche too small for the major players and develop that niche into a viable, ongoing business. However, given the trend toward consolidation in the IT industry (especially the outsourcing industry), it is likely the ASP will need to form a merger and acquisition strategy within 24 to 36 months. With steady, rising sales and consistent net profits, the ASP would be a tempting takeover target for a larger firm, and the financial health would lead to a relatively high valuation, perhaps as high as two times revenues. Alternatively, this ASP could use its financial strength to finance the acquisition of other niche ASPs, thereby growing the firm into a mid- size ASP over the medium term.

III. Success Factors

A. Well-Targeted Application

The ASP must first define its target customers. Basic marketing principles apply here. The target market must be quantifiable, identifiable, and reachable. In other words, the ASP must be able to define the customer using quantitative measurements, the ASP must be able to determine which prospective customers fit the definition, and there must be a cost-effective way to reach these prospective customers (by media advertising, trade shows, direct mail, etc.).

The ASP must offer an application that is needed by the defined target market. Preferably, the hosted application should be used by one or more of the top players in the market (to give instant credibility), but the majority of the market should either not be automated (in the area covered by the hosted application) or be using unproductive alternatives (spreadsheets, under-powered software developed in- house, hand-written log books, etc.).

B. ASP Credibility

The ASP must be able to quickly establish their credibility with prospective customers. Hosted applications normally cover an important internal function, and the ASP is asking their prospects to surrender almost complete control over that function. If the ASP is not credible, prospects will reject them out of hand.

There are two ways to attain credibility. The first (and best way) is to show a list of well-known companies that are already using the services of the ASP. (Ideally, these companies will not be direct competitors of the prospect.) The second way is to show the qualifications of key members of the management and technical teams. If an executive, board member, or investor is well known in the target market, the ASP can gain immediate credibility.

If there are no well-known individuals, a high priority should be raising the visibility of the company's "face," that individual who represents the company to the world. This can be done through speaking engagements at trade shows and conferences, writing articles for industry trade journals, and volunteering to serve on industry advisory boards. A good public relations firm can also help here.

C. Systems Infrastructure

The ASP must have a well-thought-out systems infrastructure in place prior to making the first sales call. If the system fails when a new customer first begins using the system, or if every new customer causes a performance degradation, the ASP will quickly fail. Some of the important items in this infrastructure include:

1. High availability hardware and operating systems.
2. Redundant hardware, clustered servers, and standby equipment with mirrored data.
3. High speed communication lines, preferably multi-homed to different backbone providers.
4. UPS power protection, possibly with backup generators.
5. 24/7 network monitoring systems with technicians available to quickly diagnose, troubleshoot, and correct failures and network traffic congestion.
6. Continuous backups.

D. Ironclad Security

With the distributed denial of service attacks on several high profile web sites in February 2000, executives are more aware of security issues. The ASP should have strong security measures in place, including properly programmed routers, firewalls, and intrusion monitoring and detection systems.

Strong security can be a great selling point. But even if the target market is not aware of the need for strong security, the ASP must protect its systems and its customers' data. "Hackers" can destroy and corrupt data, steal customer information, or simply deface the ASP's web site. Their actions can lead to lost customers, lost credibility, and even lawsuits.

E. Outstanding Customer Service

The IT industry is not known for superior customer service, so it is in this area that an ASP can readily differentiate itself from its competition. The ASP should consider all points of customer contact, including telephone, fax, e-mail, and on-site visits and ensure that personnel are available to customers whenever feasible.

Management should establish standards of responsiveness, and when the customer makes an indirect contact (leaves a voice mail, sends an e-mail, etc.), the ASP should measure response time. The ASP should also be proactive in communicating with its customers, sending monthly newsletters, weekly fax and/or e-mail bulletins, and keeping customers apprized of upcoming changes. When a failure occurs, the ASP should be honest and open with its customers, accept responsibility, and perhaps even apologize for the problem. (It is amazing how understanding customers can be when a vendor is forthright and humble.)

F. Viable Business Model

Finally, the ASP must have a viable business model. To do so, rigorous cost accounting must be used to identify and allocate all costs, all fixed expenses must be examined and questioned regularly, and unprofitable customers must be terminated. Prices should be high enough to enable the ASP to serve its customers at a profit, and the company should be able to generate surplus cash to provide financial stability and fund future growth. It is fashionable to use investment capital to grow revenues and market share without regard to profits, profitability, and sustainability, but, historically, this has never been a recipe for success, and it is unlikely to be one in the near future.

IV. Conclusion

The author welcomes your comments. Please e-mail him at alan@infoms.com.

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