Outsourcing Software Management

Most ASPs have shifted from renting software to managing it, so their clients can focus on the bottom line.
Scott LeibsOctober 1, 2002

If you were a CFO at a prospective client company, you had to love the pitch: Instead of paying hefty licensing fees to a software vendor and then waiting for your internal IT department to roll out, say, a big enterprise resource planning system, why not rent it from a company that was expert in deploying and managing it? You’d save a massive capital outlay, be able to predict your monthly expense, and add or reduce capacity as needed.

True, your counterparts at the companies that offered this new approach (dubbed ASPs, for application service providers) didn’t have it so good: The infrastructure needed to offer such services was costly, the per-user/per-month pricing scheme didn’t produce the up-front cash infusion that could have helped firms find their feet, and the companies most eager to embrace this new approach proved to be the dot-coms, which very soon stopped paying bills altogether.

Soon the market leaders were either declaring Chapter 11 (USinternetworking, also known as USi) or seeing their share prices plunge as precipitously as a theme-park waterslide (Corio Inc. went from $22 a share at its July 2000 initial public offering to about 70 cents as of press time). Announcements of client wins dwindled, bad news for an industry that admitted even in good times that survival depended on achieving critical mass.

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ASPs, it seemed, would soon join delivery boys and the sock puppet as Internet entities that never quite crossed the chasm. But USi and Corio have survived, smaller ASPs have remained quietly robust, and established software firms and outsourcers are now offering ASP-like service options to customers that want to be relieved of the burdens of software management.

In August, for example, Visa International began relying on Corio to manage its PeopleSoft human resource applications. Although Visa did not disclose terms, a company spokesman said that one primary driver was the desire to focus internal IT efforts on transaction processing, the heart of Visa’s business.

John Ottman, Corio’s executive vice president of worldwide markets, says that while most ASP deals usually result from a “precipitating event” such as a merger or a move to a new software system, increasingly companies are opting for ASPs simply as a way to “re-rationalize” their approaches to IT. “Visa didn’t see HR as contributing a bottom-line benefit,” says Ottman, “so it made sense to let someone else manage it.”

Most ASPs, in fact, now concentrate on managing software versus renting it. Whereas they once harbored dreams of a “one-to-many” model in which they licensed software from vendors and then rented it to many clients, that has proved unfeasible (although software makers themselves do offer this option). Instead, ASPs now tout their implementation and managerial expertise; they are hired guns, not wholesalers.

This shift has been so profound that research firm Gartner says most ASPs should now be classified as “AMOs” (applications management outsourcers). “Pure play” ASPs do exist, but they tend to be smaller firms such as, Employease, and WebEx, which make their own software available in a Web-based, pay-for-what-you-use model. (See how some of these companies compare with the CFO PeerMetrix interactive scorecards.)

Despite their troubles, ASP pioneers USi and Corio continue their drive for critical mass. In August Corio announced plans to buy the ASP assets of Qwest CyberSolutions LLC, and in May USi completed a restructuring plan and merged with InterPath, a competitor and sibling (both are backed by Bain Capital). Gartner analyst Christopher Ambrose says the market shakeout has not yet been resolved. He sees growing demand for AMO and ASP services, but says such demand will also attract more competition from IBM, EDS, Accenture, Oracle, and a host of would-be ASPs.

“We know we have to prove ourselves every day, to new customers and existing clients,” says Ottman. “But most companies haven’t even looked seriously at the ASP option yet.” When they do, he says, the advantages of having someone else manage complex software will be clear.