Outsourcing /

ASP crunch time

By Jennifer Mears
Network World, 06/25/01

Application service providers are under a lot of pressure, with many consolidating services and others failing outright. The chiefs of three major ASPs recently spoke with Network World Senior Writer Jennifer Mears about the state of this nascent industry.

One thing is certain, they say, hosting software as a service is here to stay. The question is will enterprise customers look to ASPs or to more established outsourcers such as IBM and EDS, which could further erode their business. Qwest Cyber.Solutions CEO John Charters, USinternetworking CEO Andrew Stern and Corio CEO George Kadifa take a look at the ASP world as they see it.

John Charters , CEO, Qwest Cyber.Solutions

Where do you see the ASP market going and Qwest Cyber.Solutions fitting in?

The market's been pretty consistent. What's changed is a lot of the business models. I wouldn't put us in that category. A lot of the smaller, Web-based companies that went after an emerging market segment that pretty much disappeared on them are trying to go up market. We've always been oriented toward the top end of the market. When we launched this business two years ago, we went after the $500 million-and-above type of client and have been pretty successful.

So why is the ASP market getting such a bad rap recently?

You've got a bunch of companies that targeted an emerging market segment, so they went with Web products or proprietary products or proprietary infrastructure - it was all or nothing. They were going after all new infrastructure so they built their businesses around that. When that market died, the public ones - even the private ones - couldn't raise capital.

But there is more and more business to win and less and less credible players to provide it. So those that were fortuitous in putting together the business and going after the business in the right space have seen more business. We booked $60 million in contract value in the first quarter. That's probably more than all the other ASPs combined. I don't know what USinternetworking did.

That's $60 million in ASP services?

There is no professional services in that. We don't take professional services and layer it in over the contract. If we have a transition services agreement, those are done up front and paid up front. So that was pure hosting and management revenue. The customers are still buying; there are just less and less credible companies to buy from. Now interestingly enough, you see IBM and EDS and others making headway into the market, so we're locked in pitched battles with them. We're in a best and final with them, those guys specifically, on a 7,000-seat SAP deal in Europe and the U.S.

IBM, EDS and traditional outsourcers are becoming your biggest competitors. What can QCS provide that's different?

The network. Obviously through my parental relationship with Qwest, we have control of our network without the capital burden of it. I pay for it, we allocate the cost, but it's certainly at a better rate than anyone else buying it from Qwest, plus we have an operational capability on that network that others don't have. We have a relationship with Qwest such that I can tap into their network management feeds and control the network that I provide. We can change their product designs to meet our needs, as well. That's a distinct advantage I have over IBM or EDS. They don't own or control their networks.

The key to a successful ASP model is the ability to scale. But a lot of times these bigger companies want something that is a little more customized.

What's the difference between QCS and another pure-play ASP such as USinternetworking?

They build their own data centers; they partner for their networks. That would be two major differences. They finance software for companies. We're not a bank; we don't finance software for companies. We sell them the software or we'll finance it through a third party. Our products don't line up - they do most of their business in Broadvision and Exchange; we do most of our business in Oracle and SAP and PeopleSoft and Siebel of late. So I would say we're higher on the complexity scale in terms of the types of applications we're managing and supporting, thereby generating a better margin.

Overall, where do you see the ASP market going?

You've already seen some of the wheat separate from the chaff. You've seen the players that are going to make it. And then the question becomes, where do they focus and target their market to become the trusted client adviser? As an industry, we'll continue to push this story that says you don't have to customize, you don't have to listen to that integrator, you don't have to spend three or four times what you spent on software to have it customized to meet your needs.

Andrew Stern , CEO, USinternetworking

What is going on in the ASP market and where does USinternetworking fit in?

The industry is making this transition from a classic early stage industry into a mainstream industry. One thing that goes with that is the nature of the customer is changing. A customer in an early phase of industry development is a little bit of a pioneer. Even if you go back a year or two, even when a mainstream company had adopted an ASP model, it was typically for a relatively visionary thing that they were trying to do inside the company. Today, it's just the CFO needs to upgrade his financial automation, the CIO goes out and looks at alternatives and ASPs are one of them.

As large companies start looking at ASPs, do you see the competition more with a traditional outsourcer like an IBM and an EDS and how do you compete?

I enjoyed that IDC study [that ranked USi as leading the [ASP market]. It gave me a chance in a competitive situation with IBM to point out we're four times the size of IBM in this business. We win because we have much more experience. We win because we have an integrated service offering, and we've learned a lot of lessons over almost 200 clients that have taught us how to do this better.

If you were talking with an enterprise customer who's looking at IBM and EDS and looking at USi, what's the difference?

Fundamentally, the ASP model value is that I'm going to deliver functionality as a fully integrated service. So if you want to close your books, I'm going to deliver the automation that lets you close your books. You want to sell something on the Web, I'm going to deliver the automation, the functionality that allows you to sell something on the Web. And we've spent a lot of time figuring out how to take all these components: the application, the integration, and the network and the hardware and the processes that put them together and run them and engineer them as an integrated offering. The best integrator is only working on one part of the problem. So what happens with an IBM? Well, IBM Global Services is a huge business, it obviously has far more experience than we do at the integration. It actually has more networking experience than we do. And more data experience than we do, although they probably don't have more client-server data experience than we do.

You say that there has been a slower than expected adoption of the ASP model, but a lot of enterprise customers are starting to look to you. How do you see this playing out?

It's slower than expected, but we shouldn't have expected it to go faster. We went from the stage where it was truly a relatively visionary adopter, where it's someone trying to do something different to change their business. Whereas now a lot more of the adoption is people just looking to do the things they've always done in their business, but do it in a better way. At this stage what we're seeing is it's being considered in most cases. I don't think there is a major company CIO that doesn't at least think about ASPs today.

George Kadifa, CEO, Corio

The economy is pretty tough for everybody. How is Corio doing financially?

The macroeconomic conditions are tough. But from the Corio perspective, we've been focusing on building the business. We issued our Q1 earnings recently, and we still have a lot of cash in the bank. We have about $117 million in cash right now. We've been quite efficient at cash management, while at the same time servicing our customers and winning new business. We expect this year to have some demand uncertainty to it like everyone else is experiencing. We have customers who are growing with us. If there are some marginal customers who can't make their payments, we're working with them on exit plans, and it's just a matter of execution now.

Some ASPs have scaled back, focused more on professional services, or cut down on offerings. Is Corio planning changes?

No. The business model has been the same since we started the company. We haven't really made any changes to it. Occasionally, we do some tuning here and there, but nothing of a major strategic change. We have a core set of services that we're still delivering. We have not scaled back in that regard. But at the same time we're not broadening and adding new offerings. We're trying to do more with what we have.

As your focus moves more into the enterprise realm, what can users expect?

We're not moving away from what we used to do. We're basically adding to what we've always done. A couple of years ago we were focused on the high growth, middle market customer base. We still are. Obviously, today we have very stringent customer acceptance criteria; that is you need to be with us for the next three years so that we can build a three-year contract with you. At the same time, the high end of the market, the Fortune 500 companies, have approached us.

How does Corio differentiate itself from other ASPs such as USinternetworking?

One is, we are enterprise-applications-focused, that is we have strong capabilities from an application perspective for application management and application operations, hosting management. Also, our business model is different. Our belief is it is a superior business model in the sense that we did not spend the amount of cash that some did in building data centers. We saved the company between $200 million and $300 million by not doing so. And frankly, at this stage of data center availability, there is almost a glut today in data center space. We also have an exchange side to the business that we've been able to build very successfully in a very short period of time in addition to the core capabilities we have. We are a very large [enterprise resource planning] hoster. We might be the largest. We are a very large [customer relationship management] hoster also.

How do you see the ASP market evolving?

The market is evolving toward more of a core business model; that is, a lot of the ASPs are focusing on profitability and are focusing on being very cash efficient and are focusing on delivering value propositions to the customers that are second to none. The market is rationalizing; the marginal players have disappeared. It will get rationalized in the next 12 months or so into a small number of significant players.

How can you build a scalable model when customization is required?

We looked at that initially and in the old days we thought that things should be vanilla, otherwise they wouldn't scale. But the more we looked at our cost structure, the more we realized that customizations are actually based at the application layer. No one is customizing the operating system, or the database, or the hardware. So if we maintain a technology stack that is not customized, we will be able to scale. The customization would impact maybe 20% of the cost structure, while 80% of the cost structure would still scale with what we have. So our belief today, and that's a myth we want to destroy frankly, is an ASP can deliver a fully customized solution and still be able to scale.

At this point, who are your primary competitors?

In the two segments they change. In the high end of the market, in the Fortune 500 companies, typically the old outsourcers. In the midmarket companies, the canned ASPs out there.

Any that you come up against regularly?

USinternetworking is one of them. Sometimes Agilera is another one.

How much threat do you feel from the traditional outsourcers? Do you think there is also room for the pure-play ASPs?

Yes, because we have a different approach to the customer. We're not outsourcers, we do not take things out and keep them outsourced for 10 years. We operate on a much more integrated basis with our customers. We give them more visibility instead of less. We give them more control instead of less, and we believe we have a better economic value proposition also.

ASP crunch time

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