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UBC Theses and Dissertations

Determinants of ASP success MacKenzie, Winston Joseph 2001

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DETERMINANTS OF ASP S U C C E S S by  WINSTON JOSEPH MACKENZIE  B . S c . d . , T h e University C o l l e g e of C a p e B r e t o n , 1 9 9 7  A T H E S I S S U B M I T T E D IN P A R T I A L F U L F I L M E N T O F  THE REQUIREMENTS FOR THE DEGREE OF  M A S T E R O F S C I E N C E (BUSINESS ADMINISTRATION)  in THE FACULTY OF GRADUATE STUDIES ( M a n a g e m e n t Information S y s t e m s D i v i s i o n , F a c u l t y of C o m m e r c e a n d B u s i n e s s Administration)  W e a c c e p t this t h e s i s a s c o n f o r m i n g  i^the.required standard.  T H E U N I V E R S I T Y O F BRITISH C O L U M B I A  April 2001  © W i n s t o n J o s e p h M K e n z i e , 2001 a c  In p r e s e n t i n g this t h e s i s in partial fulfillment of the r e q u i r e m e n t s for a n a d v a n c e d d e g r e e at the University of British C o l u m b i a , I a g r e e that the Library s h a l l m a k e it freely a v a i l a b l e for r e f e r e n c e a n d study. I further a g r e e that p e r m i s s i o n for e x t e n s i v e c o p y i n g of this t h e s i s for s c h o l a r l y p u r p o s e s m a y b e granted by the h e a d of m y d e p a r t m e n t or by his or her r e p r e s e n t a t i v e s . It is u n d e r s t o o d that c o p y i n g or publication of this t h e s i s for financial gain shall not b e a l l o w e d without m y written p e r m i s s i o n .  JDepartment'-oK  C  T h e University of British C o l u m b i a Vancouver, Canada  3  Abstract A p p l i c a t i o n S e r v i c e P r o v i d e r s ( A S P ) a r e a recent p h e n o m e n o n in the s p h e r e of information technology. of the  L e v e r a g i n g the a d v a n t a g e s of the universally a c c e s s i b l e a n d ubiquitous nature  Internet, application s e r v i c e providers c l a i m to lower the c o s t of o w n e r s h i p  applications.  of  G e n e r a l l y operating f r o m a central a n d r e m o t e d a t a c e n t r e , A S P s 'rent' their  a p p l i c a t i o n s to clients in a 'pay a s y o u g o ' f a s h i o n . T h i s h a s s e v e r a l a d v a n t a g e s to the client b e s i d e s c o s t s a v i n g s . T h i s t h e s i s introduces the r e a d e r to A S P s a n d e x a m i n e s the r e a s o n s c o m p a n i e s hire the s e r v i c e s of a n A S P ; furthermore based  it s u g g e s t s a n analytic  u p o n e c o n o m i c c o n c e p t s in a n attempt to predict  what  framework  business models  and  s t r a t e g i e s will b e s u c c e s s f u l in the A S P market a n d what s h a p e that m a r k e t might t a k e . T h e t h e s i s a l s o d i s c u s s e s the p o s s i b l e effect of s o m e e m e r g i n g t e c h n o l o g i e s .  ii  Table Of Contents Abstract  ii  Table Of Contents  iii  List Of T a b l e s  v  List Of Figures  vi  Acknowledgements  vii  Dedication  viii  C h a p t e r 1.  Introduction  1  C h a p t e r 2.  Defining T h e A S P C o n c e p t  3  2.1.  W h a t Is A n A S P ?  3  2.2.  What Types Of A s p s Are Out There?  6  2.3.  W h o A r e T h e P l a y e r s In T h e A S P E c o s y s t e m ?  8  2.4.  Business Models  14  ASP Market Internal Operations  14  A New Stratification OfASPs  18  2.5.  C o m p a r i n g T h e A S P M o d e l T o In H o u s e S o l u t i o n s  26  2.6.  Technological Problems And Advances  28  2.7.  Examples Of A S P s  33  ASP Market Shares C h a p t e r 3.  3.1.  33 39  T h e A S P Market  H o w B i g Is T h e Market F o r A s p s ?  39  How Much Revenue Is There For Asps?  39  Who Is Investing And How Much?  42 iii  3.2.  Market Trends  44  What Is The Economic Outlook For Asps?..  46  Changing Customer Attitudes  47  C h a p t e r 4.  A S P Framework: Deciding A S P Type  49  4.1.  E c o n o m i c C o n c e p t s U s e d In A S P F r a m e w o r k  49  4.2.  A S P Framework  52  Outcome Variable  53  Input Variables  60  Interrelationships Of Input Variables..  63  4.3.  Framework Predictions  68  Summary Of Framework Predictions C h a p t e r 5.  80  A S P Framework: Deciding Whether T o Use A n A S P  81  5.1.  F o r c e s T h a t A r e C a u s i n g O r Hindering A S P G r o w t h  82  5.2.  S u m m a r y Of P r e d i c t i o n s A n d F i n d i n g s Of A S P F r a m e w o r k  98  Contrast Between ASPs And Outsourcing  99  5.3.  A S P S t r a t e g i e s A s Dictated B y A S P F r a m e w o r k  100  5.4.  Summary  104  C h a p t e r 6.  Conclusion  105  Bibliography  107  Appendix A  List Of C o m p a n i e s  112  Appendix B  List Of Abbreviations U s e d  115  iv  List Of Tables T a b l e 1.  Categorization By Market A n d S p a n  18  Table 2.  S u b t y p e s Of N i c h e V S P s  20  T a b l e 3.  C o m p a r i s o n B e t w e e n A S P A n d Traditional IT  27  T a b l e 4.  A S P s B y T y p e A n d Target C u s t o m e r S i z e  38  T a b l e 5.  T h e C h a n g i n g Projections Of A S P R e v e n u e B y Major R e s e a r c h C o r p o r a t i o n s . 4 0  T a b l e 6.  A p p l i c a t i o n s B y P e r c e n t a g e Intending T o B u y F r o m A n A S P  45  T a b l e 7.  C o d e s F o r A S P T y p e U s e d In A S P F r a m e w o r k  54  T a b l e 8.  S u m m a r y Of V a r i a b l e Interrelationships  68  T a b l e 9.  C l i e n t A c c e p t a n c e A n d Lock-In B y Criticality A n d Substitutability  76  T a b l e 10.  Framework Predictions  80  Table 11.  F a c t o r s Increasing T h e Likelihood Of A S P U s a g e  98  T a b l e 12.  F a c t o r s Increasing T h e Likelihood Of Not U s i n g A n A S P  99  T a b l e 13.  S u m m a r y Of S u c c e s s f u l S t r a t e g i e s  v  106  List Of Figures F i g u r e 1.  Generic A S P Model  8  Figure 2.  C u s t o m e r , Client A n d A S P Interaction  11  F i g u r e 3.  Microsoft A S P S e r v i c e Delivery M o d e l  13  Figure 4.  C o m p a r i s o n Of A S P Market W i t h A n d W i t h o u t A g g r e g a t o r s .  16  F i g u r e 5.  M a r k e t S h a r e B y N u m b e r Of C u s t o m e r s [ S C N , 2 0 0 0 ]  34  F i g u r e 6.  M a r k e t S h a r e B y N u m b e r Of C o n t r a c t s [ S C N , 2000]  34  F i g u r e 7.  C o m m u n i c a t i o n s Startups V e n t u r e F u n d i n g B y Industry S e g m e n t  43  F i g u r e 8.  Attributes Affecting T h e F o r m Of A n O r g a n i z a t i o n  52  F i g u r e 9.  A S P T y p e Matrix  54  F i g u r e 10.  Functionalities C o m b i n e d Into A n A p p l i c a t i o n B y C l i e n t  56  Figure 11.  A p p l i c a t i o n s D e l i v e r e d T o Client  57  F i g u r e 12.  P a c k a g e D e l i v e r e d T o Client  58  F i g u r e 13.  Client C h o i c e Of A S P T y p e A s T r a n s a c t i o n a l C o s t s I n c r e a s e  69  F i g u r e 14.  Client C h o i c e Of A S P T y p e F o r P(i) A s A s s e t Specificity D o m i n a t e s  71  F i g u r e 15.  Client C h o i c e Of A S P T y p e F o r P(i) A s A s s e t Specificity I n c r e a s e s  72  F i g u r e 16.  Client C h o i c e Of A S P T y p e F o r f(i) O r A(i) A s Specificity I n c r e a s e s  73  F i g u r e 17.  C l i e n t C h o i c e Of A S P T y p e F o r P(i) A s Criticality D o m i n a t e s  77  F i g u r e 18.  C l i e n t C h o i c e Of A S P T y p e F o r P(i) A s Substitutability I n c r e a s e s  79  vi  Acknowledgements I w o u l d like to a c k n o w l e d g e Y a i r W a n d for his m a n y contributions in s h a p i n g this t h e s i s . M y utmost t h a n k s to Albert Dexter, for his a d v i c e a n d support a l o n g t h e w a y a n d at the e n d .  M a n y t h a n k s to Martin M r o z for his editing, input a n d m o r a l support. M y gratitude to K a l p n a S o l a n k i a n d S u n i l C h a u h a n for their late night p r o o f r e a d i n g .  M y utmost gratitude to J u l i e N i c h o l s , J e n n i f e r P a p k e a n d M a r g o t F r a s e r for  providing  information, direction a n d their e v e r - c h e e r f u l d i s p o s i t i o n s .  M y t h a n k s to S i m o n F r a s e r University Library for giving m e a c c e s s to their c o n s i d e r a b l e , a n d up to d a t e , r e s o u r c e s .  A n d lastly, for m y p a r e n t s A n i t a a n d W i n s t o n M a c K e n z i e , for their love a n d support.  vii  Dedication T o M o m a n d D a d , without w h o m I w o u l d not h a v e s t a r t e d . T o L i v i a , without w h o m I w o u l d not h a v e f i n i s h e d .  viii  Chapter 1. Introduction A p p l i c a t i o n S e r v i c e P r o v i d e r s ( A S P s ) are a growing p h e n o m e n o n in the IT w o r l d . A S P s rent a c c e s s to a p p l i c a t i o n s o v e r the Internet.  In the p a s t m u c h h y p e a b o u t their future s u c c e s s  a n d current b a d t i m e s h a v e b e e n in the n e w s .  Investors a n d c u s t o m e r s h a v e s h i e d a w a y  f r o m t h e m after w a t c h i n g the failure of dot c o r n s . W h a t a r e A S P s ? A n d h o w will they fare in the IT m a r k e t p l a c e ?  W i l l c u s t o m e r s really buy their a p p l i c a t i o n s ' o v e r the w i r e ' ? A n d m o s t  importantly, w h a t a r e the d e t e r m i n a n t s of A S P s u c c e s s ?  T h i s t h e s i s attempts to a n s w e r t h e s e q u e s t i o n s by e x a m i n i n g w h y potential f a v o u r this delivery m e t h o d for software.  customers  It s u g g e s t s a n analytic f r a m e w o r k b a s e d u p o n a n  e x t e n s i v e literature review . T h i s attempts to predict what type of A S P b u s i n e s s m o d e l will b e s u c c e s s f u l a n d what strategies w o u l d be m o s t appropriate for e a c h A S P type. T h e f r a m e w o r k a c c o m p l i s h e s this by e x a m i n i n g h o w the v a r i o u s t y p e s of A S P s will relate to o n e a n o t h e r a n d to their clients.  In C h a p t e r 2 , a definition of A S P s is set forth.  A S P s a r e briefly c o m p a r e d to o u t s o u r c e r s  a n d a r e t h e n c a t e g o r i z e d by o w n e r s h i p of application. T h e f o c u s t h e n shifts to the v a r i o u s entities interacting with A S P s .  B u s i n e s s m o d e l s a r e set forth a n d a n e w classification  s c h e m e b a s e d o n a p p l i c a t i o n m a r k e t v e r s u s s c o r e is put f o r w a r d . T h e c h a p t e r c o n t i n u e s o n with a  comparison  technological  of  solutions  hosted to  services against  performance  in-house  problems  (packet  solutions. labelling),  Some new  upcoming connectivity  s t a n d a r d s s u c h a s U D D I / S O A P , a n d a d v a n c e s in software d e v e l o p m e n t t e c h n i q u e s a r e e x p l o r e d a n d h o w they s o l v e s o m e of the p r o b l e m s with the A S P m o d e l a r e s h o w n . c h a p t e r c o n c l u d e s with s o m e e x a m p l e s of A S P s a n d their m a r k e t s h a r e .  1  The  The market for ASPs is discussed in Chapter 3. Total revenue projections are stated, as are investment figures and trends.  Predictions with regards to ASPs in the year 2001 and  beyond are presented. Changes in customer attitudes toward software as utilities instead of a product or service are discussed. An analytic framework for examining the determinants of an ASP's success is created in Chapter 4 . Some economic concepts such as transaction costs and asset specificity are reviewed since they are used throughout the framework that is developed. In Chapter 4 the outcome variable is the decision not to use an A S P or to use some type of ASP. Several variables are used to determine the ASP type decided upon. This comes together to from a framework of ASP success. Predictions are made as to what types of ASPs will succeed in the future and the strategies they should follow.  Strategies that an A S P should follow,  according to the A S P type and what the model states, in order to draw customers to their business and keep them, are discussed.  Chapter 5 puts forward the forces driving clients toward A S P usage. Also, the possible reasons that clients are not using ASPs are examined in greater detail than they are in Chapter 4 . These forces are analysed in light of the framework constructed in Chapter 4, and several of the variables used in Chapter 4 are applied to determine the client's decision to use an A S P or not. This is done in hopes of furthering the predictive abilities of the model. Furthermore, Chapter 5 suggests the strategies an A S P might follow in light of the findings of Chapters 4 and 5 to maximize the likelihood of success. Mix of services, costs and relationship to other ASPs are discussed. Chapter 6 concludes the thesis by summarizing our findings and presenting some possible research directions and extensions to this work.  2  Chapter 2. Defining The ASP Concept In this c h a p t e r the A S P c o n c e p t is d e f i n e d a n d the t y p e s of A S P s that a r e o p e r a t i n g is examined.  T h e A S P ' e c o s y s t e m ' d i s c u s s e d , a s well a s s o m e A S P b u s i n e s s m o d e l s .  A  stratification of A S P s that e x a m i n e s t h e m b a s e d o n a m a r k e t s p a n v e r s u s functionality s p a n b a s i s is p r o p o s e d .  A c o m p a r i s o n of h o s t e d s e r v i c e s a g a i n s t i n - h o u s e s o l u t i o n s is m a d e .  S o m e u p c o m i n g t e c h n o l o g i c a l a d v a n c e s a r e d i s c u s s e d that purport to eliminate of s o m e Q o S (Quality of S e r v i c e ) c o n c e r n s with r e s p e c t to the Internet n e w connectivity s t a n d a r d s that will c h a n g e the w a y s functionality is d e l i v e r e d o v e r the Internet. development  methods  a n d t e c h n o l o g i e s that will  d e l i v e r e d o v e r the Internet a r e a l s o e x a m i n e d .  create  applications  Furthermore, new d e s i g n e d to  be  T h e c h a p t e r t h e n c o n c l u d e s with s o m e  e x a m p l e s of A S P s a n d their market s h a r e .  2.1.  What Is An ASP?  International D a t a C o r p o r a t i o n s u p p o s e d l y c o i n e d the t e r m A p p l i c a t i o n S e r v i c e P r o v i d e r , or A S P , in 1 9 9 8 in a s t u d y o n the future of o u t s o u r c i n g [Butler 2 0 0 0 ] .  In [Portera 2000] a n  A S P , o r a H o s t e d S e r v i c e P r o v i d e r , is d e f i n e d a s : " . . . a n i n d e p e n d e n t , third-party provider of s o f t w a r e - b a s e s e r v i c e s that a r e d e l i v e r e d to c u s t o m e r s a c r o s s a w i d e - a r e a network, typically the  Internet."  Furthermore,  P o r t e r a differentiates  the A S P m o d e l f r o m the  traditional  client/server a p p r o a c h to software: " U n l i k e a traditional c l i e n t / s e r v e r s o f t w a r e v e n d o r , a n A S P typically installs a n d h o s t s a p p l i c a t i o n s e x c l u s i v e l y within its o w n d a t a c e n t r e . "  It shall  b e s h o w n that the d a t a c e n t r e m a y not b e l o n g to the A S P itself, but to a third party, a s long a s it is not at the u s e r ' s site.  3  E x p l o s i v e growth in network c a p a c i t y h a s e l i m i n a t e d t h e traditional a r g u m e n t that a h o s t e d application w o u l d b e t o o s l o w . T h i s c o m b i n e d with t h e d r o p p i n g p r i c e of b a n d w i d t h , a n d u p c o m i n g i m p r o v e m e n t s like p a c k e t labelling, h a s e n a b l e d t h e A S P industry to o v e r c o m e s o m e of t h e u s e r c o n c e r n s a b o u t s p e e d .  S i n c e bandwidth is currently b e i n g p r i c e d in a  c o m m o d i t y - l i k e f a s h i o n , t h e e c o n o m i e s that t h e A S P m o d e l c a n r e a l i z e will b e translated into s a v i n g s for t h e c u s t o m e r , rather than buried under c o n n e c t i o n c o s t s .  A S P s t h e m s e l v e s a r e not really a n e w c o n c e p t .  O n e author o p i n e s t h e following about  ASPs:  A S P , or application service provider, is one of the more common terms used to describe the companies working to free businesses from the burden of designing, implementing, and maintaining IT systems. Applications hosting is another popular term. I prefer outsourcing; a time-honoured term for what is really a time-honoured practice, despite efforts to the contrary to make this market look all new and shiny. [Greenbaum, 2000] A l t h o u g h this opinion m a y s e e m d i s m i s s i v e , it is a c c u r a t e with r e g a r d to t h e A S P c o m p a n i e s themselves.  H o w e v e r , t h e author d o e s m i s s a f e w b a s i c f a c t s .  F o r starters, A S P s t o d a y a r e offering  major multi-user a p p l i c a t i o n s w h e r e a s b a c k in t h e 7 0 s t h e s e w e r e mostly s i n g l e u s e r a p p l i c a t i o n s [Slavid, 2 0 0 0 ] . S e c o n d l y , h o s t e d a p p l i c a t i o n s r e p r e s e n t a c h a n g e f r o m thinking of software a s a 'product' to thinking of software a s a ' s e r v i c e ' . T h i s f u n d a m e n t a l c h a n g e in the w a y c o n s u m e r s v i e w software h a s s o m e important ramifications for t h e m a r k e t .  Lastly,  a n d m o s t importantly, A S P s a r e offered o v e r the Internet.  Let u s c o n s i d e r t h e implications of A S P s b e i n g offered o v e r t h e Internet a little further. B e c a u s e t h e Internet is ubiquitous, a n d there a r e f e w c o m p u t e r u s e r s without a c c e s s , they allow universal a c c e s s to A S P s y s t e m s b y s u p p l i e r s a n d v e n d o r s . 4  Internet  M a n y c o n s i d e r A S P s a s e s s e n t i a l l y a n o u t s o u r c i n g of the a p p l i c a t i o n m a i n t e n a n c e , d e s i g n a n d provisioning f u n c t i o n s of the M I S or IT d e p a r t m e n t [ G r e e n b a u m 2 0 0 0 , Butler 2 0 0 0 ] . Furthermore,  the  A S P model  bares a  remarkable  r e s e m b l a n c e to  another  o u t s o u r c i n g : 'time s h a r i n g ' of c o m p u t e r s in the early 1 9 7 0 s . [Slavid 2 0 0 0 ]  form  of  "In t h o s e d a y s ,  c o m p u t e r s w e r e e x p e n s i v e , a n d the e x p e r t i s e required to p r o g r a m a n d maintain t h e m w a s s c a r c e " [Butler 2 0 0 0 ] .  S o m e of t h e s e f o r c e s a r e still in effect t o d a y .  C o m p u t e r s migrated  f r o m the t i m e - s h a r i n g host to strict o u t s o u r c i n g c o m p a n i e s in the e a r l y 1 9 8 0 s .  M a n y factors  p l a y e d a role in the m o v e m e n t of c o m p a n i e s a s the u s a g e of the t i m e - s h a r e d c o m p u t e r a p p r o a c h e d 2 4 h o u r s per d a y a n d the price of c o m p u t e r s started to d e c l i n e , t h u s m a k i n g t i m e - s h a r i n g m o r e e x p e n s i v e than buying a n d running a d a t a c e n t r e .  A l t h o u g h A S P s c l e a r l y act in a n o u t s o u r c i n g role, this t h e s i s s h a l l not f o c u s o n i s s u e s r e g a r d i n g g e n e r i c o u t s o u r c i n g but e x c l u s i v e l y u p o n i s s u e s relating to A S P s .  However, our  d i s c u s s i o n of A S P s d o e s h a v e strong parallels to the r e s e a r c h in t h e field of o u t s o u r c i n g . O u t s o u r c i n g in g e n e r a l is a n a r e a of intensive r e s e a r c h a n d t h e r e e x i s t s a large b o d y of k n o w l e d g e o n the subject.  T h o s e w h o a r e interested in m o r e information  regarding  o u t s o u r c i n g a r e d i r e c t e d to W i n n i n g the O u t s o u r c i n g G a m e b y J a n e t Butler, S t r a t e g i c O u t s o u r c i n g D e c i s i o n s written by W . R . K i n g , or O u t s o u r c i n g : A C I Q ' s P e r s p e c t i v e written by Oakie Williams.  T h r o u g h o u t this t h e s i s w e shall highlight relevant f i n d i n g s in the field of  outsourcing.  For the p u r p o s e s of this t h e s i s , a n A S P shall b e d e f i n e d a s : a n o r g a n i z a t i o n that offers a c o n t r a c t u a l s e r v i c e to d e p l o y , host, m a n a g e a n d rent a c c e s s (via the Internet) to a n application f r o m a r e m o t e facility. A S P s a r e r e s p o n s i b l e for either directly or  indirectly  providing all the s p e c i f i c activities a n d e x p e r t i s e a i m e d at m a n a g i n g a s o f t w a r e application or set of a p p l i c a t i o n s [ D o u g l a s s 2 0 0 0 ] . 5  2.2.  What Types Of Asps Are Out There?  A c c o r d i n g to T e l e C h o i c e ' s S c o t t Heinlein there a r e four major c a t e g o r i e s of A S P s [Heinlein, 2 0 0 0 ] . T h e s e g r o u p i n g s a r e b a s e d mainly o n application o w n e r s h i p or c o m p a n y origins a n d a r e fairly r e p r e s e n t a t i v e of t h e c l a s s i f i c a t i o n of A S P s that m o s t a n a l y s t s a r e currently u s i n g in e x a m i n i n g this m a r k e t .  It is useful to e x a m i n e this at this juncture b e c a u s e it p r o v i d e s the  r e a d e r with a n insight into the c a t e g o r i z a t i o n of A S P s that a r e currently in u s e . Let u s look at e a c h , a n d d i s c u s s the strengths a n d w e a k n e s s e s of e a c h .  Resellers:  P a c k a g e a n o t h e r A S P ' s product a n d resell it to e n d c u s t o m e r s for a d i s c o u n t e d  c o s t . T h e y typically will bill the e n d c u s t o m e r a n d provide the first level of support. M a n y r e s e l l e r s a r e not r e s p o n s i b l e for maintaining the a p p l i c a t i o n f r o m either a t e c h n i c a l or product p e r s p e c t i v e , b e y o n d first level of support. T h e y d o not h a v e m u c h control o v e r the application but d o o w n the c u s t o m e r . T h i s m o d e l c a n b e g o o d for c o m p a n i e s wanting to offer a p p l i c a t i o n s but not h a v i n g the e x p e r i e n c e to d o s o . T h i s p r o v i d e s t h e m with the ability to c o m b i n e their o w n p r o d u c t s with the r e s o l d a p p l i c a t i o n s in a b u n d l e p a c k a g e offering. T h e d o w n s i d e s to this m o d e l a r e lack of product control a n d often s m a l l m a r g i n s . T h e resellers M i c r o a g e a n d V i a s o f t fall in this c a t e g o r y .  Aggregators:  Integrate  multiple  applications from  different  ASPs  and  offer  them  to  c u s t o m e r s . T h e a p p l i c a t i o n s a r e u s u a l l y offered through a portal with a s i n g l e s i g n - o n . Utilizing multiple A S P s a l l o w s a g g r e g a t o r s to offer vertical p a c k a g e s or m a n y horizontal p a c k a g e s . T h i s limits the n u m b e r of A S P s that b u s i n e s s e s m u s t d e a l with a s they a d d m o r e a p p l i c a t i o n s . T h e d i s a d v a n t a g e is that t h e a g g r e g a t o r m o d e l t e n d s to b e rather c o m p l e x b e c a u s e of the integration r e q u i r e m e n t s of multiple A S P s . E x a m p l e s of a g g r e g a t o r s include J a m c r a c k e r , Agiliti, a n d Bluetrain.  6  Pure-plays: R e l y least o n p a r t n e r s h i p s to deliver their a p p l i c a t i o n s . T h e y ideally h a v e their o w n d a t a c e n t r e s w h e r e they maintain the a p p l i c a t i o n s t h e m s e l v e s . T h i s g i v e s t h e m a high level of control o v e r t h e s e r v i c e a n d c u s t o m e r e x p e r i e n c e . S o m e p u r e - p l a y s a r e partnering with Internet s e r v i c e providers.  T h i s g i v e s t h e m total e n d - t o - e n d accountability to the  c u s t o m e r . T h e d i s a d v a n t a g e to this m o d e l is that it requires e x p e r t i s e in m a n y a r e a s . P u r e p l a y s must k n o w t h e software s i d e a s well a s t h e d a t a c e n t r e s i d e . It is a l s o t h e m o s t costly of  the models.  However,  many  customers  will w a n t their  A S P to h a v e  end-to-end  accountability if they a r e running critical b u s i n e s s a p p l i c a t i o n s . E x a m p l e s of p u r e - p l a y s a r e U S i , Interliant, a n d C o r i o .  Business Process Outsourcers: c a n b e either a reseller, a g g r e g a t o r , or pure-play. T h e distinction  is that they  deliver  business process outsourcing  s e r v i c e s in addition  to  application s e r v i c e s to t h e c u s t o m e r . T h e y m a y provide a n o u t s o u r c e d H R o r g a n i z a t i o n , P R firm, s h i p p i n g c o m p a n y , a c c o u n t i n g group, e t c . B u s i n e s s p r o c e s s o u t s o u r c e r s m a y partner with m a n a g e m e n t c o n s u l t i n g firms for t h e s e o u t s o u r c i n g s e r v i c e s a s well a s c o m p a n i e s like K i n k o s , O f f i c e D e p o t , F e d e r a l E x p r e s s , a n d J B Hunt. B u s i n e s s p r o c e s s o u t s o u r c e r s c a n b e c o m p a r e d to a p r o f e s s i o n a l s e r v i c e s o r g a n i z a t i o n . T h e d i s a d v a n t a g e to this m o d e l is it relies o n s e v e r a l p a r t n e r s h i p s similar to t h e a g g r e g a t o r  m o d e l a n d d e m a n d s creativity a n d  simplicity in p a c k a g i n g .  F o r t h e client of a n A S P , the distinction b e t w e e n a B u s i n e s s P r o c e s s O u t s o u r c e r a n d a n y of the other three A S P t y p e s w o u l d b e c l e a r .  In addition to t h e delivery of application  functionality, B u s i n e s s P r o c e s s O u t s o u r c e r s w o u l d a l s o deliver o u t s o u r c i n g c a p a c i t y that o u t s o u r c e r s h a v e a l w a y s d e l i v e r e d . H o w e v e r t h e distinction b e t w e e n r e s e l l e r s , a g g r e g a t o r s a n d p u r e - p l a y s b e c o m e s c l e a r w h e n c h a n g e s h a v e to b e m a d e , or a r e m a d e , to t h e application(s) w h i c h f o r m s t h e b a s i s of t h e s e r v i c e . R e s e l l e r s a n d a g g r e g a t o r s h a v e little or  7  no control o v e r the application s i n c e they a r e p a s s i n g a l o n g the s e r v i c e s of other A S P s . P u r e - p l a y s c r e a t e their o w n a p p l i c a t i o n s s o they h a v e e n d - t o - e n d control a s m e n t i o n e d previously.  2.3.  Who Are The Players In The ASP  Ecosystem?  T h e b u s i n e s s s p a c e s u r r o u n d i n g A S P s is often referred to a s a n e c o s y s t e m . T h e r e a s o n for this is the level of non-linear interactions a n d c h a n g i n g roles that the v a r i o u s p l a y e r s in this m a r k e t u n d e r g o [Charley, 2 0 0 0 ] .  W e shall b e g i n with a look at t h o s e v a r i o u s p l a y e r s a n d  w h e r e they a r e h e a d e d within this market.  H e r e w e s e e the structure of a g e n e r i c A S P interacting with o n e of its clients:  Figure 1.  Generic ASP Model  Data  Data Centre Rental Payment  Application  ISP  T h e r e a r e four k e y p l a y e r s involved in delivering the a p p l i c a t i o n s e r v i c e to t h e client in this figure.  T h e I S V (Independent S o f t w a r e V e n d o r ) , A S P (Application S e r v i c e P r o v i d e r ) , I S P  8  (Internet S e r v i c e Provider) a n d the D a t a C e n t r e . N o t e that t h e s e a r e not n e c e s s a r i l y distinct organizations.  F o r U S i , the A S P a n d  D a t a C e n t r e a r e all in o n e o r g a n i z a t i o n ,  M y S A P . c o m the I S V a n d A S P a r e all within o n e o r g a n i z a t i o n .  for  If a telco (telco is a c o m m o n  short f o r m of t e l e c o m m u n i c a t i o n s c o m p a n y ) s u c h a s A T & T w e r e to b u y U S i , only two c o m p a n i e s w o u l d b e r e p r e s e n t e d in the g e n e r i c A S P d i a g r a m a b o v e . d i a g r a m a r e the client's c u s t o m e r s .  Not d e p i c t e d in this  A S P s impact the c u s t o m e r in certain w a y s .  Let us  e x a m i n e e a c h of t h e s e p l a y e r s in s o m e detail.  Independent Software Vendors (ISVs) Historically, I S V s m a i n t a i n e d a direct relationship with the u s e r s of their software.  However,  u n d e r the A S P delivery m o d e l , the I S V is r e l e g a t e d to only a s m a l l c o m p o n e n t in the overall solution in w h i c h the A S P m a n a g e s the entire c u s t o m e r relationship.  F o r this r e a s o n , major  software h o u s e s s u c h a s O r a c l e , S A P a n d I B M h a v e a l r e a d y e n t e r e d the A S P m a r k e t a s direct c o m p e t i t o r s . m a r k e t directly.  Microsoft h a s given m i x e d s i g n a l s a s to w h e t h e r or not it will enter the  H o w e v e r , Microsoft h a s s i g n a l l e d a significant b a c k i n g of p l a y e r s a l r e a d y in  this m a r k e t with its recent . N E T platform a n d through its A S P P a r t n e r Certification P r o g r a m .  Internet Service Providers (ISPs)  T e l c o s a n d I S P s a r e the 'connectivity' c o m p o n e n t of the A S P m o d e l .  M a n y of the larger  t e l c o s h a v e the network a n d d a t a c e n t r e capabilities, but typically l a c k the  application  e x p e r t i s e that a n A S P c a l l s for. A s w e shall s e e in later in this c h a p t e r , m a n y a n a l y s t s think the t e l c o s s h o u l d , a n d will, b u y a n A S P b e c a u s e of their d e p r e s s e d m a r k e t capital v a l u e s . E x a g g e r a t i n g the p u s h for t e l c o s to buy A S P s , b r o a d b a n d s e r v i c e s a r e q u i c k l y b e c o m i n g a c o m m o d i t y with low m a r g i n s , a n d a d d i n g a h o s t e d s e r v i c e w o u l d i n c r e a s e their return o n  9  network investment [King, S e p t 2 0 0 0 ] . Q w e s t , A T & T a n d Sprint a r e all i n v o l v e d in joint A S P ventures.  Data Centre  Often referred to a s S e r v e r F a r m s , d a t a c e n t r e s c a n b e o w n e d by the A S P (as with U S i ) or o w n e d by s o m e o n e other than the A S P (as with C o r i o ) . O f t e n T h e d a t a c e n t r e s a r e often o w n e d by t e l c o s , h o w e v e r E x o d u s a n d C o n c e n t r i c a r e both d a t a c e n t r e only s e r v i c e s . W h e t h e r or not they will m o v e into the A S P m a r k e t is u n k n o w n at this t i m e .  T h e r e a r e two  m a i n c a t e g o r i e s of d a t a c e n t r e s : 1) c o - l o c a t i o n providers (co-lo's) a n d 2) m a n a g e d hosting providers.  C o - l o ' s offer clients a s e c u r e e n v i r o n m e n t with reliably c l e a n p o w e r in w h i c h to  house servers.  M a n a g e d hosting providers t a k e the next s t e p b y a d d i n g IT support a n d  h a r d w a r e , b a s i c a l l y offering clients turnkey hosting s o l u t i o n s .  F o r r e s t e r R e s e a r c h predicts  m a n a g e d hosting will a c c o u n t for 8 6 percent of a n anticipated $ 1 2 . 5 billion d a t a centre revenue  in 2 0 0 3  Development  at  [Bernard,  Feb. 2001].  M H P Digex  has  openly  Andy  Hunn, a  stated  s e n i o r director  that " C o - l o c a t i o n  of  Business  is a l r e a d y  getting  c o m m o d i t i z e d , " [ B e r n a r d , F e b . 2001] a n d the u s e r s of d a t a c e n t r e s d e s i r e the e x t r a s s u c h a s trouble-shooting s e r v i c e s that m a n a g e d h o s t s provide.  F u r t h e r m o r e , m a n y A S P s a r e c o m p a r a t i v e l y c a s h s t a r v e d a n d i n v e s t o r s a r e not a s patient a s they w e r e with the dot c o r n s w h e n it c o m e s to turning a profit [Wainewright, M a r c h 2 0 0 1 ] . Fortunately for the A S P s that a r e not planning o n building their o w n d a t a c e n t r e s , the m a r k e t for d a t a c e n t r e s e r v i c e s is f l o o d e d at the m o m e n t .  D a t a c e n t r e s e r v i c e providers w e r e  e x p e c t i n g the A S P m a r k e t to b e m u c h larger than it currently is a n d they w e r e a l s o e x p e c t e d to b e s e r v i c i n g the dot c o m market at this point in time [ B e r n a r d , F e b 2 0 0 0 ] .  Neither of  t h e s e a s s u m p t i o n s h a s held true a n d e x c e s s d a t a c e n t r e c a p a c i t y h a s t h e r e f o r e r e s u l t e d .  10  Customer A S P s affect t h e w a y c o m p a n i e s d e a l with their c u s t o m e r s .  F o r i n s t a n c e , if a c o m p a n y  o u t s o u r c e d its s h i p m e n t tracking software to a n A S P , it w o u l d m a k e s e n s e to l e v e r a g e t h e fact that A S P s deliver their s e r v i c e s o v e r t h e net. O n e w a y to t a k e a d v a n t a g e of this w o u l d be to h a v e t h e c u s t o m e r c o n t a c t the A S P directly to g e t information, o r m a k e their p a y m e n t s for g o o d s .  H o w e v e r this c a n b e d o n e in a t r a n s p a r e n t f a s h i o n .  C o n s i d e r t h e following  diagram:  Figure 2.  Customer, Client And ASP Interaction  How the System Appears to the Customer Billing, Order Info, Goods  Payment, Info Requests  How the System is really working Billing, Order Info, Goods  r ASP  Payment, Info Requests  /  11  H e r e the c u s t o m e r h a s visited the client's w e b s i t e to obtain information a b o u t its order. Customers  m a y b e l i e v e they a r e interacting with the client's IT s y s t e m s .  However,  t r a n s p a r e n t to the c u s t o m e r s t h e m s e l v e s , they a r e really interacting with t h e client's A S P . T h e A S P h a s all the d a t a a n d functionality to relieve the client of t h e b u r d e n of s u p p o r t i n g c u s t o m e r information r e q u e s t s .  N o t e that a supplier, retailer or a n y other entity that is  interacting with the client c o u l d r e p l a c e the ' c u s t o m e r ' .  Application Service Providers  (ASPs)  T h e A S P g e n e r a l l y d o e s not o w n the software it l e a s e s out to clients. C o m p a n i e s like U S i a n d C o r i o (both in the top five for n u m b e r of clients a n d contract s i z e [ S C N , 2000]) d o build s o m e of the software a n d integrate the s o l u t i o n s t h e y m a r k e t .  H o w e v e r t h e y a r e in  a g r e e m e n t s with Microsoft to u s e M i c r o s o f t ' s d e v e l o p m e n t tools a n d if they a r e g o i n g to m o v e t o w a r d a g g r e g a t i o n or reselling, they will u s e o n e of M i c r o s o f t ' s A S P p a r t n e r s :  12  Microsoft ASP Service Delivery Model  Figure 3.  Small, Medium and Large Organizations  Solution Delivery Application Developers  ValueAdded Resellers  Systems Integrators  Web Developers  ISVs  ASP - Solution Developer  ASP - Agent  Develop Packaged and/or Custom ASP Solutions on ASP Platform Enabler Systems, Own Customer Relationship  Resell Packaged ASP Services for ASP Application Aggregators  8 2= O V)  »  o  ASP - Platform Enabler  ASP - Application Aggregator  Managed Hosting, Platform, Provisioning, Billing, Telco Licensing  Messaging, Office, LOB - Licensing  T h i s d i a g r a m s h o w s the m a n y d i v e r s e activities involved in the delivery of a n A S P s e r v i c e a s put forward b y Microsoft o n its A S P partner w e b s i t e or a s p r e s e n t e d in [Cornfield, 2 0 0 0 ] . S i n c e A S P s interact with the software v e n d o r s a n d t e l e c o m m u n i c a t i o n s c o m p a n i e s (or their I S P divisions) a n d f a c e integration, d e v e l o p m e n t a n d networking i s s u e s o n a daily b a s i s , a d i v e r s e set of skills a r e required to get a n A S P running s m o o t h l y .  F o r this r e a s o n , A S P s  often strike d e a l s with I S V s , t e l c o s a n d c o n s u l t i n g firms in o r d e r to l e v e r a g e t h o s e firms' u n d e r s t a n d i n g of t h o s e a r e a s .  Qwest  Cyber.Solutions  delivers  implementation,  maintenance  Cyber.solutions  is  a  joint  infrastructure,  and venture  software,  enhancements, between  all  Qwest  in  application an  development/  end-to-end  communications  and  package. KPMG.  C y b e r . s o l u t i o n s h a s a n o b v i o u s a d v a n t a g e by h a v i n g s u c h a n intimate relationship with these companies:  Q w e s t C y b e r . s o l u t i o n s h a s a c c e s s to Q w e s t ' s n e t w o r k i n g skills a n d  13  c a p a c i t i e s at a preferential rate a n d K P M G brings in a "wealth of intellectual property".  Both  h a v e i n v e s t e d a great d e a l of c a s h into the c o m p a n y s o e v e n t h o u g h it w a s in a n e g a t i v e c a s h flow position for a long time, it h a s out l a s t e d m o s t other start u p s [King, S e p t 2 0 0 0 ] . O r e v e n P a n d e s i c , born a s a joint venture b e t w e e n Intel a n d S A P in 1 9 9 7 , P a n d e s i c d e s i g n e d its h o s t e d e - b u s i n e s s solution for s m a l l a n d m i d s i z e b u s i n e s s e s .  Pandesic  l e v e r a g e d its relationship with both p a r e n t s a n d h a d what m o s t in t h e industry c o n s i d e r e d a great s e r v i c e [ M c C a b e , N o v . 2 0 0 0 ] .  H o w e v e r , P a n d e s i c h a s g o n e out of b u s i n e s s .  The  c h a n n e l conflict o n S A P ' s part (between P a n d e s i c a n d M y S A P . c o m ) is often b l a m e d for this demise.  F o r A S P s , their relationships with the v a r i o u s industry p l a y e r s a r e e x t r e m e l y important for the survival of the c o m p a n y a n d a d o p t i o n of its s e r v i c e s within t h e industry.  W e shall  c o n t i n u e o u r d i s c u s s i o n of A S P s in s e c t i o n 2.4 w h e r e w e s h a l l c o n s i d e r t h e v a r i o u s t y p e s of A S P business models.  2.4.  Business Models  T h i s s e c t i o n e x a m i n e s the w a y s in w h i c h A S P s operations.  generate  i n c o m e a n d their  internal  S e r v i c e L e v e l A g r e e m e n t s ( S L A ) a n d the role t h e y play in the A S P / C l i e n t  relationship s h a l l a l s o b e d i s c u s s e d .  ASP Market Internal Operations  W e c a n s e e in the Microsoft A S P S e r v i c e Delivery M o d e l (figure 3) that M i c r o s o f t s u b s c r i b e s to four s p e c i a l i z a t i o n s of labour under the A S P market. ' b u s i n e s s m o d e l s ' for the r e m a i n d e r of this t h e s i s .  14  T h e s e s h a l l b e c o n s i d e r e d a s the  Platform Enabler Data centres  a n d t e l c o s fall  u n d e r this  category.  Essentially we  o r g a n i z a t i o n s that provide the h a r d w a r e a n d infrastructure  a r e talking  about  that m a k e the A S P m o d e l  p o s s i b l e . P l a t f o r m e n a b l e r s g e n e r a l l y provide m a n a g e d hosting to 3  rd  party A S P s to d e v e l o p  a n d deliver their solutions a s network s e r v i c e s . G e n e r a l l y they c h a n n e l their s e r v i c e s to e n d customer through  ISPs, A S P s and developers.  p l a y e r s in this m a r k e t .  Q w e s t , D i g e x a n d D a t a R e t u r n a r e all  P l a t f o r m e n a b l e r s c a n m a k e their r e v e n u e b y c h a r g i n g for d a t a  c e n t r e u s a g e a n d network s e r v i c e s o n the b a c k e n d a n d then c h a r g i n g the c u s t o m e r directly for Internet a c c e s s w h e n they provide it.  Solution developer (or Provider) N o t i c e that this c a n b e either a n I S V ( S u c h a s Microsoft itself), a p r o g r a m m e r d e s i g n i n g w e b p a g e s that drive the application, or a full-blown A S P . H o w e v e r u n d e r this s c h e m e it d o e s not matter. S o l u t i o n providers a r e what first c o m e to m i n d w h e n o n e t h i n k s of a n A S P a n d they c l o s e l y r e s e m b l e the g e n e r i c A S P at the b e g i n n i n g of this c h a p t e r . o v e r l a p b e t w e e n this g r o u p a n d A p p l i c a t i o n A g g r e g a t o r s .  T h e r e is h e a v y  T h e r e f o r e , Microsoft often u s e s  the ' d e v e l o p e r ' m o n i k e r to m a k e the distinction b e t w e e n t h e s e a n d a g g r e g a t o r s b e c a u s e the d e v e l o p e r h a s built the solution it is s e l l i n g . In the earlier d a y s of the m a r k e t , the provider w o u l d o w n the c u s t o m e r relationship. H o w e v e r , providers a r e b e c o m i n g d i s p l a c e d by the growth of a g g r e g a t o r s in m a n a g i n g c u s t o m e r relationships. S o l u t i o n d e v e l o p e r s c a n c h a r g e for their s e r v i c e s directly or m o r e often their c h a r g e s a r e to a g g r e g a t o r s . T h e s e c h a r g e s a r e then p a s s e d o n to the c u s t o m e r s of the a g g r e g a t o r .  15  Application Aggregators C o r i o , U S i a n d Interliant all fall under this c a t e g o r i z a t i o n . A l t h o u g h t h e y d o sell directly they c a n a l s o u s e V A R s ( V a l u e A d d e d R e s e l l e r s ) or traditional s y s t e m integration p r o v i d e r s . T h e a g e n t ' s m o s t important roles a r e the m a n a g e m e n t a n d m a i n t e n a n c e of the software b e i n g provided a s a hosted service.  A g g r e g a t o r s allow c u s t o m e r s to t a k e the A S P m o d e l to a  higher level of efficiency, by a d d i n g simplicity to the A S P c u s t o m e r relationship.  Consider  the following s c h e m a t i c :  Figure 4.  Comparison Of ASP Market With And Without Aggregators  Market without aggregators  I S V s h a v e b e e n left out to simplify the d i a g r a m , h o w e v e r s o m e or all of the entities in the d i a g r a m m a y b e d e a l i n g with a n I S V . Without a n A g g r e g a t o r i n v o l v e d , the client m a y h a v e to o u t s o u r c e to s e v e r a l A S P s . H o w e v e r there a r e m a n y s h o r t c o m i n g s to this s e t - u p . First of  16  all, m o s t of t h e s a v i n g s o n the application m a n a g e m e n t s i d e a r e s u d d e n l y lost in contact m a n a g e m e n t a n d integration if the A S P s a r e not c o o r d i n a t i n g this a m o n g s t t h e m s e l v e s . W h e r e a s with a n a g g r e g a t o r i n v o l v e d , the client c a n p r o v i d e a w i d e r s e l e c t i o n of s e r v i c e s than a n y o n e A S P provider c o u l d . F u r t h e r m o r e , the client only h a s o n e c o n t a c t to m a n a g e , a n d integration is not a n i s s u e the client h a s to d e a l with. A g g r e g a t o r s often s i m p l y b u n d l e c o s t s together a n d p a s s t h e m o n to the client.  F o r the r e m a i n d e r of this t h e s i s w h e n e v e r  a g g r e g a t o r is referred to, it is a s in the Microsoft u s e of the w o r d , not S c o t t H e i n l e i n ' s c a t e g o r i z a t i o n s i n t r o d u c e d at the b e g i n n i n g of s e c t i o n 2 . 2 .  ASP Agent A g e n t s traditionally f o c u s e d their b u s i n e s s o n integration a n d / o r other p r o f e s s i o n a l s e r v i c e s . T o get a better i d e a of the role that a g e n t s play c o n s i d e r t h e relationship A n d e r s e n C o n s u l t i n g (now c a l l e d A c c e n t u r e ) e n j o y e d with S A P .  W i t h the p r e v i o u s a r r a n g e m e n t ,  A n d e r s o n c o n t a c t e d the c o m p a n y a n d c u s t o m i z e d the software to o p e r a t e at its site. Instead u n d e r the A S P m o d e l will d e t e r m i n e w h a t p r e - p a c k a g e d a p p l i c a t i o n s a r e n e e d e d a n d c o m m u n i c a t e the c u s t o m i z a t i o n s n e e d e d for the application to w o r k at the client's site.  T h e r e a s o n w e introduce t h e s e n e w c a t e g o r i z a t i o n s is that w e will u s e t h e s e (with s o m e slight modifications) a s the b a s i s of the f r a m e w o r k w e shall set forth in c h a p t e r 4.  Although  this m o d e l d o e s not c o m p a r t m e n t a l i z e t h e A S P industry p l a y e r s a s c l e a n l y a s w e w o u l d like, w e w o u l d b e h a r d p r e s s e d to find a s c h e m e that w o u l d s i n c e m a n y p l a y e r s in this industry fall u n d e r m a n y c a t e g o r i z a t i o n s b e c a u s e they h a v e different interactions with their clients.  17  A New Stratification Of ASPs F o r the p u r p o s e of o u r a n a l y s i s in c h a p t e r 4, w e h a v e c r e a t e d a stratification b a s e d o n market (vertical or horizontal) a n d s p a n of functionality p r o v i d e d (limited to e n t e r p r i s e wide). W e d e f i n e vertical to b e relating to, involving, or integrating e c o n o m i c activity f r o m b a s i c production to point of s a l e . vertical m a r k e t s .  Horizontal is d e f i n e d a s b u s i n e s s f u n c t i o n s a c r o s s s e v e r a l  C o n s i d e r the following two by two matrix, w h e r e 'market' is vertical or  horizontal a n d ' s p a n ' is the n u m b e r of b u s i n e s s f u n c t i o n s the s e r v i c e s p r o v i d e d by that A S P support:  T a b l e 1.  Categorization By Market A n d  Span  Market Vertical  Horizontal Span Niche Enterprise  Niche V S P s  F o c u s e d Solution  Enterprise Support Services (ESS)  Full S e r v i c e V S P s  T h e s e four g r o u p i n g s a r e d i s c u s s e d in detail below.  Focused Solutions F o c u s e d S o l u t i o n s w o u l d s o l v e o n e i s s u e within o n e of the internal vertical d e p a r t m e n t s (for e x a m p l e a d e m a n d prediction algorithm provider w o u l d b e a F o c u s e d S o l u t i o n within s u p p l y chain management).  T h e s e r v i c e p r o v i d e d by a F o c u s e d S o l u t i o n w o u l d b e integrated into  a n i n - h o u s e a p p l i c a t i o n or into the s e r v i c e of a n y of the other t h r e e A S P t y p e s . recently a n n o u n c e d that it will b e joining M i c r o s o f t ' s . N E T f r a m e w o r k .  e B a y has  T h i s m e a n s that a n y  solution or s e r v i c e requiring a n a u c t i o n e n g i n e that e B a y p r o v i d e s c o u l d b e a c c e s s e d a n d integrated into that s e r v i c e a s d e s c r i b e d o n the Microsoft w e b site.  U S i n t e r n e t w o r k i n g is  a n o t h e r A S P w h o offers its s e r v i c e s in this f a s h i o n . B e c a u s e m a n y c o m p a n i e s a r e currently 18  a d o p t i n g this f r a m e w o r k , a n d f e w h a v e a n n o u n c e d it, it is h a r d to s a y w h i c h will b e F o c u s e d S o l u t i o n s a n d w h i c h will not.  Full Vertical Industry Services Full S e r v i c e V e r t i c a l S e r v i c e P r o v i d e r s or V S P s a r e starting to e m e r g e at a v e r y rapid p a c e . T h e r e a s o n for this is s i m p l e : they intimately k n o w both the industry they a r e in a n d the software th e y s e l l . T h i s results in lower c u s t o m i z a t i o n c o s t s a n d better m a r k e t a c c e p t a n c e (if o n e is in the restaurant b u s i n e s s o n e w o u l d want the p e r s o n providing software to u n d e r s t a n d t h e restaurant b u s i n e s s ) .  G o v H o s t . c o m , (focuses on Government), A d W a r e  S y s t e m s (advertising) a n d M I R U S (multi-unit restaurant c h a i n s ) a r e all e x a m p l e s of Full Service V S P s .  W h a t a vertical A S P (also c a l l e d V S P s ) brings to the table a s its p r i m a r y attribute is industry e x p e r t i s e . It offers c u s t o m e r s m o r e t h a n just a n e w w a y to p u r c h a s e s o f t w a r e ; it p r o v i d e s the s p e c i f i c industry k n o w l e d g e n e e d e d to m a k e a particular a p p l i c a t i o n s o l v e a particular p r o b l e m . " A n d , s i n c e e v e r y industry h a s its o w n set of u n i q u e n e e d s , it is this k n o w l e d g e that will b e the differentiator at d a y ' s e n d " [ B e r n a r d , J a n 2 0 0 1 ] .  T h e p o s s i b l e d r a w b a c k is that  this m a y eliminate a competitive a d v a n t a g e if a d o p t i o n rate is high within a n industry ( C o n s i d e r S A P a n d the p e t r o l e u m industry).  A l t h o u g h this w o u l d m e a n that the c o m p a n y  offering this s e r v i c e w o u l d b e v e r y s u c c e s s f u l , its s u c c e s s c o u l d z e n i t h a n d start to d e c l i n e a s S A P ' s f o r t u n e s d i d w h e n market saturation w a s r e a c h e d .  Because  these  services are  a l r e a d y s p e c i f i c to  a  particular  industry,  industry  pre-  c u s t o m i z a t i o n l o w e r s the t r a n s a c t i o n c o s t s of contracting t h e s e s e r v i c e s . A n d b e c a u s e the o p e r a t i n g c o s t s of the A S P a r e distributed o v e r m a n y clients within o n e industry, k n o w l e d g e that is g a i n e d at other clients t r a n s l a t e s into s a v i n g s for all the clients of that A S P .  19  Niche VSPs N i c h e V S P s a r e t h e A S P s that typically offer e m a i l , a c c o u n t i n g p a c k a g e s or s u p p l y c h a i n software; s e r v i c e s that a r e broadly a p p l i c a b l e but w o u l d not satisfy t h e IT n e e d s of a n y o n e organization.  N i c h e V S P s a r e n a m e d V S P s s i n c e internal d e p a r t m e n t s s u c h a s a c c o u n t i n g  or h u m a n r e s o u r c e s a r e often c o n s i d e r e d vertical within t h e c o m p a n y .  T h e y allow t h e  c u s t o m e r to f o c u s o n c o r e b u s i n e s s i s s u e s ( A c c o u n t i n g a n d f i n a n c i a l s c a m e in s e c o n d in c u s t o m e r d e m a n d [ N e w c o m b , F e b 2001]).  N e t L e d g e r is a n e x a m p l e of a N i c h e V S P  offering a c c o u n t i n g a p p l i c a t i o n s o v e r the Internet a n d Virtual H R is a N i c h e V S P offering h u m a n r e s o u r c e s o v e r t h e Internet. O n e s u b g r o u p i n g of N i c h e V S P s w o u l d b e a s noted in the following table.  Table 2.  Subtypes Of Niche VSPs  Enterprise support Services  Functionality that f o c u s e s o n s u p p o r t i n g t h e e n t e r p r i s e a n d integrating its p r o c e s s e s . Traditional E R P s o f t w a r e w o u l d naturally g r o w into this s p a c e .  Analysis and Infrequent u s e ( O n e off)  A n y s e r v i c e s that a r e d e s i g n e d to a n a l y s e a b u s i n e s s problem, data warehousing a n d data mining, decision support s y s t e m s , w a r e h o u s e layout p l a n n i n g s o f t w a r e a n d route planning software.  External collaboration support  T h i s i n c l u d e s s e r v i c e s that r e p l a c e C R M , e C o m m e r c e a n d P r o c u r e m e n t . S e r v i c e s that e n a b l e interaction b e t w e e n t h e client of t h e A S P a n d t h e external w o r l d .  Internal workflow support P e r s o n a l Productivity support  This includes e-mail, groupware, knowledge management and document management. O f f i c e productivity s e r v i c e s that w o u l d r e p l a c e p r o d u c t s s u c h a s M S Office or C o r e l W o r d P e r f e c t (in their current format)  Let u s e x p l o r e e a c h of t h e s e s u b t y p e s .  Analysis and Infrequent use: W h y b u y a n application if it is only u s e d o n c e , or v e r y infrequently?  W h y b u y a n d support a n application that is o u t s i d e of t h e b u s i n e s s ' s a r e a of  e x p e r t i s e or that requires hiring n e w talent? T h e s e q u e s t i o n s a r e driving clients to a n a l y s i s  20  a n d infrequent u s e software.  B e c a u s e the client only p a y s for t h e t r a n s a c t i o n s it m a k e s a n d  not for a l i c e n c e for t h e software e a c h t r a n s a c t i o n h a s a lower c o s t a s s o c i a t e d with it. M a n y c o m p a n i e s u s e w a r e h o u s e s but f e w s p e c i a l i z e in optimizing their layout, h e n c e b u y i n g floor layout software m a k e s little s e n s e for t h e s e c o m p a n i e s .  A S P for infrequent u s e a p p l i c a t i o n s provide a ' p e r u s e ' a c c e s s to this a p p l i c a t i o n .  Most  c o m p a n i e s t o d a y w o u l d like to h a v e a d a t a w a r e h o u s e for reporting p u r p o s e s , but f e w h a v e the i n - h o u s e e x p e r t i s e to build a n d maintain o n e ( C o g n o s ' offerings a r e a n e x a m p l e of s u c h software).  A n A S P providing a n online d a t a w a r e h o u s e a l l o w s t h e s e c o m p a n i e s a c c e s s to  t h e s e s e r v i c e s while s h a r i n g t h e c o s t of infrastructure a c r o s s m a n y c u s t o m e r s .  Currently,  connectivity i s s u e s a r e holding c u s t o m e r s b a c k f r o m u s i n g t h e s e s e r v i c e s directly without a n aggregator; however n e w technologies s u c h a s UDDI (Universal Discovery Description a n d Interface) a n d S O A P ( S i m p l e O b j e c t A c c e s s Protocol) c o u l d c h a n g e this b y r e d u c i n g t h e c o s t s of c o o r d i n a t i o n a n d c o n n e c t i o n b e t w e e n n e w partners, a s w e s h a l l s e e in s e c t i o n 2 . 6 . H i g h specificity h i n d e r s profitability for this market s i n c e c u s t o m i z a t i o n c o s t s for short-term e n g a g e m e n t s e a s i l y e a t into m a r g i n [ B u s h a u s , S e p t 2 0 0 0 ] .  It is n o t a b l e that e C o m m e r c e  a n d C R M w e r e third a n d fourth in t e r m s of n u m b e r of c u s t o m e r s p l a n n i n g o n u s i n g a n A S P to provide a particular s e r v i c e [ N e w c o m b , F e b 2001])  L o n g - t e r m a n a l y s i s s o f t w a r e f a c e s a different c h a l l e n g e .  It is b e c a u s e this software is  usually v e r y h a r d to install a n d c u s t o m i z e to e a c h client that A S P s in this a r e a deliver c o s t savings.  B e c a u s e A S P s price their software p o s t - c u s t o m i z a t i o n [Trager, F e b . 2 0 0 1 ] they  r e d u c e t h e uncertainty of the client with r e s p e c t to c o s t s of installation.  External collaboration support: E x t e r n a l collaboration support, similar to infrequent u s e s e r v i c e s , a l l o w s t h e o u t s o u r c i n g of s e r v i c e s o u t s i d e t h e c o m p a n y ' s a r e a of e x p e r t i s e . B e c a u s e of t h e t r a n s p a r e n c y of a n A S P ' s s e r v i c e s to c u s t o m e r s a n d other entities ( s e e 21  c u s t o m e r s e c t i o n in C h a p t e r 2 ) , t h e A S P c a n alleviate t h e b u r d e n of s u p p o r t i n g c u s t o m e r s , a n d d e s i g n i n g a n d maintaining a w e b s i t e or online store.  C u s t o m i z a t i o n of s e r v i c e s is  c o s t i n g this s e g m e n t b y i n c r e a s i n g its operating c o s t s . C o m p a n i e s s u c h a s P a n d e s i c a n d R e d G o r i l l a both offered e C o m m e r c e s e r v i c e s , both tied their billing to t r a n s a c t i o n s v i a t h e online s t o r e s t h e y h a d built for c u s t o m e r s , a n d both a r e n o w o u t of b u s i n e s s b e c a u s e they over e s t i m a t e d online p u r c h a s i n g .  Internal workflow support: Internal workflow i n c l u d e s e m a i l a n d d o c u m e n t m a n a g e m e n t . T h i s c a t e g o r y i n c l u d e s e m a i l , t h e s e r v i c e that m o s t b u y e r s p l a n o n getting f r o m a n A S P . M o s t of t h e s e s e r v i c e s a r e work e n a b l e r s , s m o o t h i n g t h e flow of w o r k within t h e c o m p a n y a n d h e n c e lowering disruption  of work,  internal  transaction  c o s t s , a n d their  discontinuation  would  cause  h o w e v e r t h e s e r v i c e s a r e v e r y l o w in specificity c o m p a r e d to a n  e n t e r p r i s e w i d e s e r v i c e . T h i s type of s e r v i c e h a s a lot of u p s i d e for t h e c u s t o m e r a n d little potential d o w n s i d e .  Personal Productivity support: O f f i c e productivity s e r v i c e s a r e s e r v i c e s that w o u l d r e p l a c e p r o d u c t s s u c h a s M S O f f i c e or C o r e l W o r d P e r f e c t . T h e s e s e r v i c e s h a v e b e e n s l o w to g r o w b e c a u s e they t e n d to b e u s e r interface intensive, w h i c h in turn often results in n u m e r o u s R P C s [ A R I B A , 2 0 0 0 (b)]. O n e solution h a s b e e n to build t h e s e a p p l i c a t i o n s u s i n g D H T M L ( D y n a m i c H T M L ) b e c a u s e it utilizes t h e client c o m p u t e r ' s p o w e r .  T h e s e s e r v i c e s a r e fairly  e a s y to maintain a n d a r e relativity e a s y to r e p l a c e or substitute if n e e d b e . G e t t i n g t h e s e s e r v i c e s online p r o v i d e s a c o s t s a v i n g s (you only p a y for what y o u u s e ) a n d u p g r a d e s a r e someone else's concern.  B e c a u s e t h e a m o u n t of specificity v a r i e s with t h e s e r v i c e offered w e s h a l l return to e x a m i n e N i c h e V S P s , h o w e v e r s o m e g e n e r a l i z a t i o n s c a n b e m a d e at this t i m e .  N i c h e V S P s lower  t r a n s a c t i o n c o s t s in a w a y similar to Full V S P s , t h e y s p e c i a l i z e in o n e a r e a ( h e n c e g r e a t e r 22  d o m a i n k n o w l e d g e ) a n d e n h a n c e the connectivity of the product a s m u c h a s p o s s i b l e . T h e application their s e r v i c e is b a s e d u p o n w o u l d g e n e r a l l y b e o u t s i d e the client's c o r e a r e a of e x p e r t i s e or b u s i n e s s . T h e y allow t r a n s a c t i o n c o s t r e d u c t i o n s by allowing the client to f o c u s o n its k e y a r e a of e x p e r t i s e .  Enterprise Support Services (ESS) If the A S P a l s o falls into the A g g r e g a t o r or P u r e - p l a y s u b t y p e , it c a n offer a full suite of s e r v i c e s for entire c o m p a n y u s i n g b e s t - o f - b r e e d solutions ( c o n s i d e r U S i or C o r i o ) .  If the  E S S is a n I S V ( s u c h a s O r a c l e ) the solution m a y not be a s e n d - t o - e n d b e c a u s e the A S P will attempt to only u s e its o w n p r o d u c t s . E S S s b e h a v e the s a m e a s a Full V S P with r e s p e c t to a n y g i v e n client; the difference is that their clients a r e in v a r i o u s industries w h e r e a s the V S P s clients a r e all in o n e industry. h o w e v e r t h e s e c a n b e industry-centric.  E S S , includes M y S A P . c o m and Peoplesoft Online, F o r e x a m p l e , S A P ' s s o f t w a r e is u s e d a c r o s s m a n y  industries, h o w e v e r S A P c a n c o m e in industry s p e c i f i c flavours (which m a y b e c o n s i d e r e d vertical). T h e s e c o m p a n i e s s u c c e e d b a s e d o n the h u g e t r a n s a c t i o n c o s t s a v i n g s factor they provide t h r o u g h simplification of client's IT relationships (ideally o n e E S S w o u l d deliver all the client's application n e e d s by r e p a c k a g i n g a n d integrating a p p l i c a t i o n s f r o m n u m e r o u s s o u r c e s ) giving the client o n e point of contact. L a r g e a n d m i d s i z e c o m p a n i e s a r e their m o s t c o m m o n c u s t o m e r s . T h e largest d r a w b a c k to their s u c c e s s is the vital role they w o u l d play in client o p e r a t i o n s [ B u s h a u s , J a n 2 0 0 1 ] . C u s t o m e r s realize t h e s e s o l u t i o n s h a v e v e r y high specificity a n d a r e vital to c o n t i n u e d o p e r a t i o n s o n c e they a r e installed, a n d c u s t o m e r s m a y b e w a r y of h a v i n g s u c h a d e p e n d e n c e .  An  e x t e n s i v e review of the literature r e v e a l s that c u s t o m e r s t e n d to e x a m i n e the A S P  offering t h e s e s e r v i c e s for financial stability to g a u g e w h e t h e r or not they will fail.  Often  t h e s e s o l u t i o n s d i s p l a c e i n - h o u s e IT staff a s well a s further i n c r e a s i n g that lock-in m a y 23  a l r e a d y high d u e to specificity.  C u s t o m e r f e a r s of lock-in to a particular s e r v i c e provider  c o m b i n e d with c u s t o m e r c o n c e r n s about the life s p a n of the A S P h a s h e l d this m a r k e t b a c k .  H e r e is w h a t w e h a v e l e a r n e d f r o m recent A S P e x p e r i e n c e s : Full V S P s a r e s u c c e e d i n g in s o l v i n g the n e e d s of clients in their particular industries. T h e m a r k e t is s h a p i n g up s o that N i c h e V S P s (e.g. a n a c c o u n t i n g s y s t e m provider) will often h a v e their s e r v i c e s r e s o l d or a g g r e g a t e d a n d then s o l d to clients [ M c C a b e , F e b 2 0 0 1 ] .  A l t h o u g h there a r e a large  n u m b e r of V S P s ( 1 9 % of A S P s w e r e V S P s in 2 0 0 0 ) , f e w a r e in direct c o m p e t i t i o n with o n e another [ S C N , 2000].  T h e a g g r e g a t o r m o d e l that s o m e Full V S P s a n d m o s t E S S p r o v i d e r s follow s e e m s to b e the m o s t s u c c e s s f u l in the m a r k e t today. W h i l e only 3 . 6 % of c o m p a n i e s p l a n n e d o n p u r c h a s i n g a n o n l i n e E R P s y s t e m [ N e w c o m b , F e b 2 0 0 1 ] , U S i is the industry l e a d e r .  W h y is this?  B e c a u s e the a g g r e g a t o r m o d e l a l l o w s ' o n e - s t o p s h o p p i n g ' a n d flexibility that n o n e of the other m o d e l s p r o v i d e , e s p e c i a l l y if the A S P is not a l s o a n I S V or is not t o o c o m m i t t e d to o n e software v e n d o r ' s p r o d u c t s . A g g r e g a t o r s a l s o allow a c u s t o m e r to ' e a s e ' into A S P s e r v i c e s 'step by s t e p ' rather t h e n h a v i n g a 'sink or s w i m ' d a t e .  T h i s is related b a c k to specificity  i s s u e s r e g a r d i n g lock-in a n d c u s t o m i z a t i o n (which a r e d i s c u s s e d in C h a p t e r 4 a n d 5).  Service Level Agreement (SLA) S i n c e A S P s , by their v e r y n a m e , a r e the providers of a s e r v i c e a n d p l a y a n o u t s o u r c i n g role, w e w o u l d b e r e m i s s to not c o n s i d e r the role S e r v i c e L e v e l A g r e e m e n t s play in the relationship b e t w e e n client a n d A S P . Traditionally, a n S L A w o u l d c o n t a i n m e t r i c s by w h i c h a n o u t s o u r c e r (and s o m e t i m e s the internal IT department) w o u l d b e m e a s u r e d [Butler, 2 0 0 0 ] . T h e y w o u l d h a v e g o a l s b a s e d o n t h o s e metrics. In a n A S P e n v i r o n m e n t , the metrics i n c l u d e , but a r e not limited to, s y s t e m availability, r e s p o n s e t i m e s , i s s u e priority a n d quality s t a n d a r d s [Butler, 2 0 0 0 ] .  F o r e x a m p l e , a call c e n t r e c o u l d p r o m i s e to r e s p o n d with a 24  solution to a n IT p r o b l e m within two h o u r s for 6 5 % of all c a l l s . for  m e a s u r i n g the  outsourcer's performance  by outlining  S L A s c a n p r o v i d e the b a s i s the  metrics  by which  they  measured.  H o w e v e r , w h e n d e a l i n g with a p p l i c a t i o n s , clear-cut metrics g a u g i n g functionality c a n b e h a r d to c o m e by. I s s u e s r e g a r d i n g c h a n g i n g b u s i n e s s n e e d s c a n a l m o s t n e v e r b e totally ironclad into the S L A . F u r t h e r m o r e , m a n y c o m p a n i e s that will b e u s i n g A S P s will b e o u t s o u r c i n g for the first time.  S L A s h a v e not eliminated p r o b l e m s in the traditional o u t s o u r c i n g world a n d  they will not eliminate conflict in the A S P r e a l m . T h a t h a v i n g b e e n s a i d , S L A s g o a long w a y t o w a r d eliminating unstructured conflicts a n d providing a f r a m e w o r k within w h i c h to r e s o l v e t h e s e conflicts.  E v e n the very act of forcing the parties to sit d o w n a n d lay out their  e x p e c t a t i o n s o n p a p e r m a k e S L A s b e n e f i c i a l . W e m e n t i o n S L A s only to m a k e the r e a d e r a w a r e of their e x i s t e n c e a n d p o s s i b l e impact o n A S P / u s e r relations.  O n e interesting start-up in the field of S L A m a n a g e m e n t is the c o m p a n y O b l i c o r e . F o u n d e d in J a n u a r y of 2 0 0 0 , O b l i c o r e purports to provide A S P s a n d m a n a g e m e n t s e r v i c e providers with the t o o l s to draft m e a s u r a b l e S L A s for all c u s t o m e r s . T h e O b l i c o r e software  will  m e a s u r e the r e s o u r c e s u s e d to m e e t e a c h S L A a n d help the A S P c o n c e n t r a t e o n fixing p r o b l e m S L A s without affecting other c u s t o m e r s ' s e r v i c e [Dubie, 2 0 0 0 ] .  O b l i c o r e s a y s its software tells A S P s the application r e s p o n s e t i m e a n d t h e l e v e l s of network availability a n d latency the A S P c a n g u a r a n t e e . O b l i c o r e will a l s o g i v e s e r v i c e p r o v i d e r s a n d their c u s t o m e r s a v i e w into the network a n d h o w its p e r f o r m i n g  in t e r m s of the S L A  r e q u i r e m e n t s throughout the billing c y c l e . If p r o b l e m s a r e e n c o u n t e r e d , t h e A S P c a n t a k e a c t i o n a n d p o s s i b l y a v o i d p e n a l t i e s . T h u s , S L A structuring is n o w offered a s a s e r v i c e , to service providers.  F o r further information  regarding S L A s  O u t s o u r c i n g : A C I Q ' s P e r s p e c t i v e by O a k i e W i l l i a m s . 25  the  r e a d e r is referred  to  2.5.  Comparing The ASP Model To In House Solutions  At first g l a n c e , the A S P m o d e l b e a r s m a n y striking similarities to the m a i n f r a m e m o d e l of old.  It is a n a l o g o u s to the i n - h o u s e network getting r e p l a c e d with the Internet.  A S P s a r e m u c h m o r e than that.  However  A S P s h a v e the capability to deliver the high p o w e r G U I  a p p l i c a t i o n s u s e r s h a v e b e c o m e a c c u s t o m e d to w h e r e a s m a i n f r a m e s h a v e s t a y e d distinctly o n the n u m b e r c r u n c h i n g s i d e of the street [Slavid, J a n . 2 0 0 1 ] . A S P delivery m e t h o d s a n d C l i e n t / S e r v e r s h a r e a lot of the networking c o m p o n e n t s , h o w e v e r p r o c e s s i n g a n d d a t a a r e s c a t t e r e d all o v e r the s y s t e m . A S P s u p d a t e software regularly a n d automatically (as far a s the u s e r is c o n c e r n e d ) [King, S e p t . 2 0 0 0 ] .  C l e a r l y all three m o d e l s h a v e c o m m o n traits,  h o w e v e r they clearly h a v e s o m e very different c h a r a c t e r i s t i c s a s w e l l .  Let u s c o m p a r e the  benefits a n d d r a w b a c k s of A S P s a s c o m p a r e d with s y s t e m s that h a v e b e e n d e s i g n e d a n d built ' i n - h o u s e ' .  W e start by e x a m i n i n g the benefits the u s e r of a n A S P c a n e x p e c t a n d  c o m p a r e that to the benefits of a n in h o u s e s y s t e m .  T h e following table c o m p a r e s the A S P m o d e l to the traditional s o f t w a r e delivery m o d e l b a s e d o n the strength of e a c h m o d e l .  26  Table 3.  Comparison Between ASP And Traditional IT  Benefits of the ASP model  Benefits of Traditional Model  R e d u c e d i n - h o u s e IT d e m a n d s  C o n t r o l o v e r s e r v e r s i d e architecture  Saved Money and Time  M o r e c u s t o m reporting  No  Additional  Server  software  or  Better p e r f o r m a n c e  of  C P U intensive  hardware  heavyweight R P C programs  F e w client a p p l i c a t i o n s to support  Customizability  Universal A c c e s s  Better offline p e r f o r m a n c e  Shorter Application C y c l e s  C o m m u n i c a t i o n intensive a p p l i c a t i o n s  or  E a s e of Integration No obsolescence Better distributed p e r f o r m a n c e Better c u s t o m e r s e r v i c e than i n - h o u s e Better for h a n d l i n g c h a n g e s in d e m a n d levels  T h i s table r e v e a l s that the A S P p r o v i d e s m o r e benefits, h o w e v e r the d r a w b a c k s r e v e a l e d by the s t r e n g t h s  of the older s y s t e m c a n be difficult to ignore.  C u s t o m reporting  c u s t o m i z a t i o n a r e t h i n g s that c a n eat into a n A S P s m a r g i n b e c a u s e a n A S P s d e c r e a s e s with the c u s t o m i z a t i o n e a c h client requires [ M c C a b e , N o v . 2 0 0 0 ] . i n c o m e f r o m the 'repeatability' of their installations [ M c C a b e , N o v . 2 0 0 0 ] .  and  profitability  A S P s derive  Communication,  or b u s intensive a p p l i c a t i o n s s u c h a s g r a p h i c s p r o g r a m s a n d C A D d o not readily lend  27  t h e m s e l v e s to the A S P m o d e l s either. T h e A S P c a n provide file a n d d a t a s t o r a g e support to t h e s e a p p l i c a t i o n s , h o w e v e r it d o e s not provide a v i a b l e r e p l a c e m e n t for t h e s e a p p l i c a t i o n s .  2.6.  Technological Problems And Advances  A S P s h a v e s o m e t e c h n i c a l c o n s i d e r a t i o n s that still h a v e to b e a d d r e s s e d .  M a n y of the  t e c h n o l o g i e s to maintain a n d support A S P s m o r e efficiently a r e still b e i n g d e v e l o p e d . T h r e e of the top t e c h n o l o g i c a l p r o b l e m s that h a v e impact o n c u s t o m e r a c c e p t a n c e a n d application p e r f o r m a n c e a n d a r e currently holding b a c k the growth of A S P s a r e a s follows: 1) c o n c e r n s o v e r application p e r f o r m a n c e b e c a u s e of networking  i s s u e s 2) T h e lack of  connectivity  s t a n d a r d s b e t w e e n a p p l i c a t i o n s often m a k e s integration of s e r v i c e s e x p e n s i v e a n d 3) M o s t software w a s not d e v e l o p e d for the w e b a n d its online p e r f o r m a n c e is l a c k i n g a s a result. W e d i s c u s s t h e s e i s s u e s b e c a u s e there a r e factors in s o m e client's d e c i s i o n a s to w h e t h e r or not to p u r c h a s e the s e r v i c e s of a n A S P . Let u s e x a m i n e e a c h of t h e s e p r o b l e m s a n d d i s c u s s possible solutions.  Network Performance N e t w o r k i n g I s s u e s i n c l u d e both r e s p o n s e time uncertainty a n d reliability.  Although  the  Internet is at a s t a g e in its d e v e l o p m e n t w h e r e it is a b l e to act a s a delivery c h a n n e l for software, it is by n o m e a n s a n ideal delivery platform.  T h e r e a r e too m a n y uncontrolled  factors for a n y o n e A S P , or e v e n a n y I S P to m a k e a s e r v i c e level g u a r a n t e e with regard to r e s p o n s e t i m e s that it c a n really b a c k up (other than to try to m a x i m i z e the a m o u n t of bandwidth a v a i l a b l e to the u s e r a n d h o p e for the best).  N e e d l e s s to s a y , this is not a n a c c e p t a b l e w a y of d e a l i n g with this i s s u e if the a p p l i c a t i o n s that a n A S P ' s c u s t o m e r s a r e u s i n g a r e bandwidth intensive.  Connection s p e e d between  a n y two points o n the Internet is d e t e r m i n e d by the s l o w e s t point o n the route c h o s e n by the 28  routers b e t w e e n t h o s e t w o points.  W i t h current t e c h n o l o g y it is not p o s s i b l e to 'prioritize'  d a t a to i n s u r e c u s t o m e r s requiring a high 'Quality of S e r v i c e ' ( Q o S ) .  T h i s m e a n s that  a l t h o u g h other high priority h a s to get there immediately, d a t a like v i d e o c o n f e r e n c i n g h a s to c o m p e t e with lower priority traffic o n t h e net.  T h i s p r o b l e m is b e i n g dealt with b y s e r v i c e s  s u c h a s multi-label protocol switching ( M L P S ) a n d DiffServ.  B o t h a r e a i m e d at allowing  v o i c e a n d d a t a to c o - e x i s t o n the s a m e network, a n d a s author M a r k V a i l puts it:  The emergence of M P L S and DiffServ is enabling new packet-based access solutions that can support and deliver toll-quality voice and data services. M P L S and DiffServ together enable network operators to maintain a guaranteed QoS for IP, legacy voice and data transmissions while providing tools for managing traffic, deploying and monitoring SLAs and provisioning secure data VPNs across IP backbones. Ultimately, M P L S and DiffServ will enable service providers to provision QoS across entire networks. [Vail, Jan. 2000] T h e s e s e r v i c e s a l s o allow f o r a c c e s s quality to b e dialled u p o r d o w n d e p e n d i n g o n client n e e d s , t h u s t e l c o s w o u l d b e a b l e to deliver v a r i o u s g u a r a n t e e d l e v e l s of s e r v i c e a n d bill e a c h c u s t o m e r s e g m e n t for t h e p e r f o r m a n c e it d e m a n d s , o r e v e n bill f o r high Q o S time p e r i o d s in a f a s h i o n similar to the w a y t e l c o s bill f o r long d i s t a n c e [ S k e m e r , 2 0 0 0 ] .  When  these  services b e c o m e available, I S P s  c a n offer  ASPs  a n d their  customers  g u a r a n t e e d S L A s . T h i s will alleviate most c u s t o m e r c o n c e r n s with r e s p e c t to r e s p o n s e time and  reliability a n d t h u s m o r e clients with s e e A S P s a s a v i a b l e alternative to i n - h o u s e  systems  Lack Of Connectivity Standards Between Applications T h e s e drive u p c o s t s f o r a n y IT u s e r o r provider, w h e t h e r the a p p l i c a t i o n s a r e online o r not. E a s y integration w o u l d b e of particular benefit to t h e a g g r e g a t o r o r a n y client looking to o u t s o u r c e only s o m e of its IT application n e e d s .  29  New  enablers: UDDI a n d S O A P  W i t h t h e e m e r g e n c e of b u s i n e s s o v e r the Internet, s e v e r a l b u s i n e s s p r o b l e m s e m e r g e d f o r b u y e r s a n d s e l l e r s of g o o d s a n d s e r v i c e s . N e w s u p p l i e r s a n d b u y e r s w e r e o n t h e Internet, h o w e v e r finding t h e m , b e i n g s u r e of w h o they w e r e a n d identifying w h a t t h e y a r e looking f o r or offering c o u l d b e a n o n e r o u s c h o r e .  N e w industry-wide p a n e l s c a m e into e x i s t e n c e to  d e t e r m i n e h o w to s o l v e t h e s e p r o b l e m s .  Consortiums such a s W 3 C ( W 3 Consortium) and  U D D I . o r g ( U n i v e r s a l D e s c r i p t i o n , D i s c o v e r y a n d Integration) w h i c h is a joint p a n e l f o r m e d b y A r i b a , I B M a n d Microsoft) [Ariba, 2001(a)] took o n t h e s e p r o b l e m s a n d c a m e forward with the U D D I s p e c i f i c a t i o n . U D D I offers b u s i n e s s e s a s t a n d a r d i z e d w a y t o c o n n e c t a n d interact o v e r the Internet. H e r e is h o w U D D I d e f i n e s itself:  To address this challenge, a group of technology and business leaders have come together to develop the Universal Description, Discovery and Integration [UDDI] specification - a sweeping initiative that creates a global, platform-independent, open framework to enable businesses to (1) discover each other, (2) define how they interact over the Internet, and (3) share information in a global registry that will more rapidly accelerate the global adoption of B2B eCommerce. Each incremental advance in Web-enabled commerce has carried deep implications for business processes and organizational culture. UDDI is a major advance - the first cross-industry effort driven by platform providers, software developers, marketplace operators, and eCommerce and business leaders that comprehensively addresses the problems limiting the growth of B2B eCommerce, and that will benefit businesses of all sizes by creating this global, platform-independent, open framework. UDDI is a building block to enable businesses to quickly, easily and dynamically find and transact with one another via their preferred applications. [Ariba, 2001(a)] T h e U D D I s p e c i f i c a t i o n is b a s e d o n the W 3 C ' s a n d Internet E n g i n e e r i n g T a s k F o r c e ' s ( I E T F ) standards s u c h a s X M L (extensible Mark-up Language) and S O A P (Simple Object A c c e s s P r o t o c o l ) , w h i c h w e s h a l l d i s c u s s momentarily.  With the UDDI standard, A S P s have a  f o r m a l i z e d w a y to d e s c r i b e their interface, a n d s e r v i c e s they p r o v i d e .  30  T h i s , c o m b i n e d with the a d v a n c e s in the software d e v e l o p m e n t a r e n a , a l l o w s for the A S P s that w e r e a g g r e g a t e d by providers s u c h a s U S i a n d C o r i o , to n o w b e ' d i s c o v e r e d ' by clients a n d i n c o r p o r a t e d into solutions that a r e built i n - h o u s e with o u t s o u r c e d a p p l i c a t i o n s .  S O A P is a n industry w i d e r e p l a c e m e n t for R e m o t e P r o c e d u r e C a l l ( R P C ) m o d e l s s u c h a s C O R B A a n d C O M (or D C O M ) .  S O A P u s e s no n e w t e c h n o l o g y , a n d is currently s u p p o r t e d  by both A p a c h e a n d IIS w e b s e r v e r s . S O A P u s e s a n http (hypertext transport protocol) a s a transport a n d X M L a s a d a t a descriptor [Microsoft, 2 0 0 1 ] .  Traditionally, w h e n o n e w o u l d  c o n n e c t to a ' s e r v e r f a r m ' o v e r the net, http w o u l d b e u s e d a s the transport a n d then C O M or C O B R A w o u l d t a k e o v e r the transport inside the f a r m .  S O A P , o v e r c o m e s the 'cultural'  r e a s o n s for u s e r s to stay with o n e R P C or the other.  T h i s a l l o w s for a n e w level of  interconnectivity b e t w e e n a p p l i c a t i o n s over a n http c o n n e c t i o n (note that this is not just limited to the Internet itself). T h i s c o m b i n e d with the U D D I f r a m e w o r k a l l o w s for c o m p a n i e s offering 2000(b)].  a p p l i c a t i o n s o v e r the Internet to d y n a m i c a l l y link a n d o p e r a t e t o g e t h e r  [Ariba,  T h i s is a b o o n for c o m p a n i e s offering low criticality, c o m m o d i t y or s o c a l l e d ' o n e  off applications.  Most Software Was Not Developed For The Web M o s t of the offerings that A S P s a r e providing a r e s i m p l y o l d e r a p p l i c a t i o n s with a w e b e n a b l e m e n t layer built onto t h e m [Dering, J a n . 2 0 0 1 ] .  M a n y of the e c o n o m i e s of s c a l e that  A S P s h a v e b e e n p r o m i s i n g w e r e lost in trying to deliver a n d interact with the software in a w a y for w h i c h it w a s not d e s i g n e d . S o f t w a r e v e n d o r s h a v e started retooling their offerings to perform in this n e w e n v i r o n m e n t .  Citrix is the chief p r o p o n e n t of this a p p r o a c h a n d its  s o f t w a r e ports existing software for the net.  M i c r o s o f t is h e a d i n g the other w a y with its . N E T initiative.  . N E T a l l o w s the building of w e b  native a p p l i c a t i o n s that utilize U D D I a n d S O A P to their fullest [Microsoft, N o v . 2 0 0 0 ] . 31  The  . N E T d e v e l o p m e n t e n v i r o n m e n t is d e s i g n e d s o that online s e r v i c e s c a n b e u s e d in a f a s h i o n similar to t h e w a y c l a s s libraries a r e currently u s e d in t h e C + + e n v i r o n m e n t . M a n y c l a i m that . N E T a n d U D D I r e p r e s e n t the m o d e l for future software d e v e l o p m e n t [Kerstetter, F e b . 2 0 0 1 ; F o n s e c a , Nov. 2000; Kucharvy, M a y 2000].  Microsoft is f a c i n g stiff c o m p e t i t i o n f r o m S u n  a n d O r a c l e a s t h o s e v e n d o r s retool their offerings a s well [Kerstetter, F e b . 2 0 0 1 ] .  M a n y a n a l y s t s a r e predicting that t h e major p l a y e r s will h a v e to d o m o r e t h a n just r e p a c k a g e their offerings for w e b s a l e s .  G a r t n e r ' s B e n P r i n g , l e a d A S P r e s e a r c h e r at G a r t n e r , h a s  s t a t e d t h e following:  2001 will be the year of net-native A S P solutions. The year in which the realization becomes apparent that A S P is not really an E R P play at all but just a stepping-stone from an E R P world to an Internet world. Net native applications fly on the current (let alone future) bandwidth in place in a way that Citrixised E R P applications will not be able to match. [Pring, Aug.  2000]  T h i s n e w connectivity is s o m e t h i n g that A S P s ignore at their o w n risk either w a y . O r a c l e is 'going it a l o n e ' in t h e A S P world, offering its software s e r v i c e s directly to t h e c u s t o m e r . T h e p r o b l e m ? Q u o t i n g Art W i l l i a m s , a director at G i g a Information G r o u p :  Some analysts say Oracle should get rid of Business Online altogether and simply use A S P partners. "They need to realize the real A S P opportunity lies in accelerating the uptake of their applications via the use of partnerships," Williams says. "Oracle will never satisfy customers, because they only offer their own applications." [Maselli, Oct.  2000]  O r a c l e is ignoring t w o m a r k e t t r e n d s : 1) In a i n t e r c o n n e c t e d w o r l d t h e u s e r s will s e a r c h for b e s t - o f - b r e e d [Dering, 2000] a n d 2) U s e r s a r e not g o i n g to b e a s interested in b r a n d n a m e s a s they a r e interested in functionality a n d t h e c o n s i s t e n c y of its delivery [Kerstetter, M a r 2001; Sperling, J a n . 20001].  32  A g g r e g a t o r s ignore this threat at their o w n peril a s w e l l .  U D D I / S O A P a n d . N E T type  d e v e l o p m e n t m e t h o d o l o g i e s allow u s e r s to find a n d plug into A S P s directly. A l t h o u g h this is n o w p o s s i b l e , it is the belief of the a u t h o r that U D D I / S O A P will a l l o w u s e r s that a r e h u n g up o n s u n k c o s t s to ' e a s e ' into u s i n g A S P s p i e c e b y p i e c e rather t h a n h a v i n g to i m m e d i a t e l y m a k e the j u m p .  T h i s w o u l d satisfy the ' s u n k c o s t effect', w h i c h s h a l l b e d e f i n e d in C h a p t e r  3, b e c a u s e existing i n v e s t m e n t s w o u l d b e p h a s e d out d u e to their a g e .  T h e s e c h a n g e s in t e c h n o l o g y a n d market a r e c o m i n g a b o u t at the right time to e n a b l e A S P s to b e c o m e a c c e p t e d a s relevant p l a y e r s in the software delivery m a r k e t . T h e c h a n g e that is o c c u r r i n g in c u s t o m e r attitude t o w a r d A S P s is a n interesting o n e a n d it is u n c l e a r what stature the I S V s will h o l d in this n e w m a r k e t .  2.7.  Examples Of ASPs  T h i s s e c t i o n is d e d i c a t e d to looking at c o m p a n i e s out in the m a r k e t t o d a y or in d a y s g o n e by. W e start by looking at the market s h a r e of the larger A S P s .  ASP Market Shares It is v e r y difficult to a c c u r a t e l y track the r e v e n u e s g e n e r a t e d in t h e A S P s p a c e s i n c e t h e r e a r e f e w A S P only c o m p a n i e s a n d A S P r e v e n u e s a r e blurred a s t h e y a r e often b u n d l e d with other s e r v i c e s the c o m p a n y offers [ S C N , 2 0 0 0 ] .  S o in o r d e r to g a u g e m a r k e t s h a r e w e  p r e s e n t two c h a r t s extracted f r o m A S P : A p p l i c a t i o n S e r v i c e P r o v i d i n g by S C N E d u c a t i o n . T h e first r e p r e s e n t s the m a r k e t s h a r e b y the n u m b e r of c u s t o m e r s a n d the s e c o n d s h o w s m a r k e t s h a r e b y n u m b e r of contracts (to a c c o u n t for c u s t o m e r s b u y i n g m o r e than o n e s e r v i c e ) . H e r e w e s e e m a r k e t s h a r e by n u m b e r of c u s t o m e r s  33  Figure 5.  Market Share By Number Of Customers [SCN, 2000]  T h e following figure p r e s e n t s t h e n u m b e r of c o n t r a c t s :  Figure 6.  Market Share By Number Of Contracts [SCN, 2000]  Interpath, A p p l i c a s t , Q w e s t a n d m o r e a r e i n c l u d e d in t h e other c a t e g o r i e s .  Many analysts  attribute t h e s u c c e s s of U S i n t e r n e t w o r k i n g ( U S i is a n application a g g r e g a t o r reseller) to its h a v i n g started a n A S P m o d e l with a c l e a n slate a n d h a v i n g built t h e c o m p a n y o n a pure 34  A S P foundation.  U S i n t e r n e t w o r k i n g ' s chief a d v a n t a g e is big n a m e clients " U S i h a s b e e n  better at penetrating F o r t u n e 5 0 c o m p a n i e s " s a y s B u r n e y of C a h n e r s In-stat [King, S e p t 2000].  U S i ' s i M A P s e r v i c e s h a v e g o n e the o p p o s i t e route of B r e a k a w a y a n d Intacct  b e c a u s e it h a s bought its d a t a c e n t r e s .  U S i offers e n t e r p r i s e a p p l i c a t i o n s f r o m the big  n a m e s s u c h a s Microsoft, O r a c l e a n d P e o p l e s o f t .  U S i f e e l s that in o r d e r to get t h o s e big  n a m e s the c o m p a n y h a s to o w n its d a t a c e n t r e s [King, S e p t 2 0 0 0 ] .  Michele Perry, senior  V P of m a r k e t i n g at U S i , c l a i m s this s u c c e s s is b a s e d o n the following t h r e e p r o m i s e s U S i m a k e s to its clients: " W e g u a r a n t e e what it will c o s t , w h e n you'll get it a n d that we'll k e e p it running for the next three y e a r s , " s h e s a i d in a S e p t e m b e r 2 0 0 0 interview.  In N o v e m b e r of  2 0 0 0 U S i struck a d e a l with Microsoft w h e r e in e x c h a n g e for $ 5 0 million in f u n d i n g U S i a g r e e d to give M i c r o s o f t ' s . N E T m a n a g e d a p p l i c a t i o n s s e r v i c e s platform [ F o n s e c a , 2 0 0 0 ] . U S i ' s fourth quarter l o s s in 2 0 0 0 w a s $ 1 2 million, d o w n a third f r o m Q 3 ' s $ 1 8 million l o s s [Wainewright, F e b 2 0 0 1 ] .  B r e a k a w a y s o l u t i o n s b e c a m e profitable in a hurry, well b e f o r e m o s t of its c o m p e t i t o r s . B r e a k a w a y b e g a n life a s a s y s t e m s integrator a n d h o p e s to c o n t i n u e o n a s a n A g g r e g a t o r ASP.  H o s t i n g r e v e n u e s c o m p r i s e d only 1 5 % of B r e a k a w a y ' s $ 3 2 . 5 million r e v e n u e in the  third quarter of 2 0 0 0 .  " W e ' d like to get r e v e n u e up to 3 0 % to 4 0 % of total r e v e n u e b a s e , "  D e v Ittycheria, s e n i o r V P of the A S P group at B r e a k a w a y [King, S e p t 2 0 0 0 ] . T h e c o m p a n y h a s a g r o s s o p e r a t i n g m a r g i n of 5 5 % a n d h a s d o n e this by k e e p i n g its c o s t structure low. T o d o this, B r e a k a w a y h a s d e c i d e d not to build its o w n d a t a c e n t r e s a n d i n s t e a d l e a s e s s p a c e [King, S e p t 2 0 0 0 ] . little o v e r a y e a r .  T h e c o m p a n y h a s g r o w n f r o m 120 p e o p l e to 9 0 0 e m p l o y e e s in  B r e a k a w a y builds solutions tailored to e a c h c u s t o m e r b a s e d o n software  already developed.  Breakaway claims e a c h new engagement usually requires a 2 0 %  c u s t o m i z a t i o n of the software, h o w e v e r it is u n c l e a r a s to h o w this metric is g a u g e d .  35  Unfortunately, B r e a k a w a y h a s not r e m a i n e d profitable.  Part of its f u n d i n g a g r e e m e n t with  Internet C a p i t a l G r o u p f o r c e d B r e a k a w a y to t a k e o n dot c o r n s that w e r e a l s o f u n d e d b y I C G . T h i s in turn s q u e e z e d out m o r e viable potential c u s t o m e r s that B r e a k a w a y w a s c o n s i d e r i n g . W i t h the dot c o r n s die-out, m a n y of B r e a k a w a y s c u s t o m e r s t u r n e d out to b e insolvent, d r a g g i n g B r e a k a w a y b a c k to the red s i d e of the l e d g e r [ B u s h a u s , F e b . 2 0 0 1 ] .  T h i s is a  p r o b l e m to w h i c h m a n y A S P s attribute p o o r y e a r 2 0 0 0 fourth quarter p e r f o r m a n c e .  O r a c l e a t t e m p t e d the m o v e f r o m I S V to A S P relativity early [ G r e e n b a u m , F e b . 2000] a n d h a s w a v e r e d b e t w e e n maintaining its A S P s t a n c e or m o v i n g to the b a c k g r o u n d a n d taking a m o r e traditional I S V s t a n c e [Maselli, O c t . 2 0 0 0 ] .  M a n y a n a l y s t s w e r e c l a i m i n g that O r a c l e  s h o u l d d r o p its B u s i n e s s O n l i n e division a n d a l l o w A S P s s u c h a s U S i a n d C o r i o to s e l l O r a c l e ' s a p p l i c a t i o n s , h o w e v e r O r a c l e h a s m a d e s e v e r a l large s t e p s in s h o r i n g up its A S P a r m b y restructuring the S L A s a c c o m p a n y i n g its c o n t r a c t s with clients [Maselli, O c t . 2 0 0 0 ] . T h e n e w a g r e e m e n t offers v e r y g e n e r o u s s e r v i c e g u a r a n t e e s to clients that a r e b a c k e d by a 25%  rebate on monthly fees.  In late F e b r u a r y 2 0 0 1 , O r a c l e l a u n c h e d o n l i n e tools for  maintaining online s t o r e s just w e e k s after l a u n c h i n g a n entirely w e b b a s e d c u s t o m e r support application.  T h e s e tools m o v e O r a c l e c l o s e r to providing u s e r s with a n entire suite of  a p p l i c a t i o n s a c c e s s e d only v i a the O r a c l e w e b site, rather t h a n b e h o s t e d by a n A S P .  C o r i o is a n A g g r e g a t o r A S P with a consulting b a c k g r o u n d .  C o r i o offers E R P a p p l i c a t i o n s  f r o m P e o p l e s o f t a n d S A P . B e c a u s e C o r i o c u s t o m e r s w e r e mostly dot c o r n s C o r i o h a s yet to s e e a profit f r o m its A S P s e r v i c e s . H o w e v e r , d e s p i t e the l o s s e s , M a r k V e r b e c k , a n analyst with E p o c h P a r t n e r s , s a y s C o r i o h a s s t a y e d o n track by shifting t o w a r d recurring a p p l i c a t i o n m a n a g e m e n t r e v e n u e while partnering with c o m p a n i e s s u c h a s C a p G e m i n i E r n s t & Y o u n g for i m p l e m e n t a t i o n s e r v i c e s . T h e partnership lets C o r i o win larger c u s t o m e r s , helping b o o s t  36  its a v e r a g e n e w - c u s t o m e r contract to a p p r o x i m a t e l y $ 1 0 0 , 0 0 0 per m o n t h [Maselli, F e b . 2001].  F u t u r e L i n k d e l i v e r s software from E R P software f r o m Citrix (in fact it is a top reseller) a n d h a s p a r t n e r s h i p s with Microsoft a n d G r e a t P l a i n s - recently Microsoft a n n o u n c e d p l a n s to buy G r e a t P l a i n s [Alexander, J a n . 2 0 0 1 ] . H o w e v e r , F u t u r e L i n k ' s future is u n c l e a r . In the fall of 2 0 0 0 , the L a k e F o r e s t C a l i f o r n i a , c o m p a n y a n n o u n c e d minor layoffs, m o s t of w h i c h w e r e to eliminate r e d u n d a n c y c a u s e d by a n a g g r e s s i v e acquisition s t r a t e g y during the p r e v i o u s 18  months.  But  it  h a s yet to  integrate  its c o m p a n i e s effectively  into o n e  cohesive  o r g a n i z a t i o n , a n d it m u s t further e x p a n d its p r e s e n c e o u t s i d e the U n i t e d S t a t e s to s t a y up to s p e e d [Willis, F e b . 2 0 0 1 ] .  O t h e r interesting p l a y e r s include: Q w e s t C y b e r . s o l u t i o n s , a joint v e n t u r e b e t w e e n Q w e s t c o m m u n i c a t i o n s a n d K P M G a s d e s c r i b e d previously. m a r k e t s or s p e c i f i c horizontal a p p l i c a t i o n s .  Intacct f o c u s e s o n s p e c i f i c vertical  Intacct m a i n product is f o c u s i n g o n W e b - b a s e d  a c c o u n t i n g for fast-growing c o m p a n i e s . Intacct is not building d a t a c e n t r e s ; i n s t e a d it is f o c u s i n g its efforts o n c u s t o m e r s e r v i c e . P r i c i n g starts at a relativity low c o s t of $ 5 0 per u s e r m o n t h . E v e n at this price, Intacct m a k e s a n 8 0 % g r o s s m a r g i n .  Interliant h a s b e e n a n A S P  s i n c e b e f o r e the t e r m A S P w a s c o i n e d by I D C - in 1 9 9 4 : Interliant w a s hosting a p p l i c a t i o n s . Interliant is currently E B I T D A negative at negative 19.1 million m a i n l y attributed to a great d e a l of recent capital e x p e n d i t u r e s . H o w e v e r , Interliant h a s g a r n e r e d a w e a l t h of k n o w l e d g e about hosting a n d h a s a w i d e client b a s e . [King, S e p t . 2 0 0 0 ] .  W e round out this list of e x a m p l e s by looking at w h e r e the major p l a y e r s in the m a r k e t fall u n d e r the c a t e g o r i z a t i o n s c h e m e c r e a t e d earlier in this c h a p t e r h o w e v e r this list is by no means exhaustive.  F u r t h e r m o r e , let us s e g m e n t the c u s t o m e r b a s e by the s i z e that the  A S P is targeting: 37  T a b l e 4.  \Client  A S P s B y T y p e A n d Target Client Size  Size SOHO  ASP Type  Medium  Small  \  (Between 100 a n d 1000 employees)  (less than 1 0 0 employees)  Large  (More than 1000 employees)  eBay, U S i  eBay, U S i  eBay, U S i  Javelinx, atyourbusiness.com  Javelinx, M I R U S , RetailAspect, atyourbusiness.com  Javelinx, govHost.com  NetLedger, NetAbacus, Virtual HR, Telecomputing, WebTurbo Tax, eBenefits, Applicast, CoreHarbor, Salesforce.com FutureLink, Corio, Peoplesoft  Telecomputing, Trizetto, employease.com, Learningstation.com, NetAbacus, FutureLink, Breakaway, Applicast, CoreHarbor, Salesforce.com FutureLink, Usinternetworking, m y S A P . c o m , Corio, Applicast, eOnline, Peoplesoft  Telecomputing, Trizetto, employease.com  Focused Solution  Full Vertical Service Provider  Niche Vertical Service Provider  Netledger, WebTurbo Tax  Enterprise Support Services  Usinternetworking, m y S A P . c o m Corio, AristaSoft, Oracle B O , Cyber.solutions, Peoplesoft  N o t e : information f r o m v a r i o u s s o u r c e s throughout bibliography a n d c o m p a n y w e b s i t e s  38  C h a p t e r 3.  The A S P Market  T h i s c h a p t e r p r o v i d e s t h e motivation for e x a m i n i n g t h e A S P p h e n o m e n o n b y looking at t h e m a r k e t in t e r m s of r e v e n u e a n d investment. projections a r e v e r y volatile.  A s the reader shall s e e , the market size  H o w e v e r , all of t h e m a r e fairly large, m a k i n g A S P s of interest  to i n v e s t o r s a n d a c a d e m i c s alike. A l s o highlighted is t h e a p p a r e n t c o n f u s i o n a m o n g s t t h e a n a l y s t s of this market.  T h e c h a p t e r c o n c l u d e s with a n a n a l y s i s of current m a r k e t trends  a n d short-term projections a n d predictions for t h e market.  3.1. How Big Is The Market For Asps? T h i s s e c t i o n e x a m i n e s the s i z e of t h e A S P market in t e r m s of r e v e n u e a n d investment.  It  s h a l l b e c o m e c l e a r that n o n e of t h e 'experts' k n o w what t h e m a r k e t is g o i n g to d o in the short-run.  How Much Revenue Is There For Asps? A u t h o r D a w n B u s h a u s s u m s up the c o n f u s i o n a m o n g industry a n a l y s t s with t h e following s t a t e m e n t : " W h e n it c o m e s to A S P s , t h e only thing a n a l y s t s c a n a g r e e o n is that t h e m a r k e t will c o n t i n u e to g r o w " [ B u s h a u s , S e p t 2 0 0 0 ] . T h e following table w a s c o m p l i e d f r o m v a r i o u s s o u r c e s throughout t h e bibliography a n d p r o v i d e s a s n a p s h o t of projections m a d e in the p a s t with r e g a r d to h o w big t h e A S P m a r k e t w o u l d b e c o m e , in t e r m s of r e v e n u e .  39  Table 5.  The Changing Projections Of ASP Revenue By Major Research Corporations  Year  Pre-November 2000  2001  F o r r e s t e r : $ 2 3 B (old projection)  2002  Giga: $2-$6 B  2003  Gartner: $22.7 B  (in billions)  Post-November 2000  (in billions)  IDC: $2 B  $ 2 3 Billion by 2 0 0 3 o v e r b y s e v e r a l billion - B e n P r i n g , G a r t n e r L e a d A S P Researcher  Forrester: $10 B  Detoitte: $ 4 8 . 5 B  2004  Yankee Group: $19.2 B Gartner: $25 B  Frost & S u l l i v a n : $ 1 2 - $ 1 7 B  2006  IDC: $7.75 B Frost & S u l l i v a n : $ 2 5 B  Gartner: $25.3 B  P r o j e c t i o n s m a d e prior to the s p r i n g 2 0 0 0 m a r k e t correction t e n d e d to b e m u c h higher then p r e d i c t i o n s m a d e afterward. their p r e d i c t i o n s .  H o w e v e r , e v e n after the c o r r e c t i o n , m a n y a n a l y s t s s t o o d by  T h r e e factors c a m e into play in this b e h a v i o u r : 1) A n a l y s t s felt that dot  c o r n s w e r e o v e r v a l u e d a n d the d e p r e s s i o n this c a u s e d in the m a r k e t w a s t e m p o r a r y [Trager, D e c . 2000] 2) A S P s l o o k e d like solid b u s i n e s s m o d e l s w h e n c o m p a r e d to b u s i n e s s e s like S o c k s . c o m that s o l d s o c k s online 3) T h e y did not realize all IT b u s i n e s s e s w o u l d b e painted with the s a m e b r u s h a s dot c o r n s by c u s t o m e r s a n d investors [Trager, D e c . 2 0 0 0 ] .  In  D e c e m b e r of 2 0 0 0 , the A S P m a r k e t projections started to contract drastically b e c a u s e of the fact that the chill o n IT investment a n d p u r c h a s i n g did not lift a n d b e c a u s e talk of a r e c e s s i o n in the U S m a d e a n a l y s t s think the set b a c k s that first s h o w e d up o v e r the s u m m e r w o u l d b e a r o u n d longer then they h a d anticipated [Trager, D e c 2 0 0 0 ] .  40  S i n c e m o s t A S P s a r e fairly y o u n g , they n e e d a c a s h rich e n v i r o n m e n t in o r d e r to s u r v i v e t h e n e g a t i v e c a s h flow start u p p e r i o d . A s a result, m a n y g o o d a p p l i c a t i o n s will, a n d currently are, b e i n g s o l d at well b e l o w what their m a r k e t v a l u e w o u l d b e o t h e r w i s e .  T h i s l o w price  e x i s t s not b e c a u s e t h e of t h e s h o r t c o m i n g s of t h o s e a p p l i c a t i o n s , but b e c a u s e t h e c o m p a n y that c r e a t e d it d i d not h a v e t h e n e e d e d capital to s u r v i v e this c o n t r a c t i o n [ M c C a b e , N o v . 2000].  C o n s i d e r the following s t a t e m e n t s  Frost & Sullivan's Stan Prescott is forthright enough to wish he could get back his hanging curve of a projection. The company is on record predicting $26 billion in 2006 revenue for an industry broadly defined as including hosting and managed services...'Now that we're all seeing a slowdown in the economy, I might want to pull that back a little bit.' Prescott says. T m seeing numbers tossed around for 2004. The high numbers that are realistic are $17 billion, and the low numbers are around $12 billion.' [Trager, Dec. 2000] T h e r e is a p p a r e n t c o n f u s i o n e v e n at G a r t n e r : " P r i n g w a s q u o t e d last M a r c h [of 2000] a s s a y i n g d i s a p p o i n t i n g d e m a n d m a d e h i s prediction of $ 2 2 . 7 billion in A S P r e v e n u e s b y 2 0 0 3 o v e r b l o w n b y s e v e r a l billion.  B u t in A u g u s t [of 2 0 0 0 ] , D a t a q u e s t c a m e right b a c k with a  $ 2 5 . 3 billion target for 2 0 0 4 " [Trager, D e c . 2000]  F o r t h e majority of 2 0 0 0 , G a r t n e r G r o u p repeatedly m a d e t h e following projections:  Of the  current 4 8 0 A S P s , 6 0 % (288) will b e out of b u s i n e s s b y the e n d of 2 0 0 1 , 2 0 % will survive a s p r o v i d e r s of A S P p r o d u c t s o r vertical s e r v i c e s in 2 0 0 4 , 1 6 % W i l l b e b o u g h t o u t b y a n o t h e r A S P o r b e out of b u s i n e s s b y 2 0 0 4 , 4 % (20) will still b e in b u s i n e s s a s full-service retail A S P s in 2 0 0 4 . "Industry w a t c h e r s g e n e r a l l y a g r e e that the A S P b u s i n e s s m o d e l is worth t h e h y p e , but they c a u t i o n that there is g o i n g to b e a s h a k e - o u t s o o n that will l e a v e only a f e w s e r v i c e p r o v i d e r s s t a n d i n g . " [ B u s h a u s , N o v . 2000]  41  T h i s is c o m b i n e d with a currently  lukewarm  customer  r e s p o n s e to the industry  "An  electronic a u d i e n c e poll during the S t a t e of the Industry p a n e l [in S e p t e m b e r of  2000]  indicated that 6 0 p e r c e n t of the s e v e r a l h u n d r e d solution p r o v i d e r s in a t t e n d a n c e  were  actively d e v e l o p i n g a n A S P strategy. H o w e v e r , only 31 p e r c e n t s a i d they v i e w e d the A S P m o d e l a s 'extremely important' to their b u s i n e s s e s currently." [Longwell, 2000]  Or consider  the d a m n i n g with faint p r a i s e l a n g u a g e G o l d m a n S a c h s a n a l y s t G r e g o r y G o u l d u s e s in a note to clients o n newly public A S P C o r i o , w h o s e s t o c k t r a d e s a r o u n d $ 1 1 , three dollars b e l o w its late J u l y offering price. " A l t h o u g h the A S P opportunity m a k e s s e n s e , w e believe it is n e c e s s a r y to e x e r c i s e c a u t i o n w h e n a s s e s s i n g the s p e c i f i c b u s i n e s s m o d e l s , m a n y of w h i c h a r e y o u n g a n d likely f l a w e d . " [ L a s h i n k s y , 2000]  M a n y potential c u s t o m e r s a r e waiting o n the s i d e l i n e s w a t c h i n g to s e e w h o will survive this s t a g e of the  market.  However Mark Chestnut, who  is M i c r o s o f t ' s director  business  d e v e l o p m e n t efforts with A S P s a n d I S P s , h a d this to s a y in a r e c e n t article in T h e Net E c o n o m y : " C u s t o m e r s a r e d e l a y i n g p u r c h a s e d e c i s i o n s b e c a u s e t h e y don't k n o w w h e t h e r the A S P s will s u r v i v e . . . A S P s aren't getting e n o u g h c u s t o m e r s to s u r v i v e " [Trager,  Feb  2 0 0 1 ] . H o w e v e r , the t e l c o s , a n a l y s t s , a u t h o r s a n d I S V s all maintain that this is the software delivery m o d e l of the future.  Who Is Investing And How Much? F i g u r e 7 s h o w s V C ( V e n t u r e Capital) investment in c o m m u n i c a t i o n s s t a r t u p s :  42  F i g u r e 7.  C o m m u n i c a t i o n s Startups Venture F u n d i n g B y Industry S e g m e n t  1Q2000 8.1%  2Q2000  38.6%  45.6% 35.9% ED Equipment and infrastructure • ASPs BESPs  S o u r c e : E a s t e r n M a n a g e m e n t G r o u p [Blum, S e p t . 2000]  T h e s e c h a r t s r e p r e s e n t V C investment in c o m m u n i c a t i o n s startups.  E v e n t h o u g h t h e chart  o n t h e right r e p r e s e n t s four t i m e s t h e a m o u n t o n of capital of that o n t h e left, a s a p e r c e n t a g e A S P s h a v e lost g r o u n d . broadband  delivery  equipment.  E q u i p m e n t a n d infrastructure  ESPs  (Emerging  i n c l u d e network a n d  Service Providers)  are essentially  C o m p e t i t i v e L o c a l E x c h a n g e C o m p a n i e s ( C L E C s ) , providing multiservice a c c e s s s e r v i c e s a n d integrated providers s u c h a s in-Building s e r v i c e providers  E a s t e r n M a n a g e m e n t G r o u p , w h i c h monitors t e l e c o m industry V C i n v e s t m e n t a s part of its V e n t u r e C o m p a s s s e r v i c e reports V C investment in A S P s actually d e c l i n e d f r o m $ 1 . 5 4 billion in t h e first quarter to just u n d e r $1.21 billion in t h e s e c o n d quarter.  Meanwhile,  investment in competitive s e r v i c e providers i n c r e a s e d nearly fourfold o v e r t h e s a m e p e r i o d , f r o m $ 4 4 6 million to m o r e than $1.81 billion.  F r o m a n interview with R o b e r t S a u n d e r s , a n  analyst at E a s t e r n M a n a g e m e n t , J o n a t h a n B l u m reported t h e following:  43  'There is no question that the A S P sector has taken a hit,' says Saunders. 'Though A S P deals are still getting done, the V C community clearly feels that the loss of equity valuation for ASPs and the fewer IPOs coming to market have eroded the value of these businesses. The spring [2000] correction was the clear cause...whether the trend away from ASPs holds over the long run remains to be seen. I would not count ASPs out,' Saunders says. 'But clearly the market is cycling away from those businesses as of now.' [Blum, Sept 2000] M a n y industry w a t c h e r s a r e s p e c u l a t i n g that t h e falling s h a r e p r i c e s of A S P s m a y allow b i g t e l e c o m s like A T & T , W o r l d C o m a n d Sprint (all of w h o m h a v e g o n e o n r e c o r d stating they w o u l d not b e c o m e A S P s ) to b u y A S P s at w h o l e s a l e p r i c e s [ B u s h a u s , D e c 2 0 0 0 ] . T h e m a i n p u s h for b u y i n g A S P s is that t h e b a s i c hosting offered b y m o s t t e l c o s is q u i c k l y b e c o m i n g a c o m m o d i t y , with rapidly shrinking m a r g i n s a n d alternative, n e w s o u r c e s of r e v e n u e a r e likely being considered.  B e c a u s e A T & T a n d Sprint a r e w e a k in w e b hosting s e r v i c e s , they w o u l d find A S P s s u c h a s USi  attractive  b e c a u s e it o w n s its o w n D a t a C e n t r e s .  W o r l d C o m , w h i c h is a l r e a d y  e s t a b l i s h e d a s a t o p hosting provider through its U U N e t s u b s i d i a r y a n d D i g e x w o u l d likely prefer A S P s s u c h a s B r e a k a w a y or C o r i o b e c a u s e it d o e s not n e e d to b u y m o r e d a t a c e n t r e s , a n d both of t h e s e A S P s l e a s e third party d a t a c e n t r e s [ B u s h a u s , D e c 2 0 0 0 ] .  A l t h o u g h rarely m a k i n g a n y direct c a s h i n v e s t m e n t s , I n d e p e n d e n t S o f t w a r e V e n d o r s ( I S V s ) a r e m a k i n g a significant investment in product r e - e n g i n e e r i n g a n d training ( s e e m y s a p . c o m , Microsoft's . N E T , S u n ' s Suntone).  T h e y a r e a l s o lending their n a m e s , a n d h e n c e their  credibility, to startup A S P s that h a v e p a s s e d their certification p r o g r a m s .  3.2. Market Trends  W e start b y e x a m i n i n g w h a t a p p l i c a t i o n s clients a r e s e e k i n g . C o m m u n i c a t i o n s , f i n a n c i a l s a n d e - c o m m e r c e a r e t h e m o s t c o m m o n t y p e s of a p p l i c a t i o n s b e i n g c o n t r a c t e d f r o m A S P s 44  a c c o r d i n g to a n A S P Industry C o n s o r t i u m c u s t o m e r tracking s u r v e y r e l e a s e d o n F e b r u a r y 1 2001 [ N e w c o m b , F e b 2 0 0 1 ] .  s t  T h i s s u r v e y w a s of 1 3 7 s e n i o r a n d e x e c u t i v e level m a n a g e r s  a n d IT p r o f e s s i o n a l s in t h e U . S . that h a v e p u r c h a s i n g authority for or involvement g e n e r a l office productivity or software.  with  A l l h a d indicated that t h e y w e r e currently u s i n g or  h a d p l a n s to u s e t h e s e r v i c e s of a n A S P within t h e next y e a r .  H e r e is a table outlining t h e  results (note that p e r c e n t a g e s d o not a d d up to o n e h u n d r e d s i n c e multiple a n s w e r s w e r e allowed).  T a b l e 6.  A p p l i c a t i o n s B y Percentage Intending T o B u y F r o m An A S P  Application Type  Percentage  C o m m u n i c a t i o n s ( s u c h a s email)  33.6%  Financials a n d Accounting  24.8%  E - c o m m e r c e ( c a t a l o g s a n d transactions)  21.2%  CRM  19%  Education a n d Training  18.2%  Human Resources  13.1%  Project M a n a g e m e n t  9.5%  Sales Force Automation  8.8%  P e r s o n a l Productivity (Office, word)  8.8%  Enterprise R e s o u r c e Planning  3.6%  Virtual trading c o m m u n i t i e s ( E - H u b s )  3.6%  Supply Chain Management  < 1%  T h e s e n u m b e r s a r e g i v e n here to provide t h e r e a d e r with a n a p p r e c i a t i o n of t h e a p p l i c a t i o n s that clients w o u l d likely s e e k f r o m a n A S P . In this s e c t i o n w e shall c o n s i d e r w h a t impact t h e particulars of t h e application will h a v e o n c u s t o m e r a d o p t i o n . W e s h a l l look at t h e s e r v i c e s  45  f r o m the following a s p e c t s b e c a u s e they s e e m to b e the critical f a c t o r s s h a p i n g client interaction with the software a n d client p u r c h a s i n g d e c i s i o n s  What Is The Economic Outlook For Asps? A S P s l e a r n e d a lot in 2 0 0 0 about h o w this m a r k e t will o p e r a t e . h a v e c h a n g e d their billing structures.  In r e s p o n s e , m a n y A S P s  B o t h U S i a n d C o r i o h a v e started a s k i n g c u s t o m e r s to  p a y for part of the c o s t of software l i c e n s e s up front [Kerstetter, M a r c h 2 0 0 1 ] .  USi has  f i n i s h e d its three d a t a c e n t r e s a n d is projected to b e profitable by Q 4 2 0 0 1 .  C o r i o is  projected to b e profitable by Q 4 2 0 0 2 . a v o i d e d lay-offs [ B u s h a u s , F e b . 2 0 0 1 ] .  Of the top A S P s , o n l y C o r i o a n d O r a c l e h a v e H o w e v e r , m o s t a n a l y s t s b e l i e v e 2001 will be the  y e a r A S P s round the b e n d a n d start to g r o w in t e r m s of m a r k e t p e n e t r a t i o n , r e v e n u e a n d profitability [ B e r n a r d , F e b 2 0 0 1 ; K o l b a s u k M c G e e , J a n 2 0 0 1 ] . W h y is this the c a s e ?  Firstly, the p r o b l e m s that dot c o r n s c a u s e d A S P s a r e starting to p a s s a n d A S P s a r e no longer relying o n dot c o r n s a s potential c u s t o m e r s [ B u s h a u s , F e b . 2 0 0 0 ] .  A s mentioned,  s o m e A S P s got r o p e d into h a v i n g to t a k e o n dot c o r n s a s part of their f i n a n c i n g a g r e e m e n t s - B r e a k a w a y is a prime e x a m p l e of this - a n d not only did they l o s e p a y m e n t s w h e n the dot c o r n s went out of b u s i n e s s , they a l s o lost c u s t o m e r s that h a d to b e t u r n e d a w a y [ B u s h a u s , Feb. 2000].  H e n c e , A S P s a r e turning to traditional b u s i n e s s e s , i.e. 'brick a n d mortar', a s  n e w c u s t o m e r s a n d a r e activity jettisoning dot c o r n s a s a drain o n r e s o u r c e s [ B u s h a u s , F e b . 2001].  S e c o n d l y , A S P s a r e o n e of the f e w a r e a s in IT that s t a n d to benefit f r o m the uncertainty that h a s h u n g o v e r the North A m e r i c a n e c o n o m y at the e n d of 2 0 0 0 a n d the start of 2 0 0 1 . T h e reasons?  "With  executives  nervous  about  committing  large  investments  and  large  i n v e s t m e n t s a n d m a n y capital s p e n d i n g b u d g e t s f r o z e n , e n t e r p r i s e s will f a v o u r the drip-feed, 46  p a y - a s - y o u - g o , A S P s u b s c r i p t i o n m o d e l . " [Wainewright,  March 2001].  A s if to b a c k this  analyst up, Q w e s t C y b e r . s o l u t i o n s l a n d e d a $ 2 2 million dollar d e a l with E x p a n e t s . T h i s t o p s the p r e v i o u s r e c o r d - b r e a k i n g d e a l for the A S P industry of $ 1 8 million (also by Q w e s t C y b e r . s o l u t i o n s ) with R e d b a c k N e t w o r k s .  O t h e r f a c t o r s that a r e bolstering the long term  viability of the m a r k e t is that 9 2 % of the c u s t o m e r s of A S P s h a v e reported that they a r e satisfied with the s e r v i c e they a r e b e i n g provided with a c c o r d i n g to a n A S P Industry C o n s o r t i u m s u r v e y [ N e w c o m b , F e b 2001].  T h e m a i n point b e i n g m a d e is that the future for A S P s is not a s g l o o m y a s the p r e s e n t . S a n f o r d B r o w n , v i c e president a n d g e n e r a l m a n a g e r of A T & T ' s h o s t i n g s e r v i c e s , f r a m e d it nicely w h e n he s a y " T h e r e ' s b e e n no d e n y i n g the trough of d i s i l l u s i o n m e n t , but d e s p i t e the tough  t i m e s , the future really d o e s look quite  promising.  T h e b u s i n e s s i s s u e s that  c o m p a n i e s a r e f a c i n g - they're not g o i n g to g o a w a y " [Koblentz, F e b . 2 0 0 1 ] .  Changing Customer Attitudes C u s t o m e r s a r e starting to c h a n g e the w a y s in w h i c h they interact with A S P s . A s m e n t i o n e d in C h a p t e r 2 , A S P s represent a f u n d a m e n t a l c h a n g e in v i e w i n g s o f t w a r e a s a s e r v i c e a n d not a product.  T h i s h a s s o m e rather interesting c o n s e q u e n c e s . Firstly, s o f t w a r e is starting  to follow a utility m o d e l [ G r u h n , J u n e 2 0 0 0 ] .  T h i s c o m m o d i t i z a t i o n of s o f t w a r e h a s b e e n  noted by other a u t h o r s a s well [Sperling 2 0 0 0 , Kerstetter 2 0 0 1 ] .  C u s t o m e r s a r e following a  p r o g r e s s i o n f r o m product to s e r v i c e a n d then s e r v i c e to utility.  W i t h a s e r v i c e , m e t h o d of  delivery is a n important factor, h o w e v e r u n d e r a utility m o d e l , the only c o n c e r n is delivery [Gruhn, J u n e 2000].  T o d a y , c u s t o m e r s p e r c e i v e the hosting m o d e l a s a n e w type of  a p p l i c a t i o n s delivery m o d e l .  J u s t a s in the p a s t they a r e still activity e n g a g e d in s e l e c t i n g  the s p e c i f i c application they want to u s e .  In a utility m o d e l the c u s t o m e r ' s p e r c e p t i o n s ,  e x p e c t a t i o n s a n d investment style c h a n g e s .  47  C u s t o m e r s d o not t a k e o w n e r s h i p of the  s o f t w a r e or t h e infrastructure t h e a p p l i c a t i o n s t h e a p p l i c a t i o n s runs o n . Instead, t h e y b u y the functionality a n d s e r v i c e s it p r o v i d e s a n d h a v e little c o n c e r n a b o u t h o w that functionality is d e l i v e r e d [ G r u h n , J u n e 2 0 0 0 ] .  C o n s i d e r t h e following:  USi, one of the pioneers of hosted applications, reports a marked change in the way customers are inquiring about their offerings. Last year, customer inquiries were always couched in terms of the branded application (e.g., "I want to talk to you about hosting Siebel software"). Today, only 25% of inquiries mention the software brand. More than half (52%) simply asks about USi's financial, sales-force automation or ecommerce services. U S i sees this customer behavior change as an indication that customers are accepting the hosted paradigm and are seeking out the company based on its expertise rather than the brand of application; but this also suggests a longerterm change in customer behavior. Customers are disconnecting from the application brand and looking at software as a service that provides them with desired functionality. From this point, it's only a small to disregarding the application's underlying hardware, operating systems and middleware. And it's yet another small step for customers to begin looking at these solutions as a utility that delivers desired functionality. [Gruhn, June 2000] D a t a mining a n d O L A P functionality r e q u i r e m e n t s .  f o l l o w e d this s a m e  route a n d a r e n o w c o n s i d e r e d  standard  Microsoft s h i p s S Q L S e r v e r 2 0 0 0 with O L A P a n d d a t a mining  f e a t u r e s a s part of t h e D B M S .  O n e author w o r r i e s that A S P s m a y m o v e to b e i n g c o m m o d i t y  s o q u i c k l y that t h e y m a y n e v e r b e a b l e to r e c o v e r their initial i n v e s t m e n t s [Sperling, 2 0 0 1 ] . U n l i k e other utilities, A S P s w o u l d not h a v e a stable c o m m o d i t y to deliver to t h e c u s t o m e r .  This concludes Chapter 3.  In c h a p t e r 4 a n analytic f r a m e w o r k to d e t e r m i n e t h e factors in  A S P s u c c e s s will b e c r e a t e d .  48  C h a p t e r 4. A S P F r a m e w o r k : D e c i d i n g A S P T y p e  T h i s c h a p t e r s e t s forth a n analytic f r a m e w o r k for explaining current t r e n d s in the A S P market s p a c e a n d for m a k i n g predictions a s to the s u c c e s s of v a r i o u s p l a y e r s in that market ( s u c c e s s of c o u r s e b e i n g d e f i n e d in t e r m s of c o n t i n u e d b u s i n e s s o p e r a t i o n a n d growth of both r e v e n u e a n d profit).  S i n c e w e a r e attempting to predict o u t c o m e s that h a v e not yet  o c c u r r e d , o u r f o r e c a s t s a r e b a s e d o n a s i m p l e c o n c e p t u a l a n a l y s i s rather than o n a s y s t e m a t i c e m p i r i c a l study. A c o n c l u s i v e testing of this m o d e l a n d the p r e d i c t i o n s m a d e will therefore require further empirical a n d analytical work.  N e v e r t h e l e s s , s o m e e x a m p l e s that  w o u l d s e e m to support the predictions m a d e a r e given w h e r e v e r p o s s i b l e .  T h e full a n a l y s i s of the m o d e l is s p r e a d o v e r C h a p t e r s 4 a n d 5. d e c i s i o n a s to w h e t h e r or not to b u y the s e r v i c e s of a n A S P .  C h a p t e r 4 e x a m i n e s the  F u r t h e r m o r e , if t h e s e r v i c e s of  a n A S P a r e g o i n g to b e p u r c h a s e d , f r o m what type of A S P w o u l d t h e y b e p u r c h a s e d . H o w e v e r C h a p t e r 4 f o c u s e s m o r e o n the interplay of f a c t o r s in p r o d u c i n g the type d e c i s i o n t h a n it d o e s the d e c i s i o n a s to w h e t h e r or not to hire a n A S P . In C h a p t e r 5 w e f o c u s m o r e o n the f o r c e s p u s h i n g a client t o w a r d , or a w a y f r o m , b u y i n g s e r v i c e s f r o m a n A S P m o r e than w e h a v e in this c h a p t e r by a review of the literature a n d then w e u s e that literature review to refine the f i n d i n g s of this c h a p t e r . O n c e this is c o m p l e t e d w e s h a l l h a v e m o d e l e d the entire d e c i s i o n p r o c e s s b e h i n d the client's c h o i c e s . W e c a n t h e n f o c u s u p o n t h e s t r a t e g i e s that A S P s s h o u l d a d o p t in light of this d e c i s i o n p r o c e s s a s w e d o in C h a p t e r 6.  4.1.  This  Economic Concepts Used In ASP Framework  section  i n t r o d u c e s the  economic theories  p r e s e n t e d in t h e next s e c t i o n is partially b a s e d .  49  upon which the  analytical  framework  O n e of t h e m a j o r e c o n o m i c c o n c e p t s  forming  t h e b a s i s for this f r a m e w o r k  Williamson [Williamson,  is t r a n s a c t i o n c o s t theory a s e x p l o r e d b y O l i v e r  1 9 7 5 ; W i l l i a m s o n , 1979].  Market a n d hierarchy theories are  p r e s e n t e d . W e provide t h e r e a d e r with a brief introduction to t h e s e t h e o r i e s s o that t h e A S P framework model can b e more easily understood.  Oliver  Williamson's  Transaction  Cost  Economics  T r a n s a c t i o n c o s t s a r e c o n s i d e r e d b y e c o n o m i s t O l i v e r W i l l i a m s o n to b e t h e " e c o n o m i c equivalent of friction in p h y s i c a l s y s t e m s " [ W i l l i a m s o n , 1985].  Englander quotes him a s  stating:  A Transaction occurs when a good or service is transferred across a technologically separable interface. One stage of processing or assembly activity terminates, and another begins. A well-working interface, like a well-working machine, is one where these transfers occur smoothly. In mechanical systems, we look for frictions: Do the gears mesh? Are the parts lubricated? Is there needless slippage or other loss of energy? The economic counterpart of friction is transaction cost: Do the parties to the exchange operate harmoniously, or are there frequent misunderstandings and conflicts that lead to delays, breakdowns, and other malfunctions? [Englander, 1988] F o r o u r p u r p o s e s t r a n s a c t i o n c o s t s a r e t h e c o s t s a s s o c i a t e d with 1) d e t e r m i n i n g t h e availability of s e r v i c e s 2) determining negotiating a contract. uncertainty  about  relevant p r i c e s of s e r v i c e s a n d 3) t h e c o s t s of  E n v i r o n m e n t a l factors s u c h a s c o m p l e x i t y of a g o o d o r s e r v i c e a n d  costs  increase  transaction  costs  [Williamson,  informational b a g g a g e must b e i n c l u d e d with e a c h t r a n s a c t i o n .  1975] s i n c e  more  Transaction costs have  b e e n u s e d in t h e a n a l y s i s of hierarchical v e r s u s m a r k e t structures in intra a n d c r o s s firm interactions [ W i l l i a m s o n , 1 9 7 5 , E n g l a n d e r , 1 9 8 8 ; M a l o n e 1987].  In t h e following s e c t i o n ,  factors d e t e r m i n i n g t h e s u c c e s s of A S P s will b e a n a l y s e d in light of t r a n s a c t i o n a l c o s t s , w h i c h a r e c l o s e l y related to W i l l i a m s o n ' s c o n c e p t of t h e s a m e n a m e . It is o u r a r g u m e n t that  50  t r a n s a c t i o n c o s t s a r e a f u n d a m e n t a l f o r c e in the b u y e r ' s d e c i s i o n s a s to w h e t h e r or not to contract the s e r v i c e s of a n A S P ( s ) a n d play a p r o f o u n d role in the c h o i c e of A S P s .  A r g u a b l y , A S P s lower t r a n s a c t i o n c o s t s for their clients in at least two w a y s . O n e , they h a v e s p e c i f i c k n o w l e d g e of the s e r v i c e s they a r e offering. T w o , b e c a u s e limited h u m a n r e s o u r c e s a r e b e i n g s p r e a d a c r o s s m a n y u s e r s , the c o s t of t h o s e a s s e t s attributed to e a c h t r a n s a c t i o n is l o w e r e d .  In [ M a l o n e , 1988] the a u t h o r s put forth a n analytic f r a m e w o r k in a n attempt to predict w h e t h e r n e w information t e c h n o l o g i e s will c a u s e the c o o r d i n a t i o n of e c o n o m i c activities, w h i c h a r e a d j a c e n t s t e p s in the v a l u e c h a i n .  T h e y state that e c o n o m i e s h a v e two b a s i c  m e c h a n i s m s for c o o r d i n a t i o n of the flow of g o o d s a n d s e r v i c e s t h r o u g h t h e s e a d j a c e n t s t e p s : m a r k e t s or h i e r a r c h i e s . supply and d e m a n d forces.  M a r k e t s c o o r d i n a t e the flow of g o o d s a n d s e r v i c e s through W h e n the buyer of g o o d s a n d s e r v i c e s c o m p a r e s its m a n y  p o s s i b l e s o u r c e s a n d m a k e s the d e c i s i o n b a s e d o n their o w n criterion, a m a r k e t structure is realized. steps  H i e r a r c h i e s , o n the other h a n d , c o o r d i n a t e the flow of m a t e r i a l s t h r o u g h a d j a c e n t  by controlling  predetermined  and  suppliers.  directing  the  flow of  g o o d s or  services through  M a n a g e r i a l d e c i s i o n s , not the interaction  a  of m a r k e t  set  of  forces,  d e t e r m i n e the nature of hierarchical interactions. In [ M a l o n e , 1988] a f r a m e w o r k stating that internal o r g a n i z a t i o n a l structures f a v o u r m a r k e t s w h e n p r o d u c t - d e s c r i p t i o n c o m p l e x i t y a n d a s s e t specificity a r e both low; hierarchical structures a r e f a v o u r e d w h e n t h e s e f a c t o r s a r e high  (both  factors  are  explained  in  greater  detail  further  on  in this  section).  The  o r g a n i z a t i o n a l f o r m likely for the other two p o s s i b l e c o m b i n a t i o n s of t h e s e f a c t o r s d e p e n d i n g u p o n w h i c h f o r c e is d o m i n a n t . T h i s is p r e s e n t e d graphically in t h e following figure  51  Attributes Affecting The Form Of An Organization  Figure 8.  s a  Hierarchy  o  Market  Low  High  Asset Specificity  In the f r a m e w o r k put forward in this t h e s i s , the c o n c e p t of a s s e t specificity is a l s o u s e d (and its definition is p r e s e n t e d in the following section) h o w e v e r w e a r e a p p l y i n g a similar logic a s [ M a l o n e , 1988] to t h e A S P m a r k e t s p a c e .  H o w e v e r ' c o m p l e x i t y of p r o d u c t d e s c r i p t i o n ' is  r e p l a c e d with the b r o a d e r c o n c e p t s of t r a n s a c t i o n c o s t s a n d s w i t c h i n g c o s t s .  W e shall  r e f e r e n c e this f r a m e w o r k a n d u s e logic similar to this in o r d e r to e x p l a i n s o m e o c c u r r e n c e s in the A S P d o m a i n t o d a y .  W e refine the c o n c e p t s of H i e r a r c h y a n d M a r k e t in the next  s e c t i o n . R a t h e r than a p p l y i n g t h e m to the structure of a n o r g a n i z a t i o n , w e s h a l l b e a p p l y i n g similar c o n c e p t s to the structure of the A S P market.  4.2.  ASP Framework  In this s e c t i o n w e a p p l y a n d a d a p t the prior theory to d e t e r m i n e the major f o r c e s in d e t e r m i n i n g t h e s u c c e s s of a n A S P . W e s h a l l t h e n attempt to build a f r a m e w o r k a r o u n d t h e s e f o r c e s a n d b a s e d o n this w e shall try to d e t e r m i n e w h e n a n A S P will b e u s e d , a n d if y e s , w h i c h A S P m o d e l is m o s t appropriate. 52  O u r m o d e l is b a s e d o n four input v a r i a b l e s : t r a n s a c t i o n a l c o s t s , specificity, criticality a n d substitutability.  T h e s e v a r i a b l e s a r e u s e d to justify o u r p o s s i b l e o u t c o m e s , w h i c h a r e  d e f i n e d in t h e following s e c t i o n .  Outcome Variable O u r e q u i v a l e n t of a ' M a r k e t ' structure a s d e s c r i b e d in F i g u r e 8, in t h e A S P d o m a i n w o u l d b e a s p a c e w h e r e client relationships with A S P s w o u l d b e similar to a "spot market."  T h i s is  w h e r e c l i e n t s c o u l d readily switch b e t w e e n A S P s a n d readily c o m b i n e a n d integrate their s e r v i c e s . It is o u r theory that t r a n s a c t i o n c o s t s a n d specificity w o u l d b e low for this to b e t h e case.  U n d e r t h e s e c o n d i t i o n s it is o u r a r g u m e n t that clients will b u y s e r v i c e s f r o m v a r i o u s  s o u r c e s , a s suits their n e e d s , a n d link t h e m together if t h e c o s t of d o i n g this is low.  T h e c h o i c e of A S P type (or not to u s e a n A S P ) o n the part of t h e client is t h e d e p e n d e n t v a r i a b l e in o u r f r a m e w o r k , a n d is what t h e client will d e c i d e b y m e a s u r i n g their n e e d s a g a i n s t o u r input v a r i a b l e s d e f i n e d in t h e next s e c t i o n . g r a p h i c a l l y in t h e following figure:  53  W e r e p r e s e n t o u r stratification  Figure  A S P T y p e Matrix  9.  o N O  Q2  Q3  Q1  Q4  s o  co  a.  01  as o •C a) >  Niche  Enterprise  Span of Services  In this figure e a c h quadrant r e p r e s e n t s a n A S P t y p e a s c r e a t e d in T a b l e 1. N o t r e p r e s e n t e d in F i g u r e 9 is t h e d e c i s i o n not to u s e a n A S P . W e s h a l l u s e t h e following c o d e s to act a s s h o r t h a n d for e a c h q u a d r a n t / A S P type:  T a b l e 7.  C o d e s F o r A S P T y p e U s e d In A S P F r a m e w o r k  Quadrant  Code  F o c u s e d Solution  Q1  NV  Niche V S P  Q2  NH  ESS  Q3  EH  Full V S P  Q4  EV  W i l l not u s e a n A S P  N/A  XX  A S P T y p e o r D e c i d e d not to u s e an A S P  54  Let u s e x a m i n e the impact the clients c h o i c e a s to w h e t h e r or not to u s e a n A S P or u s e a n A S P of type X further b e f o r e w e c o n t i n u e with the construction of o u r m o d e l .  In this m o d e l , if m o s t clients f a v o u r F o c u s e d S o l u t i o n s in the long run, then F o c u s e d S o l u t i o n s w o u l d b e c o n s i d e r e d the " s u c c e s s f u l " m o d e l . A S P s in N H , E H a n d E V w o u l d not be s u c c e s s f u l in this situation, b e c a u s e the client's c h o i c e w o u l d effectively cut t h e m out of t h e v a l u e c h a i n . If clients f a v o u r N i c h e V S P s , t h e n E S S a n d F u l l V S P s a r e still u n s u c c e s s f u l models. ASPs.  H o w e v e r F o c u s e d S o l u t i o n s c o u l d still exist by selling their s e r v i c e s to the N H S i m i l a r l y for long run c h o i c e s of E H a n d E V , b e c a u s e E V is t h e full s e r v i c e V S P  m o d e l , it is u n c l e a r w h e t h e r or not they c o u l d d o m i n a t e all vertical industries.  H o w e v e r , if  m o s t clients f a v o u r option X X , then N V , N H , E H a n d E V a r e all c o n s i d e r e d u n s u c c e s s f u l .  A s the c o s t of finding, c o n n e c t i n g , coordinating a n d s e r v i c e c u s t o m i z a t i o n s of a n e w A S P d e c r e a s e s (i.e. lower t r a n s a c t i o n a l c o s t s a n d specificity), clients will g o f r o m a m o d e w h e r e they d o not u s e a n A S P to interacting with the m i n i m u m n u m b e r of A S P s (i.e. u s e a full s e r v i c e V S P or E S S in q u a d r a n t s 3 or 4) t o w a r d interacting with a n u m b e r of N i c h e V S P s (NH).  At the e x t r e m e they w o u l d c o m b i n e the s e r v i c e s of a n u m b e r of F o c u s e d S o l u t i o n s  ( N V or N V a n d N H ) . S o m e A S P s (particularly U S i w h i c h h a s a d o p t e d t h e . N E T f r a m e w o r k [ F o n s e c a , N o v . 2000]) w o u l d s e e m to b e h e d g i n g the r i s k s of uncertainty by offering both E S S and F o c u s e d Solutions, hence spanning NV, N H and E H .  N V , a n d to a s o m e w h a t l e s s e r extent N H , c o r r e s p o n d to the " m a r k e t " in t h e a n a l y s i s b y [ M a l o n e , 1988] a n d w o u l d b e c h a r a c t e r i z e d by free interaction b e t w e e n the client a n d n u m e r o u s A S P s , with N V b e i n g a pure market w h e r e clients directly c o m b i n e t h e s e r v i c e s of m a n y F o c u s e d S o l u t i o n s . T h i n k i n g of a n application a s a collection of functionalities, with f(i) r e p r e s e n t i n g a u n i q u e p i e c e of functionality a n d A(i) r e p r e s e n t i n g a n a p p l i c a t i o n (in this r e p r e s e n t a t i o n T is a n indexing v a l u e ) , this w o u l d b e r e p r e s e n t e d g r a p h i c a l l y a s f o l l o w s : 55  Figure 10.  Functionalities Combined Into An Application By Client  C o n n e c t i o n s to the functionalities p r o v i d e d by v a r i o u s F o c u s e d S o l u t i o n s a n d a r e brought t o g e t h e r by the client to f o r m application A(1).  T h i s implies that t h e client is r e s p o n s i b l e for  the integration of v a r i o u s software functionalities (for v a r i o u s s o u r c e s ) . T h i s is not a n e a s y t a s k , a n d shall the implications of this shall d i s c u s s e d further in this c h a p t e r a n d C h a p t e r 5. N o t e that the client is not limited to just creating o n e a p p l i c a t i o n a n d f u r t h e r m o r e a n y f(i) c o u l d exist within the client if a n A S P is not providing that functionality.  In fact all f(i) w o u l d  exist within the client if n o A S P s a r e b e i n g u s e d .  T h i s a r r a n g e m e n t w o u l d b e the result of v e r y low t r a n s a c t i o n c o s t s a n d low specificity of s e r v i c e s if the m o s t f(i) a r e b e i n g p r o v i d e d by N V A S P s .  T h e next s t e p t o w a r d a hierarchy  a s w e h a v e d e f i n e d it w o u l d b e the u s e of N i c h e V S P s , w h i c h w o u l d a p p e a r in the following figure. A l s o note the client h a s c r e a t e d what w e d e f i n e a s the p a c k a g e d e n o t e d P(i). A g a i n the r e a d e r is r e m i n d e d that T is a n indexing v a l u e d u e to the fact that m o r e t h a n o n e p a c k a g e m a y b e r e q u i r e d . A p a c k a g e is a collection of a n u n d e r d e t e r m i n e d n u m b e r of applications:  56  Applications Delivered To Client  Figure 1 1 .  f(1)  f(2)  f(3)  f(i)  H e r e the Client h a s c o n t r a c t e d the s e r v i c e s of a n u m b e r of N i c h e V S P s (similar to F i g u r e 10, a n y A(i) c o u l d b e a n i n - h o u s e application).  T h e c o n n e c t i o n s b e t w e e n the l a y e r s in this  figure a r e not a s c l e a r a s in the p r e v i o u s figure.  T h e c o n n e c t i o n s b e t w e e n the functionality  layer a n d the application layer a r e not n e c e s s a r i l y a c r o s s a S O A P c o n n e c t i o n to a F o c u s e d S o l u t i o n a n d f(i) c o u l d b e p r o v i d e d by a n I S V . T h e y c o u l d exist s o l e l y within a n application h o s t e d b y the N i c h e V S P (in the c a s e of a n I S V providing f(i)).  In this m o d e , the client is  contracting by the application a n d m a y h a v e to interact with m o r e A S P s in o r d e r to a c q u i r e m o r e a p p l i c a t i o n s . Travelling further up this h i e r a r c h y w e arrive at the level of u s i n g a n E S S or Full V S P . T h i s c h o i c e w o u l d b e equivalent to the h i e r a r c h i e s to w h i c h [ M a l o n e , 1988] refers b e c a u s e the client w o u l d h a v e a long-term relationship with the A S P providing it with the d e s i r e d p a c k a g e of a p p l i c a t i o n s . R e g a r d l e s s of m a r k e t f o r c e s s u c h a s pricing, o n c e a n E S S or Full V S P is b e i n g u s e d the client is l o c k e d into that relationship.  57  Figure 12.  Package Delivered To Client  Note that the client may need more than one package (this is a shortcoming of Oracle Business Online as was discussed in Chapter 2) but ideally the client would need only one package. Any A(i) could simply be part of a collection of applications within the ESS or Full Service VSP (if A(i) is provided by an ISV) or they could be within Niche VSPs as would be the case if the top level ASP is an aggregator. Furthermore, in a situation where the client has made decision XX (remember this is the notation for not using an ASP) package P(i) would be provided by an ISV such as SAP or Peoplesoft. The advantage is that the client is  58  not c o n c e r n e d a b o u t what is o c c u r r i n g at the lower levels, just that the s e r v i c e s they want in P(1) a r e d e l i v e r e d , they h a v e little c o n c e r n h o w the A S P brought t h e m together.  H o w e v e r it is o u r theory that the complexity of product d e s c r i p t i o n a n d the a s s e t specificity of m o s t a p p l i c a t i o n s a r e s o high that hierarchical industry structures (i.e. the client will prefer to d e a l with E H or E V A S P s ) , with the p l a y e r s l o c k e d into l o n g - t e r m r e l a t i o n s h i p s , will exist b e t w e e n m o s t clients a n d A S P s for the f o r e s e e a b l e future. F u r t h e r m o r e , in o r d e r to m i n i m i s e t r a n s a c t i o n a l c o s t s m a n y clients will opt for a n E S S a g g r e g a t o r or Full V S P that c a n offer a p p l i c a t i o n s to support the highest n u m b e r of b u s i n e s s f u n c t i o n s p o s s i b l e b e c a u s e this r e d u c e s their c o o r d i n a t i o n c o s t s to a m i n i m u m .  B e c a u s e of the difficultly a s s o c i a t e d with software integration, the w o u l d b e o n e of the p r i m a r y f o r c e s driving the client t o w a r d u s i n g a n E S S o r Full V S P . T h i s is a c c o u n t e d for t h r o u g h the t r a n s a c t i o n a l c o s t v a r i a b l e d e f i n e d in the next s e c t i o n .  It is c l e a r f r o m t h e s e  figures that interacting with A S P s at the functionality or a p p l i c a t i o n level that the client h a s m o r e relationships to maintain with A S P s , or that if o n l y a f e w c o m p o n e n t s of their IT infrastructure is p r o v i d e d by o n e or m o r e A S P s , t h e s e s e r v i c e s m u s t b e integrated with their existing i n - h o u s e a p p l i c a t i o n s . T h i s m e a n s that the client is s u p p o r t i n g m o r e relationships a n d integrating m o r e software.  A s the p r o g r e s s i o n is m a d e t o w a r d E H or E V , the client is  directly s u p p o r t i n g f e w e r a n d f e w e r of t h e s e relationships a n d i n t e r c o n n e c t i o n s . H o w e v e r , if the d e c i s i o n is m a d e to c o n d u c t all o p e r a t i o n s i n - h o u s e , e v e n t h o u g h n o relationships to A S P s m u s t b e m a i n t a i n e d , the c o s t of this a r e higher then u s i n g a n A S P (or s o the p r o p o n e n t s of this m o d e l a r g u e ) .  W e c a u t i o n the r e a d e r that, a l t h o u g h there a r e very strong p a r a l l e l s , w e a r e not u s i n g t h e s e c o n c e p t s of ' M a r k e t ' a n d ' H i e r a r c h y ' in the s a m e w a y a s [ M a l o n e , 1988].  If the client  d e c i d e s to u s e a collection of F o c u s e d S o l u t i o n s , this w o u l d m o s t c l o s e l y r e s e m b l e the 59  ' M a r k e t ' structures d e f i n e d in [ M a l o n e , 1988] a s for t h e p u r p o s e s of this t h e s i s w e r e - u s e t h e t e r m m a r k e t but reapply it to the situation d e p i c t e d in F i g u r e 1 0 . If t h e client d e c i d e s to u s e a E S S or V S P then this m o s t c l o s e l y r e s e m b l e s the ' H i e r a r c h y ' structures a s d e f i n e d b y [ M a l o n e , 1988], h o w e v e r w e a r e reapplying this t e r m to t h e situation d e p i c t e d in F i g u r e 1 2 . F i g u r e 11 r e p r e s e n t s a c r o s s , or c o m p r o m i s e b e t w e e n t h e t w o s t r u c t u r e s .  A l s o , note that  w h e n w e h a v e a situation a s s e t forward in F i g u r e 1 2 , t h e entities at t h e bottom (the N i c h e V S P s a n d F o c u s e d S o l u t i o n s ) m a y b e h a v e in a spot m a r k e t like f a s h i o n , h o w e v e r from t h e client's p e r s p e c t i v e this is a hierarchy situation.  W e shall n o w e x a m i n e w h y t h e client w o u l d m a k e t h e d e c i s i o n to u s e o n e m o d e l or a n o t h e r or not to u s e t h e A S P m o d e l at all.  Input Variables In this s e c t i o n w e d e f i n e a n d p r e s e n t what w e c o n s i d e r to b e t h e m a i n f a c t o r s in t h e client's d e c i s i o n to u s e o n e A S P m o d e l or a n o t h e r (implicitly t h e a s s u m p t i o n h a s b e e n m a d e that the client h a s d e c i d e d to u s e a n A S P , C h a p t e r 5 p r e s e n t s t h e r e a s o n s w h y a client w o u l d u s e a n A S P ) . It is o u r theory that t h e d e c i s i o n rests o n t h e s e four v a r i a b l e s : t r a n s a c t i o n a l c o s t s , specificity, criticality a n d substitutability.  W e b o r r o w heavily f r o m t h e i d e a s of O l i v e r  W i l l i a m s o n a n d [ M a l o n e , 1988], h o w e v e r w e slightly redefine their c o n c e p t s for t h e p u r p o s e s of this t h e s i s .  Transactional Costs: F o r t h e p u r p o s e of this t h e s i s , t h e s e a r e t h e c o s t s opportunity  (whether  or realized) of finding, a g r e e i n g o n a n S L A , c o n n e c t i n g to, t h e c o s t s of  interacting with a n A S P a n d the switching c o s t s of c h a n g i n g f r o m a n i n - h o u s e solution to a hosted service or switching between A S P s .  N o t e that this w o u l d i n c l u d e t h e c o s t s of  c u s t o m i z a t i o n . T h e m a i n a r g u m e n t b e h i n d t h e A S P m o d e l is that t h e s e c o s t s a r e lower o v e r 60  the lifetime of t h e application then the client b u y i n g , installing, integrating a n d maintaining the a p p l i c a t i o n for t h e m s e l v e s (this is d i s c u s s e d further in C h a p t e r 5).  T h e c o s t of  interacting  other  with a n A S P c a n include t h e s u b s c r i p t i o n f e e (or w h a t e v e r  pricing  a g r e e m e n t is a r r a n g e d ) , a s well a s integrating t h e s e r v i c e s of that A S P with other A S P s or with a n y i n - h o u s e a p p l i c a t i o n s that will r e m a i n in u s e (i.e. a c o o r d i n a t i o n c o s t ) .  A l l things  b e i n g e q u a l , t h e n u m b e r of A S P s a n d / o r i n - h o u s e s o l u t i o n s t h e client is d e a l i n g with, t h e higher t h e t r a n s a c t i o n a l c o s t s . T h e r e a s o n for u s i n g n u m e r o u s A S P s c o u l d only b e justified (from a purely t r a n s a c t i o n a l c o s t point of view) if u s i n g t h o s e A S P s a s o p p o s e d to u s i n g o n e A S P l o w e r s t h e c o s t s of finding, c o n n e c t i n g a n d interaction s o t h e g a i n s in customizability w o u l d offset t h e i n c r e a s e d coordination c o s t s .  T h i s is not t h e traditional definition of  t r a n s a c t i o n c o s t s a s d e f i n e d b y [ W i l l i a m s o n , 1979] but a variant of it w e h a v e c r e a t e d for t h e p u r p o s e s of this t h e s i s .  F u r t h e r m o r e w e caution t h e r e a d e r that, a l t h o u g h t h e r e a r e v e r y  strong p a r a l l e l s , w e a r e not u s i n g this c o n c e p t in t h e s a m e f a s h i o n a s [ W i l l i a m s o n , 1 9 7 9 ; M a l o n e , 1988].  Asset Specificity: In [ M a l o n e , 1988] a n input u s e d b y a firm (or individual c o n s u m e r ) is c o n s i d e r e d to b e highly a s s e t s p e c i f i c ( a c c o r d i n g to O l i v e r W i l l i a m s o n ' s definition) if it c a n n o t readily b e u s e d b y other firms b e c a u s e of site specificity, p h y s i c a l a s s e t specificity, a n d / o r h u m a n a s s e t specificity.  S o m e e x a m p l e s of t h e s e t y p e s of specificity w o u l d b e : a natural  r e s o u r c e s u c h a s a n oil well is site s p e c i f i c b e c a u s e it c a n n o t b e m o v e d without great c o s t , a s p e c i a l i z e d m a c h i n e tool or a c o m p l e x c o m p u t e r p r o g r a m d e s i g n e d for a s i n g l e p u r p o s e w o u l d b e c o n s i d e r e d p h y s i c a l l y s p e c i f i c . H u m a n a s s e t specificity w o u l d include learning b y d o i n g , or skills p o s s e s s e d b y a limited p e r c e n t a g e of t h e p o p u l a t i o n . definition of specificity in t h e m o d e l c r e a t e d in this s e c t i o n .  61  W e r e u s e this  Criticality: Criticality is defined as the extent to which a good or service is necessary for the continued operation of the firm without extraordinary cost or inconvenience. For example an ERP service provided by an ASP would be considered highly critical since disruption of that service would disrupt almost all business functions. However a service such as email can be readily replaced so it is not considered to be highly critical. Note that if email service could not be reinstated in a timely fashion it would result in a disruption of business functions (this is due to the time component implicit in our definition of criticality). Criticality and specificity are logically independent, yet highly correlated in a very interesting fashion. The reason for this is as follows: if a critical IT asset is highly specific then it cannot be readily replaced and that lag in replacement is what disrupts business function. If an IT asset is low specificity then it can be readily replaced; and regardless of its criticality that quick replacement means it will not have the opportunity to disrupt the function of that business unless the continuous operation of that asset is crucial. It is difficult to imagine a situation in which an IT good or service would be have low-criticality, yet be highly specific, so we feel justified simply considering this to be a highly specific asset. Substitutability: Substitutability is generally inversely related to specificity, however the two are logically independent. Substitutability is defined as the level of ease with which one set of functionalities can be replaced with another set that perform the same task. Email is an example of a highly substitutable service. The providers of this service are numerous and the specificity of this service is low so providers can be readily changed (unless there are contractual obligations preventing this).  Substitutability is sometimes referred to by the  inverse concept of 'lock-in'. We have chosen these four variables because they seem to include all of the questions the client would want answered with respect to the use of an ASP for providing a particular 62  application.  T h e t r a n s a c t i o n a l c o s t variable a c c o u n t s for price a n d c o s t c o n c e r n s .  The  a m o u n t of specificity relates to the client's c o n c e r n s a b o u t c u s t o m i z a t i o n . A n y IT d e c i s i o n ' s p o s s i b l e i m p a c t u p o n b u s i n e s s functions must b e a c c o u n t e d for t h e r e f o r e w e criticality.  include  A l s o , a s with all IT p u r c h a s e s , the client w o u l d h a v e c o n c e r n s a b o u t h o w readily  that IT a s s e t c o u l d b e r e p l a c e d a n d this is a c c o u n t e d for by t h e substitutability v a r i a b l e . W e d o not c o n s i d e r reliability at this s t a g e b e c a u s e it w o u l d b e m o r e of a c o n c e r n in the c h o i c e to u s e a n A S P or not, therefore w e l e a v e it for C h a p t e r 5.  N o t e that p e r f o r m a n c e a n d  security w o u l d a l s o play a crucial role in the client's c h o i c e to p u r c h a s e a n IT a s s e t . H o w e v e r , a s with reliability it p l a y s l e s s of a role in the c h o i c e of A S P t y p e , s o w e a l s o l e a v e the d i s c u s s i o n of p e r f o r m a n c e a n d security to C h a p t e r 5, S e c t i o n 5.1.  W e will u s u a l l y limit the granularity of our v a r i a b l e s to a s i m p l e d i s c r e e t s p a c e of {Low, High} for the p u r p o s e s of simplicity w h e n m a k i n g predictions.  H o w e v e r w h e n a n a l y s i n g t h e m in  the next s e c t i o n w e shall v a r y t h e m o v e r a c o n t i n u o u s s p a c e of [Low, High]. H a v i n g d e f i n e d our i n d e p e n d e n t v a r i a b l e s , let us n o w c o n s i d e r their interactions to o n e a n o t h e r b e f o r e w e c o n s i d e r their i m p a c t u p o n the o u t c o m e v a r i a b l e s .  Interrelationships Of Input Variables A s d i s c o v e r e d in a review of the current literature, m a n y of the p r o p o n e n t s of t h e A S P m o d e l a r g u e A S P s lower t r a n s a c t i o n a l c o s t in s e v e r a l w a y s . a s s e r t i o n s h a l l b e d i s c u s s e d in C h a p t e r 5. ASP.  If the  c u s t o m e r currently  only  M a n y of their r e a s o n s for this  W e a s s e r t that clients will opt to u s e only o n e  h a s n e e d to  o u t s o u r c e part of  its current  IT  infrastructure, w h e t h e r or not it p l a n s o n o u t s o u r c i n g m o r e in the future p l a y s a part in their c h o i c e of A S P type.  F o r e x a m p l e , a c o m p a n y that p l a n s h a v i n g its e m a i l s e r v i c e h o s t e d  t o d a y a n d h a v i n g its C R M h o s t e d in the future w o u l d h a v e two c h o i c e s :  63  O p t i o n O n e : contract the s e r v i c e s of a provider with e m a i l s e r v i c e s only, a n d then in the future, contract the s e r v i c e s of a n A S P providing C R M a n d integrate the two or  O p t i o n T w o : contract the s e r v i c e s of a n A S P that p r o v i d e s both s e r v i c e s , p u r c h a s e the e m a i l hosting s e r v i c e s t o d a y a n d then p u r c h a s e the C R M s e r v i c e s o n c e they a r e n e e d e d .  W i t h the first option, a n e w A S P w o u l d h a v e to b e c o n t a c t e d a n d integrated with the first. W i t h the s e c o n d option, o n e A S P w o u l d suffice a n d w o u l d , a s the a n a l y s i s of t r a n s a c t i o n a l c o s t v a r i a b l e shall s h o w , b e a better situation. A n y clients w h o c h o s e t h e first option w o u l d likely switch to the s i n g l e A S P option, a n d k n o w i n g this they w o u l d h a v e incentive to pick a n A S P that p r o v i d e s a w i d e breath of s e r v i c e s , w h e t h e r or not they currently n e e d t h e m , to a v o i d this situation.  It is to c a p t u r e this type of d y n a m i c that w e h a v e s e p a r a t e d switching  c o s t s out f r o m t r a n s a c t i o n a l c o s t s .  T h e a p p l i c a t i o n s t h e m s e l v e s a r e very high in site specificity, a s m o v i n g t h e m f r o m platform to platform o n the s e r v e r s i d e c a n b e a difficult task. T h a t c r e a t e s i m m e n s e p r e s s u r e to l e a v e t h e m o n the site w h e r e they w e r e first c r e a t e d .  H o w e v e r this c o n t r a s t s a g a i n s t the  situation for the h o s t e d s e r v i c e s that a r e b a s e d u p o n t h e s e a p p l i c a t i o n s a r e v e r y low in site specificity b e c a u s e they c a n b e a c c e s s e d from a l m o s t a n y w h e r e in the w o r l d . W e a r e not a s c o n c e r n e d with the site specificity of the application a s w e a r e t h e s e r v i c e that is p r o v i d e d , part of the r e a s o n for raising this point is a s follows.  A p p l i c a t i o n s that o p e r a t e b e t w e e n  o r g a n i z a t i o n s ( s u c h a s p r o c u r e m e n t or C R M ) lend t h e m s e l v e s to t h e A S P m o d e l b e c a u s e of t h e u n i v e r s a l a c c e s s i b i l i t y of a w e b - h o s t e d s e r v i c e . T h i s is w h e r e the low site specificity of the s e r v i c e is of a d v a n t a g e .  F u r t h e r m o r e , t r a n s a c t i o n c o s t s a r e r e d u c e d b e c a u s e of the  e a s y a c c e s s to the Internet both parties w o u l d h a v e for c o n n e c t i n g to t h e A S P . T h e A S P c a n then act a s a buffer, protecting the client f r o m the c o o r d i n a t i o n c o s t s of c o n n e c t i n g to a n e w partner.  64  H o s t e d s e r v i c e s c a n b e high or low in p h y s i c a l specificity, for e x a m p l e e m a i l s e r v i c e s require relativity little c u s t o m i z a t i o n a n d h e n c e a r e not v e r y s p e c i f i c w h e r e a s a n E R P s y s t e m requiring a great d e a l of c u s t o m i z a t i o n a n d client k n o w l e d g e w o u l d b e v e r y s p e c i f i c . H u m a n a s s e t s that s u p p o r t the h o s t e d s e r v i c e a r e very s p e c i f i c a n d s c a r c e .  A s noted b y [ M a l o n e , 1988] the specificity a n d c o m p l e x i t y of g o o d s or s e r v i c e s a r e often c o r r e l a t e d ; h o w e v e r in m o s t g e n e r a l d i s c u s s i o n s the fact that they a r e logically i n d e p e n d e n t m e a n s that their h a v e to b e treated a s s e p a r a t e f a c t o r s . S i t e - s p e c i f i c a s s e t s c a n g o a g a i n s t this t r e n d . C o n s i d e r , for e x a m p l e , a n a r t e s i a n well, the well is v e r y low in c o m p l e x i t y , yet it is highly site s p e c i f i c . A n o t h e r e x a m p l e w o u l d b e that of a c o m p l e x g o o d or s e r v i c e that is low in specificity s u c h a s a n a u t o m o b i l e .  M o s t information t e c h n o l o g y g o o d s a n d s e r v i c e s a r e  very c o m p l e x w h e n c o m p a r e d to other g o o d a n d s e r v i c e s ; h o w e v e r , relative to o n e another, t h e y follow a c l e a r t r e n d .  L o w specificity g o o d s a r e u s u a l l y t h o s e that a r e e s t a b l i s h e d a n d  well u n d e r s t o o d by u s e r s a n d providers, require little c u s t o m i z a t i o n a n d h e n c e they a r e low in specificity w h e n c o m p a r e d a g a i n s t other IT g o o d s a n d s e r v i c e s . H i g h specificity g o o d s a n d s e r v i c e s a r e t h o s e that require a great d e a l of c u s t o m i z a t i o n a n d a r e g e n e r a l l y the m o r e c o m p l e x items in the IT r e a l m .  Specificity is a d o u b l e - e d g e d s w o r d . T h e buyer b e c o m e s v u l n e r a b l e b e c a u s e a s the a s s e t b e c o m e s m o r e a n d m o r e s p e c i f i c v i a c u s t o m i z a t i o n , it b e c o m e s h a r d e r a n d h a r d e r to find a r e p l a c e m e n t supplier.  C o n v e r s e l y , by c u s t o m i z i n g their g o o d or s e r v i c e , the s e l l e r h a s  limited the n u m b e r of b u y e r s w h o w o u l d b e interested in that g o o d or s e r v i c e a n d is reliant o n the c o n t i n u e d p a t r o n a g e of the buyer to r e c o u p that investment in c u s t o m i z a t i o n .  High  specificity of a s s e t s t e n d s to i n c r e a s e the lock-in of the c u s t o m e r [ W i l l i a m s o n , 1 9 7 9 ; M a l o n e , 1 9 8 8 ; E n g l a n d e r 1988].  65  N o t e that w e a r e not talking about ' m a s s c u s t o m i z a t i o n ' but referring to further specificity required b y e a c h n e w client. Sept. 2000].  C u s t o m i z a t i o n e a t s into a n A S P ' s m a r g i n o n a contract [King,  A S P s g e n e r a l l y try to build their a p p l i c a t i o n s b a l a n c i n g functionality a n d  required c u s t o m i z a t i o n for e a c h c u s t o m e r . aggregators.  T h i s is w h e r e s p e c i a l i z a t i o n is k e y for n o n -  C o n s i d e r t h e following q u o t e : ' " W h a t ' s different a b o u t u s is that other A S P s  h a v e 10 to 12 a p p l i c a t i o n s [for rent],' s a y s C o r e H a r b o r C E O J a y C h a u d h r y . 'If y o u d o that, y o u b e c o m e a generalist. W e ' r e t h e heart s u r g e o n s w h e n it c o m e s to e - p r o c u r e m e n t . . . . W e d o A r i b a d a y a n d night, s o w e really k n o w h o w to support it.'" [Aun, 2 0 0 1 ] . T h i s m e a n s that for t h e m a x i m u m efficiency n o n - a g g r e g a t o r s s h o u l d m i n i m i s e t h e c o s t s of c u s t o m i z a t i o n by f o c u s i n g o n t h e application they a r e renting. i n c l u d e s t h e c u s t o m i z a t i o n of t h e software.  A S P s a r e selling a s e r v i c e .  That service  A S P s m a k e m o n e y w h e n they d o a s little  c u s t o m i z a t i o n a s n e e d e d a n d d o what c u s t o m i z a t i o n is n e e d e d a s efficiently a s p o s s i b l e . In the  aggregator  model, money  is m a d e  purely o n integration  a n d customization  cost  reduction abilities.  H o w e v e r , for t h e current p l a y e r s in t h e market that a r e not a d a p t i n g to t h e c h a n g i n g environment.  N e w entrants  h a v e l o o k e d at what is w o r k i n g a n d built their o w n n e w  a p p l i c a t i o n s with t h e w e b in m i n d (unlike m a n y of t h e current offerings).  C o n s i d e r the  following:  No matter how well they tune their engines, though, the first generation ASPs will have a tough time outperforming the newer entrants. The newbies establish one super-reliable Web site that all their customers hook into—plugging their information into simple templates. If the Young Turks get it right, the economies of scale could produce gross profit margins topping 90%-dramatically better than the 70% average among traditional software makers and the 15% to 20% margins that early ASPs have achieved, say analysts. [Kerstetter, 2001]  66  T h i s is the m a s s c u s t o m i z a t i o n w e referred to previously.  T h i s is important b e c a u s e t h e s e  ' n e w b i e s ' a r e lowering the switching c o s t s b e t w e e n A S P s a n d h e n c e r e d u c i n g specificity. T h i s f o r c e is a p u s h t o w a r d a m a r k e t style structure in the A S P industry.  B e c a u s e clients a r e not g o i n g to b e c o n c e r n e d with b r a n d n a m e if s o f t w a r e b e c o m e s a utility as  projected  functionality,  by  many  analysts, customer  loyalty to the  underlying  loyalty  ISV erodes.  gets  p l a c e d o n the  E x a c e r b a t i n g the  A S P and  the  e r o s i o n of  ISV  i m p o r t a n c e , m a n y A S P s a r e starting to c r e a t e their o w n s o l u t i o n s , h e n c e i n c r e a s i n g m a r g i n by cutting out the I S V . T h i s w o u l d b e inline with our t r a n s a c t i o n c o s t t h e o r y s i n c e r e m o v i n g the I S V w o u l d further r e d u c e the c o s t per t r a n s a c t i o n .  T h e lower the a m o u n t of c u s t o m i z a t i o n required, the better for the A S P if c u s t o m e r s a r e usually short t e r m .  F o r a n A S P , lower c u s t o m i z a t i o n m e a n s higher m a r g i n in the short run,  w h i c h c a n b e translated into further reducing transaction c o s t s if the relationship is a shortt e r m relationship.  H o w e v e r f r o m a specificity point of v i e w long t e r m relationships w o u l d be  c r e a t e d with the lock-in of a high-specificity s e r v i c e ; a n d high up-front c u s t o m i z a t i o n c o s t s c o u l d b e c o n s i d e r e d a n investment to g a i n a long s t r e a m of monthly p a y m e n t s g e n e r a t e d by a long-term relationships.  S e r v i c e s that a r e not e a s i l y c u s t o m i z a b l e (i.e. a r e highly s p e c i f i c  before the client p u r c h a s e s them)  f a c e a s e r i o u s p r o b l e m b e c a u s e of the high  cost  a s s o c i a t e d with c u s t o m i z i n g t h e m : b u s i n e s s e s don't want to c h a n g e their p r o c e s s e s to suit the a p p l i c a t i o n .  S A P e x p e r i e n c e d this p r o b l e m o n c e c u s t o m e r s started to w o n d e r about  l o s s of competitive  advantage.  M a n y potential clients will not b u y if the software  p e r c e i v e d to require b u s i n e s s p r o c e s s c h a n g e s .  is  T h i s m a k e s further c u s t o m i z a t i o n costly  s i n c e the application is a l r e a d y highly p h y s i c a l l y s p e c i f i c .  H o w e v e r , the c u s t o m e r  often  a d a p t s to the software, a n d is effectively creating specificity by m a k i n g himself or herself s p e c i f i c to the a p p l i c a t i o n , h e n c e creating lock-in.  67  T h e net result of t h e s e interrelations is that m a n y of t h e s e v a r i a b l e s a r e not o r t h o g o n a l (i.e. if the a x i s t h e y w o u l d b e r e p r e s e n t e d by w o u l d not m e e t at a 9 0 d e g r e e a n g l e if d r a w n in two dimensions).  T h i s m e a n s that a c h a n g e in o n e v a r i a b l e often m a y result in a c h a n g e of  a n o t h e r (or others).  B e c a u s e it is o u t s i d e t h e s c o p e of this t h e s i s w e s h a l l not d e l v e into this  in a m u c h greater extent.  W e s u m m a r i z e t h e interactions of t h e four v a r i a b l e s in t h e  following table:  T a b l e 8.  S u m m a r y Of Variable Interrelationships  Impact of  Factor 2  Factor 1  increasing  Factor 1 upon Factor 2  Transactional Cost  Specificity  N o Effect  Transactional Cost  Criticality  N o Effect  Transactional Cost  Substitutability  N o Effect  Specificity  Transactional Cost  Increases  Specificity  Criticality  Increases  Specificity  Substitutability  Decreases  Criticality  Transactional Cost  Increases  Criticality  Specificity  N o Effect  Criticality  Substitutability  Decreases  Substitutability  Transactional Cost  N o Effect  Substitutability  Specificity  Decreases  Substitutability  Criticality  Decreases  W e n o w c o n s i d e r t h e impact e a c h of t h e s e v a r i a b l e s w o u l d h a v e u p o n t h e output d e c i s i o n variable.  4.3. Framework Predictions In this s e c t i o n w e e x a m i n e t h e impact e a c h input v a r i a b l e w o u l d h a v e u p o n t h e output decision variable.  E a c h v a r i a b l e is c o n s i d e r e d a l o n e , with t h e o r t h o g o n a l v a r i a b l e s being 68  h e l d e q u a l a n d t h e resulting c h a n g e s predicted by o u r m o d e l is put f o r w a r d .  N o t e that in  e a c h of t h e d i a g r a m s in this s e c t i o n the client is not n e c e s s a r i l y m o v i n g f r o m q u a d r a n t to q u a d r a n t , their c h o i c e is at t h e outset of d e c i d i n g w h e t h e r to u s e a n A S P a n d if s o w h i c h A S P s to contract. F u r t h e r m o r e w e a s s u m e that t h e client is not currently u s i n g a n A S P .  Transactional  Costs  A s m e n t i o n e d , t r a n s a c t i o n a l c o s t s (denoted T C in this section) a n d s w i t c h i n g c o s t s a r e interrelated, h o w e v e r it is o u r opinion that they a r e related w e a k l y e n o u g h that t h e impact of v a r y i n g T C o v e r t h e s p a c e of [Low, High] c a n b e i g n o r e d in t h e following a n a l y s i s .  It is o u r a r g u m e n t that a s T C is i n c r e a s e d , specifically a s t h e c o s t s of finding, a g r e e i n g o n a n S L A , c o n n e c t i n g to, a n d interacting with a n A S P (or A S P s ) i n c r e a s e s clients will m o v e t o w a r d a n A S P that s u p p o r t s t h e w i d e s t n u m b e r of b u s i n e s s f u n c t i o n s . G r a p h i c a l l y this c a n be r e p r e s e n t e d a s t h e following:  F i g u r e 13.  Client C h o i c e Of A S P T y p e A s Transactional C o s t s Increase  o N O  CO  X  sz  a. CO  (A  05 O  > Niche  Enterprise  Span of Services  In this diagram TC represents transactional costs 69  In this d i a g r a m the a r r o w r e p r e s e n t s the c h o i c e of the client, a n d h o w it c h a n g e s a s transactional costs are increased. w h e t h e r E V or E H a r e u s e d .  In this a n a l y s i s , t r a n s a c t i o n a l c o s t s a r e indifferent  to  A n a r g u m e n t c o u l d b e m a d e that the client w o u l d f a v o u r E V  b e f o r e E H ( r e m e m b e r E H is a n E S S w h e r e a s E V is a Full V S P ) . H o w e v e r , it is o u r belief that this w o u l d heavily d e p e n d a n t u p o n what vertical industry the client is in s i n c e a n y V S P only o p e r a t e s within o n e vertical industry, a n d h e n c e w e d o not include this at this juncture. A l s o , in this d i a g r a m a n d in F i g u r e s 14 to 18, o n c e the a r r o w e n d s t h e client's d e c i s i o n b e c o m e s not to u s e a n A S P .  In [ M a l o n e , 1988] a c r o s s - c o m p a r i s o n of c o m p l e x i t y of product d e s c r i p t i o n a g a i n s t a s s e t specificity is u s e d to d e t e r m i n e the structure of intra a n d inter firm interactions. E v e n t h o u g h the t h e s i s of their work w a s that a s information t e c h n o l o g y l o w e r e d t r a n s a c t i o n c o s t s , firms will u s e m a r k e t s structures m o r e a n d m o r e .  U D D I a n d S O A P a r e t e c h n o l o g i e s that lower  the c o s t of finding a n d c o n n e c t i n g to n e w A S P partners in N V a n d N H . H e n c e t e c h n o l o g i e s s u c h a s t h e s e w o u l d lower the T C of c o n n e c t i n g to v a r i o u s A S P s a n d p u s h clients toward t h e s e q u a d r a n t s . W e feel that the r e a s o n for this is the control the client g a i n s in the lower levels of our functionality  hierarchy w o u l d then offset the c o s t s of  maintaining  more  relationships with A S P s .  U D D I a n d S O A P c o u l d topple a g g r e g a t o r s in E H a n d E V s i n c e t h e s e t e c h n o l o g i e s e n a b l e e a s y l i n k a g e b e t w e e n clients a n d N i c h e V S P s (NH) or F o c u s e d S o l u t i o n s ( N V ) . H o w e v e r , it w o u l d s e e m that clients buying into the A S P m o d e l w o u l d benefit f r o m totally o u t s o u r c i n g rather then mixing A S P s e r v i c e s with i n - h o u s e client/server or m a i n f r a m e s y s t e m s .  Full  s e r v i c e A S P s deliver the m o s t benefit w h e n they a r e in control of all the a p p l i c a t i o n s the client is u s i n g , b e c a u s e this m i n i m i s e s the n u m b e r of firms a n d s e r v i c e s that m u s t b e  70  c o o r d i n a t e d by t h e client.  O n c e the T C of u s i n g a n A S P b e c o m e s h i g h e r then u s i n g in-  h o u s e s o l u t i o n s t h e client will m a k e d e c i s i o n X X .  Asset Specificity L i k e s w i t c h i n g c o s t s , w e c a n n o t c o n s i d e r a s s e t specificity to b e o r t h o g o n a l to t h e other four v a r i a b l e s . I n c r e a s i n g specificity invariably m e a n s i n c r e a s i n g c u s t o m i z a t i o n , h e n c e impacting transactional  costs and  by definition  i n c r e a s i n g specificity i n c r e a s e s s w i t c h i n g c o s t s .  I n c r e a s e s in specificity imply a d e c r e a s e in substitutability. Criticality c a n b e held c o n s t a n t in this a n a l y s i s .  H o w e v e r , letting specificity d o m i n a t e w h e r e p a c k a g e level s e r v i c e s a r e  required p r o d u c e s the following:  Figure 14.  Client Choice Of ASP Type For P(i) As Asset Specificity Dominates  o  Q2  Q3  Low Specificity  s 8.  High Specificity CO O  Q1  Q4  > Niche  Enterprise  Span of Services  T h i s is ignoring the other f a c t o r s , h o w e v e r w e shall v i e w w h a t w e feel is the m o r e realistic o u t c o m e w h e n the other f a c t o r s a r e t a k e n into a c c o u n t . O u r rationale b e h i n d the following is this: If specificity r e q u i r e m e n t s a r e low, a n enterprise w i d e s e r v i c e m a k e s t h e m o s t s e n s e a s  71  it k e e p s T C at a m i n i m u m a n d p r e s u m a b l y a n E S S w o u l d c o u l d p r o v i d e the m o s t g e n e r i c solution that w o u l d satisfy t h o s e n e e d s .  A s specificity b e c o m e s a g r e a t e r c o n c e r n a Full  V S P w o u l d b e s o m e w h a t " p r e - c u s t o m i z e d " for the industry that the client is in, h e n c e satisfying the i n c r e a s e d n e e d for specificity. O n c e specificity r e q u i r e m e n t s i n c r e a s e further, the ability to 'mix a n d m a t c h ' a p p l i c a t i o n s (and at the e x t r e m e functionalities) b e c o m e s the m o s t important factor.  If the client only requires a n application A(i) this p r o c e s s starts in N H  a n d e n d s in N V , if the client only requires a functionality f(i) the p r o c e s s w o u l d start a n d e n d in N V . H o w e v e r , this a n a l y s i s i g n o r e s the impact that specificity h a s o n T C , switching c o s t s a n d substitutability.  Figure 15.  W e feel that a m o r e realistic o u t c o m e w o u l d b e t h e following:  Client Choice Of ASP Type For P(i) As Asset Specificity Increases  o  Q2  s  s.  Q3 Low Sf jecificity  \ /  (9  CD O  •e  Q1  High Sp ecificity Q4  CU >  Niche  Enterprise  Span of Services  B e c a u s e the client is s e a r c h i n g for a p a c k a g e P(i) it w o u l d m a k e little s e n s e b a s e d o n our p r e v i o u s T C a n d switching c o s t a n a l y s i s to c o n s i d e r N V or N H s e r v i c e s . S o to simplify the a n a l y s i s w e a s s u m e the client is s e e k i n g a p a c k a g e P(i) a n d t h e n e x t e n d this a n a l y s i s to A(i)  72  a n d f(i). within  A s the required specificity i n c r e a s e s the client w o u l d d e c i d e to u s e a V S P if o n e is their  vertical  market,  c u s t o m i z a t i o n at the outset.  since  these  services  would  presumably  require  less  H o w e v e r the c a s e w h e r e the client is s e a r c h i n g for a n A S P to  provide A(i) or f(i) is rather interesting w h e n the other f a c t o r s a r e c o n s i d e r e d :  Figure 16.  Client Choice Of ASP Type For f(i) Or A(i) As Specificity Increases  Q2  I I  Low Specificity Q1  Q3  1  i High Specificity Q4  Niche  Enterprise  S p a n of S e r v i c e s  Desicion path starts in Q(1) iff(i) is desired, Q(2) if A(i) is desired  N o t e that this is c l o s e to b e i n g the c o m p l e t e o p p o s i t e of the prediction m a d e in F i g u r e 15. T h e r e a s o n for this is a s f o l l o w s : a s s u m i n g f(i) is r e q u i r e d a n d s p e c i f i c i t y i n c r e a s e s s o w o u l d switching c o s t s , to a v o i d the situation of coordinating with n u m e r o u s F o c u s e d S o l u t i o n s , or A S P s in g e n e r a l (i.e. in a n attempt to m i n i m i s e T C ) , the client w o u l d d e c i d e u p o n a n A S P in N H (from this point o n w a r d the a r g u m e n t for A(i) or f(i) is identical s o w e s h a l l only refer to A(i)).  A s specificity of the application i n c r e a s e s further the s w i t c h i n g c o s t a n d t r a n s a c t i o n a l  73  c o s t a r g u m e n t s a g a i n p u s h the client toward a n A S P s u p p o r t i n g a wider n u m b e r of b u s i n e s s p r o c e s s e s a n d f r o m this point o n w a r d or a r g u m e n t parallels that for p a c k a g e P(i).  In F i g u r e s 15 a n d 16 the client's d e c i s i o n will b e c o m e X X a s specificity b e c o m e s e x t r e m e l y high.  T h i s a r g u m e n t is strongly paralleled by r e s e a r c h in the field of g e n e r a l o u t s o u r c i n g  [Butler, 2 0 0 0 ] .  H o w e v e r the client's d e c i s i o n in the c a s e is s t r o n g l y r e l a t e d to criticality a n d  substitutability s o b e f o r e w e a n a l y z e criticality a n d substitutability in the f a s h i o n w e did the p r e v i o u s t h r e e v a r i a b l e s w e must first s t e p b a c k , a n d c o n s i d e r the c h o i c e s the client is m a k i n g b e f o r e they h a v e d e c i d e d to enter into a contract with a n A S P or build the d e s i r e d p a c k a g e , a p p l i c a t i o n or functionality t h e m s e l v e s . T h i s is e x p l a i n e d in the following, rather lengthy, a s i d e .  T h e p e r c e i v e d level of criticality (to the client) w o u l d s e e m to b e i n v e r s e l y related to the w i l l i n g n e s s of clients to b u y into a n A S P ' s s e r v i c e s (i.e. high criticality i m p l i e s the client will f a v o u r d e c i s i o n X X ) . C l i e n t s a r e a w a r e that if the provider of a high criticality, highly s p e c i f i c s e r v i c e w e r e to g o out of b u s i n e s s w o u l d halt their o p e r a t i o n s for a n u n d e t e r m i n e d a m o u n t of time. C l i e n t s a r e a l s o a w a r e that this is a n e w m a r k e t a n d G a r t n e r is giving a n y particular A S P a 2 in 5 c h a n c e of surviving this y e a r [ B u s h a u s , S e p t 2 0 0 0 , P r i n g F e b . 2 0 0 1 ] .  T h i s h a s l e a d to a n interesting set of p a r a d o x e s within the industry.  It w o u l d s e e m clients  w o u l d flock to the first A S P that w a s profitable, a n d in r e s p o n s e m a n y A S P s did not build d a t a c e n t r e s ( c o n s i d e r B r e a k a w a y a n d C o r i o in C h a p t e r 2).  H o w e v e r t h e A S P with the  largest client b a s e is the only A S P that built d a t a c e n t r e s : U S i . U S i e v e n g o e s s o far a s to u s e its o w n e r s h i p of its d a t a c e n t r e s a s a m a r k e t i n g tool. T h i s m a y b e b e c a u s e clients v i e w this a s a m o r e " r e a l " c o m p a n y b e c a u s e it h a s real, tangible a s s e t s w h e r e a s t h e o t h e r s m a y s e e m too m u c h like the dot c o r n s , w h e r e o n c e they g o out of b u s i n e s s nothing r e m a i n s .  74  C l i e n t s a r e willing to let A S P s h a n d l e ' h e a d a c h e ' a p p l i c a t i o n s s u c h a s e m a i l a n d m e s s a g i n g . T h i s d u e of the fact it is not hard to switch A S P s if n e e d b e with t h e s e a p p l i c a t i o n s s i n c e the specificity is low a n d they a r e highly substitutable.  B e c a u s e critical a p p l i c a t i o n s a r e usually  not e a s i l y substituted, clients h a v e two r e a s o n s not to b u y in. a n d specificity is often high.  Firstly, substitutability is low  T h e client c a n n o t e a s i l y b u y t h e s e s e r v i c e s s o m e w h e r e e l s e  o n c e they h a v e m o v e d to a n A S P solution that h a s b e e n highly c u s t o m i z e d .  Compounding  this lock-in is that A S P solutions often m a k e i n - h o u s e IT staff r e d u n d a n t , h e n c e the IT d e p a r t m e n t is often e m p t i e d a n d a n e w staff c o u l d b e h a r d to get a g a i n . d e p e n d e n c e o n the A S P is e x t r e m e l y high a s w e l l .  S e c o n d l y the  E v e n if the A S P g a v e a c o p y of the  software to e a c h client w h e n they went out of b u s i n e s s , it is u n c l e a r if m a n y of  the  c o m p a n i e s w o u l d b e a b l e to maintain or run it o n their o w n a n d m o s t w o u l d s u r e l y l o s e the t r a n s a c t i o n c o s t benefits that d r o v e t h e m to A S P s to b e g i n with.  A high criticality a n d a high substitutability situation w o u l d b e d o m i n a t e d b y the fact that n e w providers a r e e a s y to c o m e by. But this logic only holds to a limit. If the s y s t e m is critical in the  extreme  a n d virtually  zero downtime  is a l l o w e d , c o n f i d e n c e in the  provider  may  dominate.  If a s e r v i c e is of low criticality a n d not e a s i l y substituted, t h e n the client h a s little c o n c e r n if the s e r v i c e is offered or not s i n c e it is not critical, h o w e v e r it is u n c l e a r if this situation w o u l d e v e r exist.  If a s e r v i c e is low criticality a n d e a s i l y substituted t h e n the c o m p a n y h a s no  d o w n s i d e for g o i n g with a n A S P solution, a n d lock-in is low.  S o , f r o m the clients point of view, the following c o n c l u s i o n s a r e m a d e :  75  T a b l e 9.  Client A c c e p t a n c e A n d Lock-In B y Criticality A n d Substitutability  Criticality Low  High  In this c a s e the a m o u n t of lock-in is high a n d criticality is low. It is u n k n o w n h o w the client w o u l d a c c e p t t h e s e services. In this c a s e lock-in is low. A n d s i n c e the s e r v i c e is not critical, the client w o u l d b e v e r y willing to p u r c h a s e these services.  In this c a s e the lock-in is high a n d the criticality is high a s w e l l . H e n c e , the client w o u l d b e l e s s willing to purchase these services. A l t h o u g h lock-in is low, the criticality is h i g h . H e n c e the client's a c c e p t a n c e w o u l d d e p e n d u p o n w h i c h factor dominates.  SubstitutabM1ly\^  Low  High  Intuitively this table w o u l d s e e m correct s i n c e lock-in d e c r e a s e s with substitutability a c c e p t a n c e i n c r e a s e s with criticality.  and  In t e r m s of our o u t c o m e v a r i a b l e a n d specificity w e  arrive at the following c o n c l u s i o n s : high criticality a n d low substitutability drive clients toward an X X decision.  H i g h substitutability a n d low criticality m a k e clients c h o o s e f r o m the set  { N H , N V , E H , E V } , h o w e v e r in this c a s e specificity is low. T h e o u t c o m e s of the m i x e d c a s e s are unclear.  A s w e shall s e e momentarily, criticality a n d substitutability a r e w e a k v a r i a b l e s with r e g a r d to the c h o i c e of A S P type in our m o d e l w h e n c o m p a r e d to the other t h r e e input v a r i a b l e s . H o w e v e r , they a r e powerful v a r i a b l e s for explaining the d e c i s i o n o n the client's part to u s e a n A S P or not. W i t h this in m i n d w e c o n t i n u e in a similar f a s h i o n a s b e f o r e a n d a s s u m e the d e c i s i o n to u s e a n A S P h a s b e e n m a d e .  Criticality  A s the astute r e a d e r h a s probably d e d u c e d , o u r a r g u m e n t s r e g a r d i n g criticality h a s strong parallels with the a r g u m e n t s r e g a r d i n g specificity.  Criticality's relationship to the other  v a r i a b l e s (that is to s a y : t r a n s a c t i o n a l c o s t s , specificity a n d substitutability), is identical to  76  that of specificity, e x c e p t with r e s p e c t to substitutability w h e r e the i n v e r s e relationship is not a s powerful.  H o w e v e r criticality, a s w e shall s e e in the next c h a p t e r , is o n e of the major  f o r c e s s t o p p i n g clients f r o m p u r c h a s i n g the s e r v i c e s of a n A S P in the m a r k e t  today.  R e g a r d l e s s of this, w e shall a s s u m e that the d e c i s i o n to contract a n A S P h a s b e e n m a d e . S i m i l a r to specificity, let us first c o n s i d e r the c a s e w h e r e criticality is a l l o w e d to d o m i n a t e :  Figure 17.  Client Choice Of ASP Type For P(i) As Criticality Dominates  Q2  r-High Criticality Q1  Niche  Q3 Low Criticality  1  1  Low Criticality Q4  Enterprise  Span of Services  N o t e that w e c o u l d h a v e u s e d a figure similar to F i g u r e s 13 or 14 to indicate that criticality is indifferent to E H or E V A S P , h o w e v e r w e h a v e u s e d this figure to e m p h a s i z e the parallels b e t w e e n criticality a n d specificity.  In this c a s e , b e c a u s e the client is l o o k i n g for a p a c k a g e  P(i) w e w o u l d a s s u m e that the other f a c t o r s w o u l d drive t h e m to contract a n E S S or Full VSP.  H o w e v e r a s criticality i n c r e a s e s , ignoring other v a r i a b l e s , it w o u l d m a k e s e n s e for the  client to d e c i d e u p o n a collection of A S P s f r o m N H b e c a u s e they a r e no longer a s reliant u p o n the c o n t i n u e o p e r a t i o n of o n e c o m p a n y (so they a r e , in a f a s h i o n , diversifying their  77  portfolio in the A S P m a r k e t by diluting the d e p e n d e n c e o n a n y o n e A S P ) a n d at the e x t r e m e the highest n u m b e r of A S P s w o u l d b e involved in delivering a p a c k a g e if only F o c u s e d S o l u t i o n s w e r e u s e d . A g a i n , a s with specificity, this a r g u m e n t starts with a N i c h e V S P for a n application A(i) a n d starts a F o c u s e d S o l u t i o n for a functionality f(i). T h i s is highly unrealistic o n c e the other v a r i a b l e s a r e c o n s i d e r e d .  H o w e v e r w e c a n n o t m a k e a s c l e a r a set of predictions with r e g a r d to criticality.  It is our  belief that the d e c i s i o n path a s criticality i n c r e a s e s w o u l d m i m i c the d e c i s i o n path of specificity in F i g u r e 17; h o w e v e r there is no driving r e a s o n f r o m a criticality point of v i e w to pick a A S P of the E S S or Full V S P type or v i c e v e r s a .  Ultimately, client c h o i c e with regard  to this v a r i a b l e w o u l d b e b a s e d o n a n empirical study of A S P s in t h e m a r k e t that s e e m to b e the m o s t financially healthy a n d the reputations of the A S P s in t h e m a r k e t for reliability of s e r v i c e s a s d i s c u s s e d in C h a p t e r 5.  S o , unfortunately, o u r analytical m o d e l falls short in  fully capturing the client b e h a v i o u r in r e g a r d to criticality a n d further r e s e a r c h w o u l d b e required to m a k e a n y predictions o n this v a r i a b l e w h e n the other v a r i a b l e s a r e t a k e n into account.  Substitutability A s e x p l o r e d earlier substitutability h a s a significant b e a r i n g o n t h e c h o i c e of A S P type b y the customer.  Substitutability is inversely related to switching c o s t s a n d specificity a n d is  o r t h o g o n a l to neither. A s w e h a v e d o n e with the p r e v i o u s two v a r i a b l e s , let u s v a r y the level of substitutability while ignoring the other v a r i a b l e s . N o figure is r e q u i r e d to d e s c r i b e what o c c u r s in this c a s e , b e c a u s e nothing h a p p e n s a s substitutability is i n c r e a s e d or d e c r e a s e d if the other v a r i a b l e s a r e i g n o r e d . W h a t e v e r f o r c e s c a u s e t h e client to d e c i d e u p o n o n e A S P or a n o t h e r a r e still d o m i n a n t b e c a u s e substitutability, in o u r o p i n i o n , h a s n o direct logical impact o n A S P type c h o i c e w h e n c o n s i d e r e d a l o n e . 78  S i m i l a r to criticality,  substitutability  b a s e d d e c i s i o n s w o u l d likely b e the result of b u s i n e s s a n a l y s i s of the current A S P s a n d p l a y s a n important role in the clients d e c i s i o n a s to w h e t h e r or not to u s e a n A S P to begin with. H o w e v e r w h e n specificity is a l l o w e d to vary a s our p a s t a n a l y s i s h a s s t a t e d they w o u l d the following d e c i s i o n path is f o l l o w e d :  Figure 18.  Client Choice Of ASP Type For P(i) As Substitutability Increases  High Sub. Q2  Q3  Low Sub.  Q1  Niche  Q4  Enterprise  Span of Services  Not surprisingly this is the e x a c t o p p o s i t e of F i g u r e 15 b e c a u s e substitutability is inversely related to specificity. A n d with regard to our output v a r i a b l e , t h e a r g u m e n t for this v a r i a b l e is the e x a c t o p p o s i t e of our a n a l y s i s of specificity.  H o w e v e r , a s m e n t i o n e d , criticality a n d substitutability play a p r o f o u n d role in the d e c i s i o n a s to w h e t h e r or not to u s e a n A S P .  79  Summary Of Framework Predictions W e s u m m a r i z e t h e predictions m a d e in this s e c t i o n a n d in t h e next s e c t i o n w e a p p l y t h e m in o r d e r to d e t e r m i n e t h e s t r a t e g i e s A S P s s h o u l d follow d e p e n d i n g u p o n what q u a d r a n t they fall into.  In t h e following table w e vary e a c h v a r i a b l e o v e r t h e r a n g e [Low, High] a n d allow  the n o n - o r t h o g o n a l v a r i a b l e s to c h a n g e in v a l u e a s w e h a v e in F i g u r e s 1 3 , 1 4 , 1 7 a n d 1 9 .  T a b l e 10.  Framework Predictions  Decision Path as variable increases from  Variable  low to h i g h  Transactional Costs  N V , N H , { E H or E V } , X X  Specificity  NV, N H , E H , E V , X X  Criticality  {NV, N H , E H , E V } , X X  Substitutability  XX, EV, EH, NH, NV  T h e s e predictions a r e m a d e in light of the n o n - o r t h o g o n a l relationships b e t w e e n t h e input variables a s w e have described them.  E v e n with a s l o w a granularity a s Q = {Low, High}  t h e s e four v a r i a b l e s w o u l d r e p r e s e n t a v e c t o r s p a c e of 3 2 v a l u e s , s o o u r a n a l y s i s is f a r f r o m e x h a u s t i v e o n this s p a c e .  A l s o , note that e a c h of t h e s e p r e d i c t i o n s f o r m a t e s t a b l e  h y p o t h e s e s with r e g a r d to t h e c h o i c e s of t h e client.  E m p i r i c a l testing w o u l d b e required to  c o n f i r m or d i s p e l t h e s e h y p o t h e s e s  This concludes Chapter 4.  In C h a p t e r 5 w e f o c u s m o r e o n t h e f o r c e s p u s h i n g a client  t o w a r d , or a w a y f r o m , buying s e r v i c e s f r o m a n A S P then w e h a v e in this c h a p t e r . O n c e this is c o m p l e t e d w e shall h a v e m o d e l e d t h e full d e c i s i o n p r o c e s s o n t h e part of t h e client.  80  C h a p t e r 5 . A S P F r a m e w o r k : D e c i d i n g W h e t h e r To U s e A n ASP A s s e e n in the p r e v i o u s c h a p t e r s , the A S P m o d e l is o n e that is b a c k e d b y m a n y p l a y e r s in the IT world, including the current big n a m e s in software. W i l l this s o f t w a r e delivery m o d e l succeed?  In this c h a p t e r w e set forth to e x a m i n e the f o r c e s driving clients t o w a r d adopting  the A S P m o d e l a n d the f o r c e s i m p e d i n g the growth of the A S P m o d e l . T h e s e f o r c e s a r e the result of a n e x t e n s i v e literature review or h a v e b e e n c r e a t e d by the author.  W e r e u s e the v a r i a b l e s of C h a p t e r 4 in our a n a l y s i s of t h e s e f o r c e s w h e r e v e r p o s s i b l e , h o w e v e r a s t h e r e a d e r shall s e e shortly, they a r e not e n o u g h to fully e x p l a i n t h e d e c i s i o n to u s e a n A S P . H e n c e w e shall a d d v a r i a b l e s to this part of the m o d e l w h i c h a r e strong in predicting if a X X d e c i s i o n will b e m a d e .  T h u s w e h o p e to c a p t u r e the entire d e c i s i o n  p r o c e s s of the client in its d e c i s i o n to u s e a n A S P or not, a n d if y e s , what type of A S P . O n c e w e h a v e m o d e l e d this w e then attempt to d e t e r m i n e t h e s t r a t e g i e s that the A S P s h o u l d follow to m a x i m i z e the likelihood of long-term s u c c e s s in the next c h a p t e r .  F o r the  majority of this c h a p t e r w e shall u s e X X to indicate a c h o i c e not to u s e a n A S P or Z Z to indicate that the client h a s c h o s e n to u s e a n A S P . M o s t t i m e s w e c a n only state that a c h o i c e of Z Z only i m p l i e s that Z Z e { N H , N V , E V , EH}, without b e i n g a b l e to s a y w h i c h e l e m e n t Z Z is e q u a l to in m o s t c a s e s .  S o our o u t c o m e v a r i a b l e r e m a i n s t h e s a m e , e x c e p t  for the fact that w e a r e u n a b l e to state clearly what the A S P type is in the following a n a l y s i s . A l s o unlike our p r e v i o u s a n a l y s i s , w e h a v e m a n y m o r e v a r i a b l e s , w h i c h w e d e f i n e in the following s e c t i o n .  81  5.1.  Forces That Are Causing Or Hindering ASP Growth  T h i s s e c t i o n e x a m i n e s the f o r c e s that a r e driving the growth a n d d e m a n d for A S P s e r v i c e s . A s w e h a v e s e e n in C h a p t e r 3 , although d e c l i n i n g , the investment in A S P s is still fairly large. W h a t is driving that i n v e s t m e n t ?  A l s o , w h y a r e the r e s e a r c h c o m p a n i e s , d e s p i t e their  o b v i o u s c o n f u s i o n , projecting s u c h large r e v e n u e for A S P s ?  T h e IT industry h a s s e v e r a l  p r o b l e m s that A S P s purport to s o l v e .  A t h o r o u g h review of existing literature, a n d a n a l y s i s of the v a r i o u s f a c t o r s the author h a s f o u n d a n d c r e a t e d a s a result of this review, a r e p r e s e n t e d in this s e c t i o n . F u r t h e r m o r e the author a g g r e g a t e s the factors a client w o u l d u s e in its d e c i s i o n to u s e a n A S P into the following c a t e g o r i e s :  •  P u r e information t e c h n o l o g y c o n c e r n s  •  Cost concerns  •  Management concerns  •  Inertia to s t a y with i n - h o u s e s y s t e m s  ' P u r e information t e c h n o l o g y c o n c e r n s ' include i s s u e s with r e g a r d to a c c e s s , security a n d integration of a p p l i c a t i o n s . A n A S P is s u p p o s e d to bring a l o n g all the k n o w l e d g e required to set up a n d maintain a n application. ' C o s t c o n c e r n s ' a r e s i m p l y the a n s w e r s to the q u e s t i o n s "Will a n A S P s a v e m y b u s i n e s s m o n e y , a n d h o w will a n A S P s a v e m e m o n e y ? " the  e x p r e s s i o n "time  is m o n e y " d o e s hold true,  m o s t time  Although  concerns are included  in  ' m a n a g e m e n t c o n c e r n s ' . In ' m a n a g e m e n t c o n c e r n s ' , w e h a v e i n c l u d e d i s s u e s that g e n e r a l l y a r e a s s o c i a t e d with IT, other than t e c h n i c a l c o n s i d e r a t i o n s a n d c o s t . T h e s e i s s u e s i n c l u d e : m a n a g e m e n t distraction f r o m running the b u s i n e s s , troubles in a c c o u n t i n g for IT c o s t s , project m a n a g e m e n t c o n c e r n s a n d predicting c o s t . W e find that it is in this a r e a that A S P s 82  g a i n t h e m o s t traction, a n d t h e s e a r e what clients f o c u s o n w h e n c o n s i d e r i n g a h o s t e d application. factors.  L e t u s e x a m i n e e a c h of t h e s e c a t e g o r i e s in detail a n d look at their underlying  T h e o r i e s a b o u t e a c h individual factor a r e put forward  c a u t i o n e d a n d r e m i n d e d of t h e following p i e c e of s y m b o l logic.  below.  T h e r e a d e r is  T h a t if t h e s t a t e m e n t "If A  then B " is true, it is not a s s u m e d that "not A then not B " is a l s o true u n l e s s it is explicitly stated.  Pure information technology concerns  P u r e information t e c h n o l o g y c o n c e r n s include i s s u e s with r e g a r d to a c c e s s , security a n d integration of a p p l i c a t i o n s .  S o m e of t h e i s s u e s that e n d - u s e r s a r e c o n c e r n e d a b o u t in this  regard are:  1.  G e o g r a p h i c a l l y Distributed a n d / o r M o b i l e W o r k f o r c e  2.  Security Issues  3.  Performance Issues  4.  N e e d for Internal a n d External C o l l a b o r a t i o n  5.  Integration I s s u e s  Let u s e x a m i n e e a c h of t h e s e in detail a n d look at h o w t h e s e f a c t o r s w o u l d impact t h e d e c i s i o n to u s e a n A S P .  Geographically  Distributed  and/or Mobile  Workforce  P o r t e r a f r a m e s t h e n e e d of m o d e r n c o m p a n i e s with e m p l o y e e s w h o a r e widely distributed or highly m o b i l e , to a c c e s s c o m p a n y a p p l i c a t i o n s :  Distributed organizations and those with highly mobile workforces are prime candidates for a hosted applications solution. Good communication is critical to any 83  organization, but especially in environments where people don't have the opportunity to personally interact with all of their peers on a regular basis. Hosted applications enable better communication within distributed firms by providing full-time universal access to information regardless of location - bypassing the barriers and occasional outages often associated with remote access procedures. Firms with centralized employees who all work together in the same building will not enjoy many of the benefits of a hosted software solution. [Portera, 2000] C l e a r l y this is tied to the c o n c e p t of low site specificity of the s e r v i c e p r o v i d e d by the A S P a s m e n t i o n e d in C h a p t e r 4 .  S o if a c o m p a n y h a s a g e o g r a p h i c a l l y distributed or m o b i l e  w o r k f o r c e they h a v e a n incentive to t a k e a d v a n t a g e of this property of the s e r v i c e s of a n ASP.  T h i s a r g u m e n t c o u l d a l s o b e f r a m e d in t e r m s of t r a n s a c t i o n a l c o s t s , w h e r e the c o s t  per t r a n s a c t i o n of supporting this w i d e s p r e a d or m o b i l e w o r k f o r c e is m o r e e x p e n s i v e if it is d o n e i n - h o u s e t h a n by a n A S P .  Either w a y the following theory is put f o r w a r d :  If the w o r k f o r c e of a client is highly mobile or g e o g r a p h i c a l l y s p r e a d out t h e n the client is inclined to u s e a n A S P , otherwise they w o u l d d e c i d e not to u s e a n A S P .  Security  Issues  S i n c e clients often b e c o m e m o r e security a n d d a t a protection a w a r e , s t a n d a r d protections like b a c k u p s b e c o m e m o r e strictly e n f o r c e d .  Ironically, the s e c u r i t y p r o b l e m s c r e a t e d by  d e a l i n g with a n A S P a r e p r o b l e m s that a l r e a d y exist in m o s t o r g a n i z a t i o n s t o d a y . M o s t n o n IT p e r s o n n e l a n d m a n a g e m e n t b e l i e v e that the t r a n s m i s s i o n of s e n s i t i v e d a t a o v e r the Internet is u n s a f e , h o w e v e r c o n s i d e r the following:  "The risk of being intercepted is not even in the top 1,000 concerns for companies today. Web sites make a point of using encryption to guard against a problem we do not have....A case in point: ICSA.net has verified with all major credit card companies, security firms, numerous banks, and law-enforcement agencies the number of cases in which credit card information was intercepted over the Internet. The answer: none. Ever. The real security issue when dealing with an A S P is much closer to home. It involves locking down security inside your own company and 84  ensuring that your A S P does the same. When problems occur, it's at either end of the data transmission, and it's clear that on that score, both companies and the ASPs they use have a lot to think about." [Gilster, 2000] A s with their o w n o r g a n i z a t i o n s , clients must insure the A S P t h e y ' v e d e c i d e d to u s e is taking n e c e s s a r y security p r e c a u t i o n s .  T h i s is the c r u x of the s t a t e m e n t that A S P s  improve  security: e n d u s e r s often overlook security g a p s in their o w n e n t e r p r i s e , h o w e v e r o n c e a n A S P is involved they b e c o m e h y p e r s e n s i t i v e to security i s s u e s . F u r t h e r m o r e , A S P s c a n hire d e d i c a t e d security e x p e r t s that n o n e of their clients a l o n e c o u l d afford. A l t h o u g h security is s o m e t h i n g holding b a c k s o m e c u s t o m e r s , preliminary a n a l y s i s of the m o d e l s h o w s that security actually i m p r o v e s . S o w e p r o p o s e the following:  If the client p e r c e i v e s that A S P s i m p r o v e security then they a r e inclined to c h o o s e to u s e a n A S P , o t h e r w i s e they w o u l d d e c i d e not to u s e a n A S P .  N o t e that this is b a s e d u p o n what the client b e l i e v e s to b e true a b o u t s e c u r i t y i s s u e s with r e g a r d to A S P s .  A s time g o e s o n a n d the A S P m o d e l b e c o m e s m o r e familiar that  perception should b e c o m e more accurate.  Performance  Issues  It is a l m o s t i m p o s s i b l e to g u a r a n t e e r e s p o n s e t i m e s o v e r the Internet b e c a u s e there a r e too m a n y f a c t o r s o u t s i d e the A S P ' s control.  H o w e v e r , for s o m e potential clients, a g u a r a n t e e d  r e s p o n s e time is a must a n d m a y prevent s o m e clients f r o m u s i n g a n A S P . P a c k e t labelling will e n a b l e priority a s s i g n m e n t , a n d t h u s allow I S P s to provide s o m e level of s e r v i c e g u a r a n t e e s , w h i c h c o u l d b e p a s s e d o n to c u s t o m e r s v i a the A S P .  85  A l s o , a s m e n t i o n e d , U D D I / S O A P a n d p a c k e t labelling will s p e e d t h e m a r k e t forward.  UDDI  will allow potential clients to link u p with A S P s q u i c k l y a n d e a s i l y further r e d u c e c o o r d i n a t i o n c o s t s b y lowering u p front investment. A s stated in C h a p t e r 2, p a c k e t labelling with allow a g u a r a n t e e d quality of s e r v i c e level.  W e a s s e r t that a s U D D I / S O A P m a t u r e , a n d p a c k e t  labelling b e c o m e s a v a i l a b l e , a p p l i c a t i o n s that a r e s p e c i f i c a l l y built for t h e online market c o m e into b e i n g ; h o s t e d s e r v i c e s will g a i n stature a s their p e r f o r m a n c e a n d e a s e of i m p l e m e n t a t i o n a p p r o a c h e s that of i n - h o u s e s y s t e m s . F u r t h e r m o r e , barriers to A S P growth, s u c h a s network r e s p o n s e t i m e s , will b e e l i m i n a t e d with p a c k e t labelling t h u s r e d u c i n g uncertainty about p e r f o r m a n c e .  Essentially,  w e a r e stating  t h e following:  A s performance  differences  between the  application a s p r o v i d e d i n - h o u s e or b y a n A S P b e c o m e s m a l l e r t h e client is inclined to d e c i d e to u s e a n A S P , o t h e r w i s e they w o u l d d e c i d e not to u s e a n A S P .  Need for Internal and External  Collaboration  C o n s i d e r the following:  Cross-organizational collaboration has become a necessity in today's business environment. However, the overhead and security issues associated with enabling collaboration via the Internet has created a dilemma in many organizations between the need for network security and the need to share information with partners, clients and other third parties. Hosted applications resolve this issue by providing access to all customer-authorized parties, with higher security levels than most individual firms can attain. [Portera, 2000] C o n s i d e r F i g u r e 2 o n p a g e 11; in addition to t h e c u s t o m e r of t h e client, t h e A S P c o u l d a l s o interact with a n y party that w i s h e d to contact t h e client electronically. Traditional c o n n e c t i o n m e t h o d s s u c h a s EDI d o not allow t h e s a m e f r e e d o m of readily c o n n e c t i n g to n e w partners  86  or third parties in the w a y that the Internet (and additionally u s i n g S O A P a n d / o r U D D I ) . T h i s is o n e of the primary a d v a n t a g e s of A S P s o v e r traditional o u t s o u r c i n g .  F o r t h e s e r e a s o n s w e m a k e the following c l a i m : A s A S P s a n d t e c h n o l o g i e s s u p p o r t i n g A S P s e n a b l e the q u i c k a n d c h e a p e r creation of electronic relationships c o m b i n e d with the client's i n c r e a s i n g n e e d for t h e s e relationships, the client will b e inclined to u s e a n A S P .  Integration  Issues  W e c o n s i d e r s o f t w a r e integration p r o b l e m s to b e the primary r e a s o n that clients w o u l d m o v e t o w a r d u s i n g a n E S S or Full V S P b e c a u s e they a r e v e r y difficult to m a n a g e , a s w e h a v e m e n t i o n e d in C h a p t e r 4 .  F o r e x a m p l e , if a client n e e d e d a n a c c o u n t i n g p a c k a g e a n d a H R  p a c k a g e a n d the client u s e s the s e r v i c e s of two N i c h e V S P s to p r o v i d e that, then the client w o u l d h a v e to integrate t h e s e p a c k a g e s . integrates t h o s e p a c k a g e s .  If a n E S S or Full V S P is u s e d then the A S P  B y using a n E S S or Full V S P the client is benefiting t h o s e  A S P ' s e x p e r t i s e in integration.  A l t h o u g h it c o u l d b e a r g u e d that this is a n ' e a s e of m a n a g e m e n t ' i s s u e , it h a s b e e n c a t e g o r i z e d with IT p r o b l e m s b e c a u s e a l t h o u g h integration p r o b l e m s a r e u s u a l l y difficult to m a n a g e , they a r e a p r o b l e m that originates with the IT itself.  S i n c e t h e A S P a n d the client  will h a v e a n S L A , if the client o r d e r s multiple s e r v i c e s f o r m the A S P it is the A S P ' s p r o b l e m to get t h o s e a p p l i c a t i o n s to work together.  T h e only c a s e w e r e this w o u l d not b e by default  is w h e n the client t a k e s a m i x e d a p p r o a c h w h e r e a h o s t e d a p p l i c a t i o n is to b e tied in with a local n o n - h o s t e d a p p l i c a t i o n .  In this c a s e it is not i m m e d i a t e l y c l e a r w h o w o u l d  r e s p o n s i b l e for integration, h o w e v e r this w o u l d b e a n i s s u e w o r k e d out in t h e S L A .  87  be  For t h e s e r e a s o n s w e m a k e the following c l a i m : A s A S P s i n c r e a s e the clients ability to integration a p p l i c a t i o n s e a s i l y , the client will b e inclined to u s e a n A S P .  Cost concerns  In this s e c t i o n the c o s t s a v i n g s of A S P s a r e a n a l y s e d . T h e s e s a v i n g s c a n b e significant, e s p e c i a l l y for larger c o m p a n i e s a n d c o m p a n i e s in the start-up p h a s e . O f t h e m a n y potential s a v i n g s , following a r e s o m e of the m o s t c o m m o n f o u n d in a review of the literature:  1.  L o w e r up front c o s t s  2.  C o s t of application c a n b e e x p e n s e d outright similar to a l e a s e p a y m e n t  3.  C o s t of a p p l i c a t i o n s a r e s p r e a d o v e r m a n y u s e r s  4.  L o w e r T o t a l C o s t of O w n e r s h i p  5.  A p p l i c a t i o n s that a r e n e e d e d infrequently c a n be u s e d with out h a v i n g to buy the application outright  M a n y of t h e s e benefits a r e o b v i o u s c o n s e q u e n c e s of the A S P m o d e l a n d billing s y s t e m . H y p o t h e s e s a r e not m a d e o n the first four points in the list a b o v e . T h i s is b e c a u s e they a r e inherent properties of the A S P m o d e l a n d individual A S P s w o u l d not c r e a t e s t r a t e g i e s explicitly u p o n t h e s e factors.  H o w e v e r they a r e part of the client's d e c i s i o n p r o c e s s s o they  a r e i n c l u d e d for the s a k e of c o m p l e t e n e s s . Let u s e x p l o r e e a c h in g r e a t e r detail.  Lower up front costs  L o w e r up front c o s t s o c c u r for the u s e r s of a h o s t e d s e r v i c e s i n c e c o s t s a r e d e f e r r e d o v e r the c o u r s e of y e a r s . T h i s is a n o b v i o u s a d v a n t a g e over buying s o f t w a r e .  Often companies  m a k e large upfront i n v e s t m e n t s in software p a c k a g e s only to find the p a c k a g e d o e s not m e e t their IT r e q u i r e m e n t s . T h i s is of benefit to c o m p a n i e s that d o not h a v e a c c e s s to large 88  s o u r c e s of capital a n d w o u l d not h a v e b e e n a b l e to afford it o t h e r w i s e . e c o n o m y w o u l d s e e m helpful to A S P s .  T h e slowing  Uncertainty is driving m a n y m a n a g e r s to a v o i d l o n g -  t e r m c o m m i t m e n t s [Wainewright, M a r c h 2 0 0 1 ; K o b l e n t z , F e b . 2 0 0 1 ] .  Further r e d u c i n g the  c o s t s of u s i n g a n A S P is the fact that s i n c e A S P s h a v e t r e m e n d o u s e x p e r i e n c e c u s t o m i z i n g their software, h o s t e d a p p l i c a t i o n s a r e usually up a n d running m u c h f a s t e r t h a n i n - h o u s e IT projects.  I s s u e s r e g a r d i n g h a r d w a r e a n d networking a r e a l s o greatly simplified u n d e r the  A S P m o d e l , driving the c o s t of c r e a t i n g this relationship lower.  H o w e v e r , the price of starting a relationship, while still lower, is not a s i n e x p e n s i v e a s it o n c e was.  U p until recently A S P s followed a pure " p a y per play" m o d e l . H o w e v e r , C o r i o a n d U S i  (two of the industry l e a d e r s ) s w i t c h e d to a d o w n - p a y m e n t m o d e l [Kerstetter, M a r c h 2 0 0 1 ] . W h a t impact this will h a v e o n client a c c e p t a n c e , a n d w h e t h e r other A S P s will follow this l e a d , is yet to b e s e e n .  R e g a r d l e s s , the e c o n o m i c s b e h i n d the rent v e r s u s b u y a r g u m e n t  still h o l d s true.  We  f e e l that this factor is not a driving f o r c e toward the u s e of a n A S P until a n e w  functionality, application or p a c k a g e is n e e d e d b e c a u s e clients that a r e s a t i s f i e d with their current  IT infrastructure  i n e x p e n s i v e to start.  w o u l d not b u y the s e r v i c e s of a n A S P s i m p l y b e c a u s e it is  H o w e v e r , o n c e there is a n e e d for a n e w set of functionalities, this  b e c o m e s a powerful motivator for p u r c h a s i n g the s e r v i c e s of a n A S P .  Cost of application  can be expensed  outright similar to a lease  payment  C o s t of a p p l i c a t i o n c a n b e e x p e n s e d outright (like a l e a s e p a y m e n t ) without h a v i n g to d e p r e c i a t e the c o s t of software. U n d e r the traditional software a s a p r o d u c t m o d e l , the h u g e upfront c o s t h a d benefit o v e r m a n y reporting p e r i o d s (whether t h o s e p e r i o d s a r e m o n t h s or years).  F o r this r e a s o n , the C a n a d a C u s t o m s a n d R e v e n u e A g e n c y d o e s not allow the 89  c o m p a n y to e x p e n s e that outlay of c a s h , but treats it a s the p u r c h a s e c o s t of c a p i t a l . T h i s capital i n v e s t m e n t c o u l d n e v e r b e fully e x p e n s e d , therefore t h e tax benefits a r e only o n the a m o u n t the product d e c r e a s e s in v a l u e a c c o r d i n g to capital c o s t a l l o w a n c e s a s set forth by the g o v e r n m e n t .  T h i s is a primary a d v a n t a g e of u s i n g a n A S P o v e r p u r c h a s i n g software.  T h i s is a c o s t factor that w o u l d drive clients to d e c i d e to p u r c h a s e a n A S P w h e n n e w functionalities a r e r e q u i r e d .  Cost of applications  are spread  over many  users  It h a s b e e n e s t i m a t e d that the c o s t of maintaining a d e d i c a t e d s e r v e r c o m p a r e d to s h a r e d s e r v e r r e s o u r c e s c a n b e a s m u c h a s three t i m e s higher in a 15 m o n t h time f r a m e [ S C N , 2000].  T h i s d o e s not t a k e into a c c o u n t maintaining the s o f t w a r e that r e s i d e s o n t h o s e  s e r v e r s . S o a s a result the c u s t o m e r of a n A S P s a v e s o n infrastructure c o s t s .  M o r e importantly, the c u s t o m e r s a v e s b e c a u s e they d o not h a v e to p a y for the  entire  a p p l i c a t i o n ; they only p a y for the part they a r e u s i n g (if per s e a t or p e r t r a n s a c t i o n billing is used).  T h i s h a s the s i d e effect of allowing s m a l l u s e r s to a c c e s s h e a v y - d u t y a p p l i c a t i o n s  that w e r e p r e v i o u s l y unaffordable, the effect of w h i c h c a n n o t b e u n d e r s t a t e d .  Furthermore  this is o n e of the primary a d v a n t a g e s of using a n A S P o v e r p u r c h a s i n g s o f t w a r e .  Lower  Total Cost of  Ownership  L o w e r T o t a l C o s t of O w n e r s h i p ( T O C ) exist s i n c e m a i n t e n a n c e of the application a n d availability a r e the c o n c e r n of the A S P .  F u r t h e r m o r e , c o s t s a v i n g s a r e r e a l i z e d b e c a u s e the  c o s t of maintaining a d e s k t o p client, u n d e r the client/server m o d e l , is e s t i m a t e d at $ 1 0 , 0 0 0 dollars p e r y e a r in s o m e o r g a n i z a t i o n s [ S C N , 2 0 0 0 ] .  U n d e r a full A S P s y s t e m , l o w - e n d  d e s k t o p s with a w e b b r o w s e r c a n r e p l a c e m o s t of t h e s e .  90  T h e s a v i n g s o n installation a n d  m a i n t e n a n c e of d e s k t o p software c o u l d b e in the millions for larger c o r p o r a t i o n s .  Lower  t r a n s a c t i o n c o s t s a l s o play a role b e c a u s e the c o s t of the IT infrastructure to support the application is s p r e a d o v e r m a n y u s e r s .  A l s o c o m p u t i n g p o w e r , e s p e c i a l l y o n the s e r v e r  s i d e , is better utilized.  Applications application  that are needed  infrequently  can be used  without having  to buy  the  outright  W a r e h o u s e layout p l a n n i n g a n d W a r e h o u s e locating software w o u l d b e a g o o d e x a m p l e of s u c h software.  M a n y c o m p a n i e s u s e w a r e h o u s e s but f e w s p e c i a l i z e in optimizing their  layout, h e n c e b u y i n g floor layout software m a k e s little s e n s e for t h e s e c o m p a n i e s . T h e s e ' o n e o f f a p p l i c a t i o n s w o u l d h a v e to b e p u r c h a s e d , or a c c e s s w o u l d b e g a i n e d through c o n s u l t i n g c o m p a n i e s that w o u l d b e u s i n g the software.  H o w e v e r in the A S P m o d e l clients  p a y o n a p e r u s e b a s i s , s o there is potential for significant c o s t s a v i n g s if the application is a o n e time u s e or infrequently u s e d p i e c e of software.  H e n c e the following c l a i m is m a d e : If a client intends to u s e a n a p p l i c a t i o n rarely they a r e m o r e inclined to h a v e a n A S P provide that application (in other w o r d s m a k e the d e c i s i o n to use an A S P ) .  Management c o n c e r n s  M a n a g e m e n t c o n c e r n s include but a r e not limited to the following:  1.  N e e d to q u i c k l y s c a l e up or d o w n b a s e d o n w o r k l o a d s a n d growth rates  2.  Y e a r l y c o s t s of application c a n b e predicted m o r e a c c u r a t e l y  3.  ASPs  can  be  held  more  accountable  department. 91  for  shortcomings  than  an  internal  IT  4.  Upgrading issues  Let u s e x p l o r e t h e s e in detail.  Need to Quickly  Scale  Up or Down Based  on Workloads  and Growth  Rates  P o r t e r a m a k e s t h e following s u g g e s t i o n with regard to this i s s u e  Fast-growing companies and those with highly variable workloads may be welladvised not to make the capital outlay associated with a client/server application with limited future capacity, and instead opt to adopt the "pay as you go" model offered by the A S P model - with virtually unlimited scalability. If, however, a company's workload and growth rate is stable and projected to remain so, then a client/server application may make more sense. [Portera, 2000] O b v i o u s l y what P o r t e r a h a s s a i d about client/server c a n b e e x t e n d e d to m a i n f r a m e s y s t e m s or a n y i n - h o u s e s y s t e m s a s well. particular r a n g e of w o r k l o a d .  T h i s is b e c a u s e i n - h o u s e s y s t e m s a r e built to h a n d l e a  If t h e w o r k f o r c e o r w o r k l o a d is curtailed t h e i n v e s t m e n t in t h e  resultant e x c e s s c a p a c i t y is w a s t e d s i n c e i n - h o u s e s y s t e m s a r e often v e r y site s p e c i f i c o r physically specific.  If t h e w o r k l o a d o r w o r k f o r c e is rapidly i n c r e a s i n g , a n i n - h o u s e s y s t e m  c o u l d b e o v e r w h e l m e d with d e m a n d levels it w a s not d e s i g n e d to h a n d l e .  T h e r e is not a s  b a d a n e x c e s s c a p a c i t y situation for t h e client if a n A S P is u s e d s i n c e t h e client is only p a y i n g for t h e part of t h e application they a r e u s i n g . C o n v e r s e l y , A S P s t e n d to s c a l e m u c h better than i n - h o u s e solutions [Portera, 2 0 0 0 ] .  T h i s l e a d s to t h e following h y p o t h e s i s : If a client is e x p e c t i n g a volatile growth pattern t h e client will t e n d to c h o o s e to u s e a n A S P .  92  ASPs  can  be  held  more  accountable  for  shortcomings  than  an  internal  IT  department.  S e r v i c e L e v e l A g r e e m e n t s ( S L A s ) structure is v e r y important in this r e g a r d .  If a n i n - h o u s e  project g o e s o v e r b u d g e t in t e r m s of c o s t or time, the c o m p a n y h a s little r e c o u r s e . T h i s is often the c a s e with c o n s u l t a n c i e s that m a k e no g u a r a n t e e s (or often b r e a k p r o m i s e s ) with regard to c o s t a n d d e a d l i n e s .  H o w e v e r S L A s f o r m a legal a n d e n f o r c e a b l e  b e t w e e n two i n d e p e n d e n t entities.  document  It is r e a s s u r i n g to the client to h a v e s o m e protection  a g a i n s t t h e s e all too c o m m o n e v e n t s in the IT world. T h i s c o n c e p t is d i s c u s s e d e x t e n s i v e l y in the literature o n o u t s o u r c i n g .  T h i s l e a d s to the following theory: the requirement of a set of functionalities that traditionally involve c o s t o v e r r u n s , d e l a y s or e x t e n s i v e consultant activity will drive client c h o i c e toward using an A S P .  Upgrading  Issues  ASPs  an  have  packages.  inherent  advantage  with  regard  to  traditional  E R P and  client/server  M a n y c o m p a n i e s that bought into E R P s a r e not s a t i s f i e d a n d a r e probably  hesitant to u p g r a d e their E R P p a c k a g e s .  L a r g e IT projects t e n d to t a k e y e a r s , a n d o n c e  they start running well, a n u p g r a d e to the p a c k a g e is o n the h o r i z o n (this is often referred to a s ' t e c h n o l o g y indigestion' in the literature o n A S P s ) .  T h i s is not g o i n g to c h a n g e , in fact:  "the rapid p a c e at w h i c h t e c h n o l o g y is c h a n g i n g is only g o i n g to i n c r e a s e e v e n m o r e " [Bushaus, Sept 2000].  T h e p r o b l e m of software b e c o m i n g o b s o l e t e is n o l o n g e r a p r o b l e m  that the client h a s to worry about if a n A S P is u s e d b e c a u s e u p g r a d i n g the a p p l i c a t i o n s is n o w the c o n c e r n of the A S P .  93  T h i s l e a d s to the following h y p o t h e s i s : If the client r e q u i r e s a set of functionalities t h e n A S P s lower the c o s t s of u s i n g that application by eliminating or r e d u c i n g the c o s t s of u p g r a d i n g t h u s i n c r e a s i n g the likelihood that the u s e of a n A S P will b e c h o s e n .  Inertia to stay with current In-House systems If a client d e c i d e d to u s e a n A S P they m a y h a v e to w a l k a w a y f o r m existing IT i n v e s t m e n t s , IT h u m a n r e s o u r c e s a n d traditional m e t h o d s of d e a l i n g with IT i s s u e s . W h a t p r o b l e m s is this c a u s i n g ? Let u s b r e a k d o w n this i s s u e into four major c o m p o n e n t s .  1.  R e s i s t a n c e f r o m internal IT staff  2.  S u n k c o s t s of existing s y s t e m s  3.  T h e k n o w l e d g e that is lost with IT staff is very hard to r e g a i n  4.  C l i e n t uncertainty about the future for A S P s  T h e s e a r e f a c t o r s that, a s they i n c r e a s e , e n c o u r a g e the retention of i n - h o u s e IT s y s t e m s . Let us e x a m i n e e a c h .  Resistance  from internal IT staff  R e s i s t a n c e f r o m internal IT staff c a n b e significant.  A s in [Phair, 2 0 0 0 ] t h e p r e v i o u s 'IT  c h a m p i o n ' m a y not b e willing to let g o of current s y s t e m s they h a d a d v o c a t e d a n d w o r k e d h a r d to get. T h i s IT c h a m p i o n w o u l d a l s o feel s o m e w h a t foolish admitting that s y s t e m s they h a d a d v o c a t e d a r e a l r e a d y o b s o l e t e a n d m a y not e n d o r s e a n A S P solution for that r e a s o n . F u r t h e r m o r e , IT staff w o u l d b e a w a r e of the fact that A S P s o l u t i o n s w o u l d m a k e m a n y of their j o b s r e d u n d a n t , a n d that " k n o w l e d g e e m p i r e s " they h a v e built up a r o u n d existing s y s t e m s w o u l d fall by the w a y s i d e [Phair, 2 0 0 0 ] .  94  T h i s l e a d s u s to the following h y p o t h e s i s : Internal  IT staff  r e s i s t a n c e c a n r e d u c e the  likelihood of the client c h o o s i n g to u s e a n A S P .  Sunk costs of existing  systems  S u n k c o s t s of existing E R P , C l i e n t / S e r v e r or M a i n f r a m e s y s t e m a r e h a r d to w a l k a w a y f r o m for o b v i o u s r e a s o n s . [Charley, 2000] refers to this a s the s u n k c o s t effect, w h e n the b i a s is t o w a r d s s t a y i n g with the i n c u m b e n t IT t e c h n o l o g y , e v e n w h e n the profit-maximizing d e c i s i o n for a firm w o u l d b e to c h o o s e the A S P . T h i s is of great c o n c e r n to A S P s that r e p l a c e the m o s t e x p e n s i v e s y s t e m s s i n c e potential clients m a y u s e this logic to justify not u s i n g t h o s e A S P ' s solutions.  T h i s l e a d s to the following theory: L a r g e or recent s u n k c o s t s r e d u c e the likelihood of the client c h o o s i n g to u s e a n A S P .  The knowledge  lost with IT staff is very hard to regain it if need  be  O n c e a n A S P is a d o p t e d a n d internal IT staff is lost, the k n o w l e d g e that is lost with t h e m is very h a r d to regain a n d is d i s c u s s e d widely in the literature o n o u t s o u r c i n g [Butler, 2 0 0 0 ] . A n interesting a c c o u n t of the c o n s e q u e n c e s of this effect is f o u n d in [ K i n g , 1992].  T h i s is  c l o s e l y related to the f e a r of A S P failure. IT staffing i s s u e s r e p r e s e n t a d o u b l e - e d g e d s w o r d for A S P s , s u c h that it is a r e a s o n to buy a n d not to buy A S P s e r v i c e s . T h i s is c l o s e l y related to the substitutability v a r i a b l e in the p r e v i o u s c h a p t e r .  T h i s i m p l i e s that the lock-in that results b e c a u s e the client h a s r e d u c e d staff is a deterrent to p u r c h a s i n g the s e r v i c e s of a n A S P . substitutability  W e shall not b a s e a h y p o t h e s i s a b o u t h o w the  of the s e r v i c e i m p a c t s the c h o i c e of the client.  e x p a n d e d further in the next factor. 95  H o w e v e r this i d e a is  Uncertainty  About the prospects  for  ASPs  W e h a v e n a m e d the following c y c l e the " C a t c h 2 2 s y n d r o m e " it c o n s i s t s of:  a)  C l i e n t s a r e not s u r e w h i c h A S P m o d e l s will fail s o they d o not b u y in.  b)  A S P s c a n n o t get clients b e c a u s e they a r e all waiting to s e e w h i c h A S P s will s u c c e e d  c)  A S P s fail without clients  d)  S e e a.  T h i s is w h e r e s o m e of the pall of the dot c o r n s h a n g s o v e r the h e a d s of A S P s ; c u s t o m e r s h a v e little faith in m a n y IT c o m p a n i e s a n d i d e a s . H o w e v e r this f e a r m a n y not b e u n f o u n d e d , here's why:  The Gartner Group predicts that 60% of them will fail in the next year [2001]. And by the way, that is a lot more serious than an online pet store suddenly running out of cat chow After all, the demise of a company that runs your critical software would be a little like the power company's cutting off your service for good. [Lashinksy, 2000] A g a i n , M a r k C h e s t n u t ' s q u o t e c o m e s b a c k to u s : " C u s t o m e r s a r e d e l a y i n g  purchase  d e c i s i o n s b e c a u s e they don't k n o w w h e t h e r the A S P s will s u r v i v e . . . A S P s aren't  getting  e n o u g h c u s t o m e r s to s u r v i v e . "  Mission-critical applications such as E R P and C R M were among the first to be offered by ASPs, but they can be a tough sell to customers concerned about turning over control and security of their data to unproven service providers. Even a successful sale results in a small number of seat sales because the majority of a customer's employees do not need access to those applications, analysts say. [Hagendorf, 2000]. If a n A S P w h o p r o v i d e s m i s s i o n critical application fails, results c o u l d b e d e v a s t a t i n g , a n d it is for this r e a s o n m a n y a n a l y s t s project ' c o m m o d i t y a p p l i c a t i o n s ' m a y b e the earliest growth market s p a c e . " W h i l e a n a l y s t s s a y the A S P m o d e l h a s b e e n s l o w to c a t c h o n , they believe 96  a ubiquitous application s u c h a s m e s s a g i n g c o u l d b e the ticket to m a i n s t r e a m s u c c e s s . " [Hagendorf,  2000].  F u r t h e r m o r e " C u s t o m e r s a l r e a d y think of e-mail a s a utility," s a y s L a u r i e  M c C a b e , v i c e p r e s i d e n t a n d s e r v i c e director at c o n s u l t i n g firm S u m m i t S t r a t e g i e s . "In e v e r y s u r v e y I've s e e n , m e s s a g i n g a n d collaboration w e r e in the top half of t h o s e a p p l i c a t i o n s c u s t o m e r s w o u l d c o n s i d e r h o s t i n g . " [Hagendorf,  2000]  C o n s i d e r i n g the A S P Industry  S u r v e y q u o t e d earlier in C h a p t e r 3 a n d the a n a l y s i s of C h a p t e r 4, this w o u l d s e e m to hold true.  T h e literature a b o u t A S P s f o c u s e s strongly u p o n this p r o b l e m . C u s t o m e r s a r e not m o v i n g to t h e m o d e l a n d that is c a u s i n g A S P s to fail. T h i s is c l o s e l y r e l a t e d to t h e a n a l y s i s in C h a p t e r 4 that l e a d to T a b l e 8.  T h i s is the c a s e with a n y n e w m a r k e t a n d c a n only b e o v e r c o m e in  time. W e n o w state the p r e v i o u s t h e o r i e s explicitly in the t e r m i n o l o g y of this c h a p t e r :  A s substitutability of a n A S P ' s s e r v i c e d e c r e a s e s the likelihood of t h e client c h o o s i n g to u s e a n A S P d e c r e a s e s . F u r t h e r m o r e , a s the substitutability i n c r e a s e s s o d o e s t h e likelihood of a d e c i s i o n to u s e a n A S P . T h e s a m e set of s t a t e m e n t s hold true for criticality of the s e r v i c e s in the r e v e r s e .  A s criticality of a n A S P ' s s e r v i c e d e c r e a s e s the likelihood of the client  c h o o s i n g to u s e a n A S P d e c r e a s e s . A s the criticality i n c r e a s e s s o d o e s t h e likelihood of a d e c i s i o n to u s e a n A S P .  L o w criticality, high substitutability a n d low specificity a p p l i c a t i o n s c o u l d b e c o n s i d e r e d the m o s t ' A S P friendly' a s t h e s e a p p l i c a t i o n s a r e the e a s i e s t to s e l l , a n d c h e a p e s t to c u s t o m i z e . H i g h criticality, low substitutability a n d highly s p e c i f i c a p p l i c a t i o n s a r e the least ' A S P friendly' s i n c e they a r e the h a r d e s t to sell a n d most e x p e n s i v e to c u s t o m i z e .  T h e next s e c t i o n s u m m a r i z e s the findings of this c h a p t e r .  97  5.2.  Summary Of Predictions And Findings Of ASP Framework  T h r o u g h o u t the p r e v i o u s s e c t i o n w e m a d e h y p o t h e s i s a n d t h e o r i z e d a b o u t the affects of s e v e r a l f a c t o r s in the clients c h o i c e of w h e t h e r to u s e a n A S P or not. t h e s e h y p o t h e s e s together  W e bring e a c h of  to f o r m the s e c o n d part of our A S P f r a m e w o r k ,  which  is  s u m m a r i z e d in the following set of t a b l e s . N o t e that s o m e of t h e s e f i n d i n g s a r e A S P s p e c i f i c a n d s o m e c a n b e a p p l i e d to o u t s o u r c i n g in g e n e r a l , w e indicate t h o s e factor that a r e A S P specific.  Table 11.  Factors Increasing The Likelihood Of ASP Usage  Highly m o b i l e or g e o g r a p h i c a l l y d i v e r s e w o r k f o r c e ( A S P s p e c i f i c ) Client p e r c e i v e s that A S P u s a g e i m p r o v e s security P e r f o r m a n c e of a p p l i c a t i o n s s a m e online a s i n - h o u s e I n c r e a s e d n e e d for external electronic relationships ( A S P specific) C l i e n t d e s i r e to integrate a p p l i c a t i o n s ( A d v a n t a g e o v e r p u r c h a s i n g software) C o s t a n d time reductions in creating external electronic relationships ( A S P specific) Client n e e d s a n application infrequently ( A d v a n t a g e o v e r p u r c h a s i n g software) Client is e x p e c t i n g volatile growth pattern in w o r k l o a d or w o r k f o r c e ( A S P s p e c i f i c ) Client  expectations  of  cost  overruns,  delays  or  extensive  consultant  activity  ( A d v a n t a g e o v e r p u r c h a s i n g software) H i g h substitutability of s e r v i c e s L o w criticality of s e r v i c e s  T h e next t a b l e p r o v i d e s the set of our h y p o t h e s e s with r e g a r d to f a c t o r s that c a n i n c r e a s e the likelihood of the client's d e c i d i n g not to u s e a n A S P . T h i s is different f r o m the a b o v e  98  b e c a u s e w e h a v e f o u n d that not all of the a b o v e factor c a n d e c r e a s e the likelihood of u s i n g a n A S P a s they d e c r e a s e .  Table 12.  Factors Increasing The Likelihood Of Not Using An ASP  L o w mobility or g e o g r a p h i c a l l y central w o r k f o r c e Client p e r c e i v e s that A S P u s a g e d e c r e a s e s security ( A S P specific) P e r f o r m a n c e of a p p l i c a t i o n s w o r s e online a s c o m p a r e d to i n - h o u s e ( A S P specific) L o w substitutability of s e r v i c e s H i g h criticality of s e r v i c e s  T h e s e t a b l e s c o m b i n e d with T a b l e 9 of C h a p t e r 4 d i s p l a y the results of the f r a m e w o r k the A S P f r a m e w o r k this t h e s i s set out to c r e a t e .  T h e s e three t a b l e s attempt to m o d e l the  c u s t o m e r s d e c i s i o n p r o c e s s a s to w h e t h e r or not to u s e a n A S P a n d if s o , w h i c h of the four t y p e s c r e a t e d in this t h e s i s .  Contrast Between ASPs And Outsourcing A s d i s c u s s e d in C h a p t e r 2 , the fact that A S P s a r e a c c e s s i b l e o v e r the Internet is o n e of their primary a d v a n t a g e s o v e r traditional o u t s o u r c i n g of IT functions.  T h i s h a s s e v e r a l important  implications:  •  B e c a u s e the Internet c a n be c o n n e c t e d v i a s t a n d a r d networking e q u i p m e n t p r o t o c o l s , A S P s r e d u c e the n e e d for infrastructure  •  and  investment.  A S P s e r v i c e s c a n g o 'live' in a m u c h shorter time f r a m e t h e n other  outsourcing  m e t h o d s b e c a u s e the s e r v i c e s of a n A S P a r e a l r e a d y running. •  P r e v i o u s l y m a n y s m a l l e r clients c o u l d not afford the i n v e s t m e n t required for larger applications and  s e r v i c e s with traditional 99  outsourcing.  However,  because  the  s e r v i c e s of a n A S P c a n h a v e a low starting c o s t t h e s e clients c a n n o w h a v e a c c e s s to t h e s e a p p l i c a t i o n s . •  T h e Internet a l l o w s third parties w h o w i s h to interact with the client to d o s o with greater e a s e .  O t h e r f o r m s of o u t s o u r c i n g d o not a l l o w t h e t r a n s p a r e n c y to third  p a r t i e s , s u c h a s c u s t o m e r s , a s a n A S P d o e s . T r a n s p a r e n c y is w h e r e the third party b e l i e v e s that they a r e interacting with the client's IT s y s t e m s , w h e n in reality they a r e interacting with the A S P ' s IT s y s t e m s . T h i s is d e p i c t e d in F i g u r e 2 of C h a p t e r 2 . •  A S P s c a n s u p p o r t the rapid c r e a t i o n b u s i n e s s - t o - b u s i n e s s r e l a t i o n s h i p s b e t w e e n the client a n d parties s u c h a s s u p p l i e r s by acting a s a buffer o n the Internet. T h i s c a n b e attributed  to the fact that A S P s  organizations,  but  can  not only c a n integrate  integrate  cross-organizational  a p p l i c a t i o n s internal applications  as  to  well.  F u r t h e r m o r e , A S P s c a n act provide the facilities for 'translation' b e t w e e n t h e s e applications. •  B e c a u s e the s e r v i c e s of a n A S P a r e often p u r c h a s e d o n a 'per u s e r ' b a s i s , A S P s a r e better s u i t e d to highly volatile w o r k l o a d s .  •  ASPs  s u p p o r t a highly mobile or g e o g r a p h i c a l l y d i v e r s e w o r k f o r c e  better  then  traditional o u t s o u r c i n g b e c a u s e of the universal a c c e s s i b i l i t y of the Internet.  N o w that w e h a v e s h o w n w h y a client w o u l d opt to u s e a n A S P a s o p p o s e d to b u y i n g , building or o u t s o u r c i n g in the traditional w a y s , w e n o w m o v e o n to t h e s t r a t e g i e s A S P s s h o u l d a d o p t in light of this.  5.3.  ASP Strategies As Dictated By ASP Framework  T h i s s e c t i o n outlines the s t r a t e g i e s a n A S P s h o u l d a d o p t .  T h i s is b a s e d o n what type of  A S P m a x i m i z e s the likelihood of s u c c e s s a n d what type of m a r k e t structure it s h o u l d e x p e c t .  100  T h i s is b a s e d o n the findings of this a n d the p r e v i o u s c h a p t e r .  W e s h a l l u s e the A S P  f r a m e w o r k c r e a t e d in C h a p t e r 4 a n d 5 a s well a s the findings in the other c h a p t e r s to outline t h e s e s t r a t e g i e s . W e start b y reviewing the findings of C h a p t e r 4 .  In C h a p t e r 4 w e f o u n d that t r a n s a c t i o n c o s t theory a n d o u r o w n f i n d i n g s w o u l d indicate that clients w o u l d t e n d to u s e a E n t e r p r i s e S u p p o r t S e r v i c e provider or a Full V S P , u n l e s s they a r e confident that they will not o u t s o u r c e m o r e than a limited a m o u n t of functionality or if t r a n s a c t i o n a l c o s t s a r e s o e x t r e m e l y low that c o o r d i n a t i o n c o s t s incurred a r e c o n s i d e r e d worthwhile w h e n c o m p a r e d to the benefit of b e i n g a b l e to mix a n d m a t c h t h e s e r v i c e s of a n y set of A S P s a n d I S V s . W e d o not feel that t r a n s a c t i o n a l c o s t s a r e low e n o u g h in this market b e c a u s e of integration related c o s t s [King, 1992], s o it is our theory that clients will t e n d to u s e either E n t e r p r i s e S u p p o r t S e r v i c e providers or a Full V S P s .  T h i s i m p l i e s that the A S P  will t a k e o n the f o r m s h o w n in F i g u r e 1 2 . In that figure the client interacts with o n e A S P for a p a c k a g e P(i). T h i s h a s the benefit for the client of offsetting all the c o s t s of c o o r d i n a t i o n a n d integration to t h e A S P .  U n d e r this market structure, N i c h e V S P ' s s e r v i c e w o u l d b e  r e s o l d t h o u g h a n E V or E H A S P b e c a u s e t r a n s a c t i o n c o s t s a r e m i n i m i s e d by h a v i n g all IT f u n c t i o n s h a n d l e d by o n e contact.  T h i s a l s o m i n i m i s e s t r a n s a c t i o n c o s t s for the client with  r e g a r d to c o n n e c t i n g to n e w application s e r v i c e s b e c a u s e a n E V or E H A S P w o u l d b e r e s p o n s i b l e for integrating that n e w s e r v i c e into the client's p a c k a g e of s e r v i c e s .  W e predict the two m a i n retail m o d e l s will b e E n t e r p r i s e S u p p o r t S e r v i c e p r o v i d e r s a n d Full V S P s , a n d that both s h o u l d both h a v e lower specificity s e r v i c e s (which h a v e l e s s lock-in a c c o r d i n g to o u r theory) t h u s allowing t h e m to g a i n c u s t o m e r s . O n c e clients a r e u s i n g their s e r v i c e s their high specificity w o u l d b e u s e d to m a x i m i z e l o c k - i n .  Niche V S P s  m u s t f o c u s o n lowering c u s t o m i z a t i o n c o s t s , a n d both  Niche V S P s  and  F o c u s e d S o l u t i o n s m u s t i m p r o v e interoperability by u s i n g t e c h n o l o g i e s a n d s t a n d a r d s that  101  r e d u c e the c o s t of c o n n e c t i o n , thus lowering t r a n s a c t i o n a l c o s t s . H o w e v e r , for N i c h e V S P s a n d F o c u s e d S o l u t i o n s a s a g r o u p , this will i n c r e a s e c o m p e t i t i o n a s s w i t c h i n g c o s t s a r e lowered.  F u r t h e r m o r e , N i c h e V S P s must maintain their f o c u s o n a c o r e s e r v i c e . T h e y m a y  g a i n the h i g h e s t m a r g i n by selling s e r v i c e s to the E S S a n d Full V S P m o d e l s , h e n c e cutting d o w n o n interaction c o s t s with c u s t o m e r s . S o m e N i c h e V S P s that o w n s e r v i c e s with b r o a d a p p e a l , s u c h a s a c c o u n t i n g p a c k a g e s , m a y b e a b l e to o p e r a t e without d e p e n d i n g heavily u p o n a n Full V S P or E S S for r e s a l e . H o w e v e r m o s t N i c h e V S P s will require a n a g g r e g a t o r or reseller to provide t h e m with a n a u d i e n c e of p o s s i b l e clients, e s p e c i a l l y the providers of infrequent u s e a p p l i c a t i o n s .  F r o m a specificity p e r s p e c t i v e , the client w o u l d prefer to b e a b l e to d e a l with N i c h e V S P s or F o c u s e d Solutions.  T h i s w o u l d allow the client the highest d e g r e e of  customisability.  T e c h n o l o g i e s s u c h a s U D D I , S O A P a n d X M L a r e a t t e m p t s to p u s h t h e m a r k e t in that direction b y lowering the t r a n s a c t i o n a l c o s t s of t h e s e relationships. H o w e v e r , the integration p r o b l e m s the client w o u l d f a c e a r e great, a n d a s a result the t r a n s a c t i o n a l c o s t s of maintaining s e v e r a l relationships w o u l d b e s o high, that w e c o n c l u d e that the client w o u l d m o v e t o w a r d a n E S S or Full V S P . S o m e r e s e a r c h in other a r e a s of IT o u t s o u r c i n g arrives at the s a m e c o n c l u s i o n s [King, 1 9 9 2 ; L o h , 1992].  Next g e n e r a t i o n d e v e l o p m e n t tools a n d t e c h n i q u e s s h o u l d further i n c r e a s e the t r a n s a c t i o n a l c o s t s a v i n g s by r e d u c i n g the c o s t s of i n c r e a s i n g specificity.  A S P s h a v e c h a n g e d the I S V  m a r k e t a n d h o w I S V s interact with the e n d u s e r of their p r o d u c t s [ B u s h a u s , S e p t . 2 0 0 0 ; S C N , 2 0 0 0 ] . It is u n c l e a r w h a t impact this will h a v e o n I S V s , h o w e v e r t h e r e is the potential for t h e m to b e d i s p l a c e d . N e t w o r k i n g i m p r o v e m e n t s that m a k e Q o S m o r e p r e d i c t a b l e will instil g r e a t e r client c o n f i d e n c e a n d a l s o s p u r A S P growth.  102  E n t e r p r i s e S u p p o r t S e r v i c e providers or Full V S P s will optimally h a v e both low criticality/high substitutability offerings to g a i n clients a n d high criticality/low substitutability offering to lockin c u s t o m e r s a s f o u n d in C h a p t e r s 4 a n d 5.  A s they s c a l e c u s t o m e r s f r o m low criticality  s o l u t i o n s to high criticality solutions, lock-in is i n c r e a s e d . H o w e v e r , c u s t o m e r s a r e not blind to the c o n c e p t of lock-in or substitutability, a n d A S P s m a y h a v e to p r o c e e d m o r e c a u t i o u s l y than E R P s did b e c a u s e c u s t o m e r s m a y feel they w e r e t a k e n a d v a n t a g e of in p r e v i o u s enterprise i m p l e m e n t a t i o n s , a n d A S P s a r e in a financially w e a k p o s i t i o n .  E V A S P s g a i n the m o s t traction in m a r k e t s that h a v e ' s p e c i a l ' n e e d s .  Healthcare and  g o v e r n m e n t s f e e l , m a y b e rightly s o , that they a r e s o different f r o m other o r g a n i z a t i o n s that they require s o l u t i o n s a i m e d at t h e m a l o n e [Brown, J u l y 2 0 0 0 ; M c C a b e , F e b . 2 0 0 1 ] . T h i s is b e c a u s e m o s t software that h a s b e e n d e s i g n e d for b u s i n e s s in g e n e r a l r e q u i r e s a n extra a m o u n t of s p e c i f i c a t i o n for t h e m . organizations and businesses.  T h i s is d u e to the fact that they a r e different f r o m other  h a v e a different  set of criterion  for  s u c c e s s than  m o s t for  profit  T h e E n t e r p r i s e S u p p o r t S e r v i c e p r o v i d e r s a n d Full V S P s will c o m e into direct  c o m p e t i t i o n in t h e s e vertical m a r k e t s , a n d it is u n c l e a r w h o will prevail.  I S V s h a v e the m o s t to l o s e in this market. If they don't m o v e to a n A S P m o d e l they will l o s e direct contact with m o s t of their current c u s t o m e r s . A s c u s t o m e r loyalty a n d lock-in s w i t c h e s to the A S P a w a y f r o m the I S V , the future role for the ' b r a n d n a m e s ' in s o f t w a r e starts to b e c o m e unclear.  Analysts are already complaining about m y S A P a n d O r a c l e ' s Business  O n l i n e offering o n l y its o w n software.  I S V s a r e g o i n g to h a v e a h a r d t i m e c o m p e t i n g in the  utility m o d e l that s e e m s to b e o n the horizon a s b r a n d n a m e of s o f t w a r e d i m i n i s h e s in v a l u e relative to the v a l u e of the A S P ' s n a m e .  103  5.4.  Summary  T h i s c o n c l u d e s C h a p t e r 5. In this c h a p t e r w e e x a m i n e d the f a c t o r s in the client's d e c i s i o n to u s e a n A S P or not.  In s e c t i o n 5.2 w e c o n s t r u c t e d two t a b l e s w h i c h r e p r e s e n t the s e c o n d  half of our A S P f r a m e w o r k a n d in s e c t i o n 5.3 w e s t a t e d the s t r a t e g i e s A S P s s h o u l d adopt a s a c o n s e q u e n c e of the predictions in our m o d e l . W e n o w m o v e o n to C h a p t e r 6.  104  Chapter 6 .  Conclusion  T h e A S P m o d e l is still in its early s t a g e s of d e v e l o p m e n t a n d m a n y of the current b u s i n e s s m o d e l s a r e m o s t likely f l a w e d [ L a s h i n k s y , 2 0 0 0 ] . H o w e v e r its s u c c e s s is b a c k e d by most of the big n a m e s in software a n d c u s t o m e r s a r e starting to a c c e p t the i d e a of o u t s o u r c i n g their a p p l i c a t i o n s in this f a s h i o n .  A r g u a b l y , current  a p p r e h e n s i o n about A S P s  is, in part, a function  of larger c o n c e r n s  a s s o c i a t e d with m a n y Internet software c o m p a n i e s , n a m e l y the dot c o r n s . A s time g o e s o n a n d s o m e A S P s a r e s u c c e s s f u l , t h e s e c o n c e r n s will be r e d u c e d a n d c u s t o m e r s m a y b e m o r e willing to e m b r a c e A S P s . Dell, Microsoft, S u n , H e w l e t t - P a c k a r d a n d O r a c l e h a v e e n t e r e d the m a r k e t lending their credibility to fledging A S P c o m p a n i e s t h o u g h p a r t n e r s h i p s a n d certification p r o g r a m s [ F o n s e c a , N o v . 2 0 0 0 ; T r a g e r , F e b 2 0 0 1 ; Tillett, M a r 2 0 0 1 ; B u r k e , Nov. 2000].  A S P s will start gaining c u s t o m e r s a s dot c o m f e a r s start to slip a w a y a n d  network i m p r o v e m e n t s will eliminate m a n y c u s t o m e r c o n c e r n s [ M e a r s , F e b . 2 0 0 1 ] .  T h i s t h e s i s set out a n s w e r the following q u e s t i o n : W h a t a r e the d e t e r m i n a n t s of A S P s u c c e s s ? T o a n s w e r this q u e s t i o n w e first set about defining a n d f r a m i n g the c o n c e p t s a n d i s s u e s s u r r o u n d i n g the A S P d o m a i n . W e then introduced a n e w stratification of A S P s b a s e d o n target m a r k e t v e r s u s the s p a n of the p r o c e s s e s they support.  H a v i n g d o n e this, w e  c r e a t e d a n analytic f r a m e w o r k in a n attempt to predict what b u s i n e s s m o d e l s a n d s t r a t e g i e s will b e s u c c e s s f u l in the application s e r v i c e provider m a r k e t s p a c e a n d w h a t s h a p e that m a r k e t will h a v e .  T o d o this w e m o d e l e d the d e c i s i o n p r o c e s s w h i c h the client u s e s to  d e c i d e w h e t h e r or not to u s e a n A S P a n d if s o w h i c h A S P type to u s e . W e c o n c l u d e d the following s t r a t e g i e s m a x i m i z e the likelihood of long-term s u c c e s s d e p e n d i n g o n w h e t h e r  105  they a r e of type Full V S P or E n t e r p r i s e S u p p o r t S e r v i c e s v e r s u s t y p e s N i c h e V S P or F o c u s e d Solution:  Table 13.  Summary Of Successful Strategies  EV or EH  NH or NV  K e e p c u s t o m i z a t i o n c o s t s low.  Offer both high a n d low substitutable services  K e e p c u s t o m i z a t i o n c o s t s low by u s i n g m a s s c u s t o m i z a t i o n a n d building e x p e r t i s e in the s e r v i c e o f f e r e d . F o s t e r relations with a g g r e g a t o r s that E V a n d E H a r e p r e d i c t e d to b e c o m e  Mix a n d m a t c h b e s t of b r e e d software  Stay focused on core knowledge  F o c u s o n integration a n d functionality d e l i v e r e d , not of the n a m e s of the I S V s that created solutions  Utilise U D D I a n d S O A P (or similar t e c h n o l o g i e s ) for their connectivity s t a n d a r d s to drive d o w n t h e c o s t s of c o n n e c t i n g to E V a n d E H  A l s o a s a result of o u r a n a l y s i s , w e stated that t r a n s a c t i o n a l c o s t s a n d a s s e t specificity in this m a r k e t a r e v e r y high. H e n c e the A S P market will t a k e o n a h i e r a r c h y structure in w h i c h clients will opt to  interact  with o n e A S P that s a t i s f i e s the  maximum  number  of  IT  r e q u i r e m e n t s a s d e p i c t e d in F i g u r e 1 2 .  S i n c e this t h e s i s attempts to predict c h a n g e s that h a v e not o c c u r r e d yet a n d  market  structures in a still forming market s p a c e a s i m p l e c o n c e p t u a l analytic f r a m e w o r k c o n s t r u c t e d i n s t e a d of u s i n g a s y s t e m a t i c empirical study.  was  A c o n c l u s i v e test of this m o d e l  a n d the p r e d i c t i o n s m a d e a s a result of it will, therefore, require further e m p i r i c a l work. E m p i r i c a l s t u d i e s of current A S P s a n d A S P c u s t o m e r s to d e t e r m i n e r e a s o n s for buying s e r v i c e a s well a s benefits r e a l i z e d c o u l d a l s o further  r e s e a r c h in this field  greatly.  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[78] W i l l i s , Clint ( F e b . 2 0 0 1 ) , " R a m p C h a m p s , " Forbes, S p e c i a l A S P I s s u e , p 9 4 - 1 0 2 .  111  Appendix A  L i s t Of C o m p a n i e s  Accenture:  A provider of c o n s u l t i n g s e r v i c e s a n d s y s t e m s integration s e r v i c e s  AdWare Systems: A Full V S P (Vertical S e r v i c e Provider) f o c u s e d o n the a d v e r t i s e m e n t a n d m a r k e t i n g industry Agiliti:  A S P of type E S S (Enterprise S u p p o r t S e r v i c e s ) a n d a n a p p l i c a t i o n aggregator  Applicast Ariba:  A n E S S type A S P  I S V (Independent S o f t w a r e V e n d o r ) f o c u s e d o n providing s u p p l y chain b u s i n e s s solutions  AT&T:  Large telecommunications company  Bluetrain:  A S P of type E S S a n d a n application a g g r e g a t o r  Breakaway:  a n E S S type A S P  C a p G e m i n i E r n s t & Y o u n g : A provider of m a n a g e m e n t c o n s u l t i n g s e r v i c e s , s y s t e m s integration, a n d t e c h n o l o g y d e v e l o p m e n t Citrix:  P r o v i d e r of software for porting existing s o f t w a r e to t h e Internet  Concentric:  a n E S S type A S P  Corio:  A n E S S type A S P .  D a t a return:  P r o v i d e r of d a t a c e n t r e s e r v i c e s  Digex:  P r o v i d e r of d a t a c e n t r e s e r v i c e s , o w n e d by W o r l d C o m  eBay:  O n l i n e auction c o m p a n y . R e c e n t l y a n n o u n c e d a d o p t i o n of . N E T platform t h u s m a k i n g it a F o c u s e d S o l u t i o n A S P  Exodus:  Network m a n a g e m e n t s e r v i c e provider  FutureLink:  A n E S S type A S P  GovHost.com:  Full V S P targeting g o v e r n m e n t s  Great Plains:  I S V of b u s i n e s s software recently a c q u i r e d by M i c r o s o f t  IBM:  Hardware manufacturer and ISV. 112  ICSA.net:  International C o m p u t e r S e c u r i t y A s s o c i a t i o n . R e s e a r c h e s a n d c o n s u l t s o n security i s s u e s related to c o m p u t i n g  Intacct:  N i c h e V S P providing a c c o u n t i n g application s e r v i c e s  Intel:  W o r l d s largest m a n u f a c t u r e r of c o m p u t e r p r o c e s s o r c h i p s  Interliant:  A n E S S type A S P  International D a t a C o r p o r a t i o n (IDC): A provider of c o n s u l t i n g s e r v i c e s a n d IT industry research Interpath:  A n a g g r e g a t o r A S P of type E S S  J.D. Edwards:  Consulting company and ISV  Jamcracker:  A S P of t y p e E S S a n d a n application a g g r e g a t o r  KPMG:  C o n s u l t i n g a n d integration s e r v i c e s c o m p a n y  Microage:  A S P s e r v i c e reseller  Microsoft:  L a r g e I S V that p r o v i d e s software for the p e r s o n a l c o m p u t e r market. R e c e n t l y r e l e a s e d . N E T f r a m e w o r k for the d e v e l o p m e n t of Internet native applications  MIRUS:  Full V S P targeting multi-unit restaurant c h a i n s  MySAP.com:  O n l i n e e x t e n s i o n of S A P , E S S type A S P  Oblicore:  A S P Offering S L A monitoring s e r v i c e s  Oracle:  L a r g e I S V of d a t a b a s e m a n a g e m e n t software of the s a m e n a m e . A S P division c a l l e d ' O r a c l e B u s i n e s s O n l i n e ' , t y p e E S S  Pandesic:  Joint venture b e t w e e n Intel a n d S A P . P r o v i d e d e - C o m m e r c e s e r v i c e s , w e n t out of b u s i n e s s in J u l y of 2 0 0 0 . N i c h e V S P t y p e A S P  Peoplesoft:  L a r g e provider of E R P s y s t e m s  Peoplesoft Online:  O n l i n e e x t e n s i o n of P e o p l e s o f t , E S S t y p e A S P  Portera:  D e v e l o p e r a n d A S P for subscription b a s e d software for p r o f e s s i o n a l s e r v i c e s industries (consulting firms, c r e a t i v e a g e n c i e s a n d other professional services organizations), Niche V S P type A S P  Qwest communications: Large telecommunications  113  company  Has  Q w e s t C y b e r . S o l u t i o n s : O w n e d by K P M G a n d Q w e s t . Q w e s t C y b e r . S o l u t i o n s is a n E S S ASP SAP:  L a r g e s t provider of E R P s y s t e m s  Sprint:  Large telecommunications company and ISP  Sun Systems:  M a n u f a c t u r e r of S u n c o m p u t e r s , a n d a n I S V for U N I X b a s e d c o m p u t e r s y s t e m s a n d competitor to Microsoft a n d the p e r s o n a l c o m p u t e r market  U S i n t e r n e t w o r k i n g ( U S i ) : A n early entrant in the A S P market. Q u a l i f i e s a s a both a F o c u s e d Solution (in the a r e a s of f i n a n c e , a c c o u n t i n g a n d s u p p l y chain) b e c a u s e of its u s e of . N E T , a s a N i c h e V S P a n d E S S UUNet:  P r o v i d e r of d a t a c e n t r e s e r v i c e s , o w n e d by W o r l d C o m  Viasoft:  A S P s e r v i c e reseller  WWW  C o n s o r t i u m ( W 3 C ) : D e v e l o p s interoperable t e c h n o l o g i e s (specifications, g u i d e l i n e s , software, a n d tools) for the Internet  WorldCom:  Large telecommunications company and ISP  114  Appendix B  L i s t Of A b b r e v i a t i o n s U s e d  (Brief d e s c r i p t i o n s a r e given w h e r e n e c e s s a r y )  CLEC  : C o m p e t i t i v e L o c a l E x c h a n g e C o m p a n i e s ( c o m m o n t e r m in t e l e c o m m u n i c a t i o n s industry a p p l i e d to local t e l e p h o n e c o m p a n i e s that resulted f r o m the d e r e g u l a t i o n of the t e l e p h o n e industry c o m m o n in the 1 9 9 0 s )  COM  :  Component  Object  Model  (programming  model  that  Microsoft  uses  for  development)  CRM  : Customer Relationship Management  D B M S : DataBase Management System  D C O M : Distributed C O M ( s e e C O M a b o v e , a distributed v e r s i o n of the c o m p o n e n t object m o d e l u s e d by Microsoft. D C O M is mainly u s e d in distributed, multi-tier a p p l i c a t i o n s and databases)  D H T M L : D y n a m i c H T M L (an e x t e n d e d v e r s i o n of H T M L that a l l o w s for the u s e of the C P U of the client c o m p u t e r .  U s i n g D H T M L , the client c o m p u t e r is u s e d for m o r e than just  p r e s e n t a t i o n , w h i c h is the c a s e with H T M L )  ERP  : Enterprise R e s o u r c e Planning  ESP  : E m e r g i n g S e r v i c e P r o v i d e r (term c o i n e d by E a s t e r n M a n a g e m e n t G r o u p a n d a p p l i e d to C o m p e t i t i v e L o c a l E x c h a n g e C o m p a n i e s ( C L E C s ) , providing multiservice a c c e s s s e r v i c e s (data, v o i c e a n d w i r e l e s s h a r d w a r e installation a n d s e r c i v e ) a n d integrated providers s u c h a s in-Building s e r v i c e providers)  ESS  : Enterprise Support Service  H T M L : HyperText Mark-up Language  HTTP  : HyperText Transport Protocol 115  IETF  : Internet E n g i n e e r i n g T a s k F o r c e  IPO  : Initial P u b l i c Offering  ISP  : Internet S e r v i c e P r o v i d e r  ISV  : Independent S o f t w a r e V e n d o r  IT  : Information T e c h n o l o g y  MLPS  : M u l t i - L a b e l P r o t o c o l S w i t c h i n g ( M e t h o d p r o p o s e d for a s s i g n i n g priorities to d a t a p a c k e t s . M L P S w o u l d allow for v a r i o u s Q o S o n the Internet)  MRP  : Material R e s o u r c e P l a n n i n g  NPV  : Net P r e s e n t V a l u e  OLAP  : O n L i n e Analytical P r o c e s s i n g  QoS  : Q u a l i t y of S e r v i c e  RPC  : Remote Procedure Call  SLA  : Service Level Agreement  S O A P : S i m p l e O b j e c t A c c e s s P r o t o c o l ( N e w connectivity s t a n d a r d for s e r v i c e s v i a the Internet, p r o p o s e d by A r i b a , Microsoft a n d I B M . )  TC  : Transactional Costs  TCO  : T o t a l C o s t of O w n e r s h i p  UDDI  : U n i v e r s a l D e s c r i p t i o n D i s c o v e r y a n d Interface ( N e w connectivity s t a n d a r d p r o p o s e d by A r i b a , Microsoft a n d I B M . )  VAR  : Value A d d e d Reseller  VC  : V e n t u r e Capitalist  116  VSP  : Vertical Service Provider  W3C  : W W W Consortium  XML  : e x t e n s i b l e M a r k - u p L a n g u a g e (a v e r s i o n of H T M L that a l l o w s for the creation of  d a t a t a g s by the u s e r . O f t e n p r o p o s e d a s a r e p l a c e m e n t for e l e c t r o n i c d a t a interchange)  117  

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