Intelligent Enterprise

Better Insight for Business Decisions

RSS
Webcasts
Whitepapers
Subscribe
Home

October 8, 2002

Outsourcing Deja Vu

IT outsourcing is staging a comeback, but must first learn from ASP's mistakes

by Joshua Greenbaum

One of the unfortunate casualties of the 1990s is about to stage a comeback, and it's going to make a huge difference in how many companies spend their IT dollars in the next few years. What used to be called the application service provider (ASP) market took a near fatal hit as users questioned the viability and positioning of the companies that sought to pioneer the concept. But it's hard to keep a truly good idea down, and the basic services that the ASP vendors were trying to provide to enterprise software customers are now even more relevant, and possible, than they ever were before.

But before you dust off an ASP proposal from some '90s relic, it's important to learn from past mistakes. Today's ASP market has returned to its roots in outsourcing, and the best candidate for your outsourcing may be a company you already know well: your enterprise applications vendor.

Same Game, Different Name

What the ASPs pushed was an Internet-era rehash of that grand old concept in the computer business, IT outsourcing. The idea is pretty simple: Take the part of your IT infrastructure that has no particular strategic value, and hand it off to an outsourcing company that will own the hardware, run the software, and provide the help-desk services and maintenance your users need.

Back in the '90s, the main driver for ASPs was personnel costs: Many companies, particularly those outside the geo-economic centers of the Internet boom, had a hard time finding and retaining qualified personnel to run their advanced or advancing IT environments. This situation was particularly true at a time when implementation costs for enterprise software were two to five times the cost of the software itself and qualified IT personnel were commanding increasingly high salaries or bailing out to join their local Internet start-up.

But the benefits of the model reached far beyond overhead and total cost of ownership, both potentially huge savings. ASPs also promised to maintain much better service levels, lower downtime, better manage IT costs, and cut back on the need for executive management to focus on nonstrategic elements of the business.

What Went Wrong

What happened to the ASPs is a lesson in how not to provide strategic IT services. Many ASPs lusted for the outrageous fortunes of the dotcommers and built companies that lacked the basic requirements for user acceptance: expertise, stability, and confidence. But companies needed something more akin to a bank than a software start-up, and the fear — later justified — of ASPs' financial failures kept many otherwise willing customers away.

Other ASPs tried to cover too many types of applications and quickly found that they had no way to scale their businesses. The applications didn't support multitenancy, which meant that customers needed their own hardware and software, erasing any possible economies of scale for the ASP. The result was, ironically, that the more customers an ASP acquired, the less profit it could make.

And, finally, so many companies with different business models started calling themselves ASPs that, in the end, no one knew what the term meant. Some of the ASPs were really software vendors that "rented" their software and had no real track record or expertise in true outsourcing. And many of these companies were on even shakier financial ground than the "real" outsourcing ASPs, which only made for a bigger mess and more user wariness.

Then and Now

So here we are in 2002, and only a few things have changed. Companies no longer have trouble finding and retaining good help — the market is flush with enterprise software experts — but now they can hardly afford to keep the ones they have, much less hire new people to run new IT projects. Management ranks are thinner, too, and the need to focus on bottom-line results has made running the company and tending to the IT requirements as well difficult. And the ASPs are largely gone or irrelevant: Survivors are still not the sturdy, reliable companies that make for a safe outsourcing bet.