A Critical Review of the Emergence, Development, Business Models and Performance of the Application Service Provider (asp) Sector

The internet proved itself in its ability to create new business and give birth to companies that succeeded into the millions. These new businesses managed to redefine and recreate business models that worked, but could not have existed without the internet. One of these new business models is the application service provider (ASP), which emerged in the late 1990's on the back of the internet boom.

The Application Service Provider Consortium defines an ASP as an organization that "manages and delivers application capabilities to multiple entities from a data centre across a wide area network (WAN)." Basically an ASP business model is a business that offers software solutions to businesses which they connect to via the internet or a dedicated intranet connection, on a one-to-many basis. The business then pays for the amount it uses the software or pays a regular fixed fee. Many refer to it as outsourcing your IT, yet there are fundamental differences between ASPs and outsourcing. ASPs tend to target SMEs and offer a standard package which is web-based, whereas outsourcing usually involves tailor made packages which can include any aspect of IT; software or hardware.

ASPs were fuelled by the belief that they offered a new business model to customers, similar to gas and electricity, where you only pay for what you use, 'software-as-a-service'. The technological factors, including scalability, speed and focus as well as price and flexibility are what drove the model forward. It was believed that the ASP model could enhance IT efficiency and reduce the total cost of ownership of IT (IDC 2000). This was perfect for new businesses and SMEs as it cut off barriers to entry with cost, eliminating the need for a whole IT infrastructure, time, set up time could be almost instantaneous, and expertise, businesses didn't need to have an experienced IT staff as the ASP did. The ASPs would maintain and backup all data, keeping it safe and secure, which some businesses couldn't do themselves. New companies that are growing rapidly, but have insufficient infrastructure and lack IT expertise can take advantage of ASP offerings. For fast-growing firms, time to market with sufficient systems is crucial to seize market share. ASPs mean that firms don't have time to wait till they can develop their own infrastructure.

Another important factor that has lead to the development of ASPs is the growing complexity of software and software upgrades. Technology moves too fast for many businesses to keep up with and it has become extremely expensive to attempt to do so. Why should small businesses spend large amounts of resources on continually upgrading their IT? This doesn't just affect small businesses, some companies may have thousands of desktops, changing even a simple software application on these can cost millions of dollars. The ASP model can eliminate some of the problems.

There are different types of ASP business models; one easy way to categorize them is by splitting them up into horizontal, vertical, enterprise and pure-play. Horizontal ASPs offer a particular type of application for a business function across all business sectors, such as Human Resources software. Vertical ASPs offer applications to a particular sector, such as healthcare, they may provide application services for laboratory, prescribing, charting, outpatient visit, coding, and clinician scheduling, and reporting. Enterprise ASPs offer complex solutions such as ERP. Pure-Play are web-enabled applications such as email clients, most people use e-mail services such as Hotmail that are in fact ASPs.

There are many advantages to a utilising an ASP model, there is the reduced cost of not needing an in house IT infrastructure. Companies can implement IT solutions much faster as they are pre-developed and can be quickly customized. Accessibility of applications can be improved, so that companies with offices in different locations can use the same software. And all this can be accomplished without the need for an IT department with high expertise. The Meta group suggest that new companies experiencing rapid growth are most likely users of ASPs as they don't have time to wait for their own infrastructure to be developed.

So the ASP business model looks attractive, yet the reality is that the market was originally not a success on any scale with what was originally thought. Dr Katy Ring of Ovum suggests that "ASP was always a supply-side concept" (ComputerWeekly.com, Thursday 3 May 2001, Where now for the ASP market?). She believes it was created by large vendors which had already fully saturated their existing market. In some ways this holds justification as the ASP model emerged because the technology was there for it to do so. The ASP was never the result of a customer's need; it simply offered generic software on the premise that it could make life easier for businesses and lower costs.

One mistake ASPs made was assuming that the benefits of the model were obvious. Because they felt the model looked so attractive, little targeted, focused marketing was done. Seltsikas and Currie (2002), found that 70% of the SMEs they studied didn't know what an ASP was and only 6% used one. Enterprises are not clear as to how an ASP could actually lower the cost of ownership and improve business processes. This is understandable as very rarely does it work out cheaper to pay a regular fee to use something than it does to own it. So this wasn't a flaw with the ASP model, but a flaw with ASP companies business models. None the less it contributed to the initial failing of the ASP sector, with few businesses actually knowing how an ASP could help them.

Another problem is that potential users of ASPs are concerned about privacy and security issues. There is the issue of the actual physical security of the data, important information that is vital to the running of a business will be physically stored on servers not owned or maintained by them. Not actually ever seeing how secure their data is could make a company very uneasy and unlikely to use an ASP. An ASP should have great security, emergency contingencies and backups in place, but because a business doesn't have any control over this it falls down to trust. The data security, whether the information is going to be accessed by the ASP is a concern for many. The personnel of the ASP will have access to the data for backup purposes, so it could be duplicated or manipulated. Therefore it is very important to have security as an important part of the business model, so that a customer never loses information because proper backups weren't made and to install confidence in customers or potential customers.

One of the key drawbacks to the ASP model is that businesses