The Silver Lining: Bad Economy May Be Good News For xSPs

The widely publicized advantages of using an xSP (service provider) are becoming old news: no infrastructure costs, almost no implementation time, available through a standard browser, etc. At this time last year, analysts thought VARs would soon be reaping the benefits of a solution that can accommodate decentralized/remote workforces and create recurring revenue. Obviously, the market did not evolve as anticipated. There are those in the industry who insist that the model is still a force to be reckoned with, but even before September 11, analysts were reevaluating their growth predictions. Adding to those concerns, Exodus, one of the "strong" ASPs (application service providers), filed for bankruptcy. Then there's the roller coaster year that USinternetworking (USi) experienced in 2001. In April, IDC named USi the top ASP (application service provider) of 2000. By late summer, it was announced that USi was up for $100 million in funding. Before fall was over, there were rumors of bankruptcy. Even the ASP Industry Consortium (ASPIC) was folded into CompTIA in late 2001. It seems to be a logical conclusion that VARs and end users aren't exactly falling over themselves to sign up, and the industry as a whole has some serious user objections to overcome.

The Long Road To Market Maturity
"We've even found within our own company that one objection people don't seem to want to talk about is that they are worried they are displacing themselves," comments Mike Clark, VP of indirect sales channels at Verio, Inc. (Englewood, CO). "Potential customers are asking themselves 'If I do that, will I be out of a job or putting one of my colleagues out of a job?' VARs have the additional concern that suppliers of traditional solutions may cut them off if they begin offering hosted ones."

Chris Patteson, director of product management/pricing for dotLogix (Memphis, TN), says his company has conducted some research on driving demand on the part of VARs, and he believes that ASPs are going to have to sweeten the pot with more than just the promise of monthly residuals. He foresees services like lead generation, toolkits, and co-marketing as some of the incentives vendors will have to offer their resellers to make the model viable.

Patteson emphasizes that hosted solutions can also be a complement to traditional ones, rather than a replacement. VARs can negotiate licensing options that allow them to move a solution in-house in the future. While this may cost a bit more at the outset, this could help foster a feeling of security. It also allows applications to be "tested" via ASP before an expensive in-house solution is implemented or used as an interim solution prior to relocation or an anticipated growth spurt.

The Quest For Five Nines: Is The Payoff Worth It?
A typical reaction to the suggestion of an end user solution is concern about uptime. Your customer may envision paying an idle workforce while a hosted solution is unavailable. Service providers agree that this fear is unfounded. "The availability is actually much lower with a traditional solution," asserts Rex Northen, cofounder and VP of product development at Bizfinity (Cupertino, CA). When something goes wrong - and it will - an end user probably doesn't have the same kind of redundancy and backup that a good service provider does. If you do business with a service provider where every tier and layer is redundant and every disaster scenario has been considered and rehearsed, you have far higher availability. The most likely reason data wouldn't be available would be when a client's Internet connection goes down."

That brings us back to the advice that experts have been giving to service provider customers since the model was created: negotiate a good SLA (service level agreement) which spells out the expectations. "If a service provider is bound by an SLA that says he has to give you money back for downtime, he will make sure it's up," assured Clark.

On the other hand, if a customer is willing to settle for less than the much touted "five nines" (99.999%) of guaranteed availability, an ASP solution might be even more attractive. "You can purchase all the extra layers, but VARs might ask customers to consider whether that is the same degree of reliability they would require in an in-house solution. Patteson says requiring a reasonable guarantee of uptime could save customers money and would probably still provide a high level of service.

When Armed Guards And Biometrics Aren't Within Your Budget
Service providers dismiss users' fears about data security in a similar way. "The idea that a hosted solution is less secure than an in-house one couldn't be further from the truth," says Northen. In a good solution, every tier of the infrastructure is on a separate network, and it's almost impossible to penetrate. In addition, encryption should be used for URLs, data storage, and transmission." In an environment where these precautions are coupled with multiple layers of authorization and a new "key" is issued for each session, reproducing a request and compromising data is nearly impossible. Physical security of data centers is also an important element to consider. The building itself often has armed guards, biometric protection, and cages around the data center.

One reason hosted solutions are often more secure than traditional ones is that they leverage the economies of scale, eliminating multimillion dollar investments on the part of VARs and end users. Just as with uptime guarantees, Patteson believes that flexible SLAs can offer users additional savings. "Customers should be able to balance the services with the cost and pick the one that's right for them, maybe taking a little more risk if their data isn't highly sensitive."

The security of an outsourced solution goes even further than infrastructure, according to Northen. "The people who are most likely to want to steal your data are in and around your office," he says. It's much more difficult to breach a secure ASP than to sit down at an empty desktop and sign on to the network. Often, an employee has the most to gain, whether the goal is sabotage, falsifying data, or downloading sensitive information or customer contacts after being terminated.

Expect The Best, Prepare For The Worst
These are all compelling reasons to use an ASP model, but the fact is that instability in the marketplace is a realistic concern. A Yankee Group study from October 2001 suggests that end users are becoming increasingly aware of the ASP failure rate. Even vendors admit to being a little shaken up by the big names that have failed. "The best thing for a VAR to do when working with an ASP is ask to see the financial plan," advises Patteson. "Ask them 'How well are you funded? How do you plan to maintain your business for the long term? What kind of safety net can you offer me if you go under or are purchased?'" Patteson also advises VARs to look for providers that have insurance policies that allow them to continue operations for a period of time, even if the money runs out. Bail-out options and non-proprietary applications are two other items Patteson advises VARs to have on their SLA checklists.

Regardless of these assurances, these industry experts agree that it's essential that you have some plan for disaster recovery. Northen states, "It's crucial that you take steps to download and back up regularly even if you are using a hosted solution or partner with a service provider who can offer backup copies."

"We have picked up some competitors' resellers because they don't feel secure," says Clark. "Take a good look at the termination clauses and service disruption policies in their SLAs. If a service provider declares bankruptcy, can you get out or do you have to wait until service is interrupted? If you're contractually obligated to stay, that's a very precarious position." Clark also points out that the market may be stabilizing, due in large part to consolidation in the industry.

In a brief issued in October 2001, Yankee Group Analyst Carrie Lewis warned service provider customers that only those companies that deliver significant financial results by the second quarter of 2002 are likely to survive. Yankee Group advised those using hosted solutions to limit the size and duration of contracts as well as establish backup plans.

Recession = Opportunity For Lower Cost Solutions
Not all analysts are quite as pessimistic about the future of ASPs. In a December 2001 report, IDC predicts a 28% CAGR (compound annual growth rate) for service providers, anticipating that the market will reach an estimated $499 billion by 2005.

The downturn in the economy may end up having a positive impact on service providers. "The ASP model is obviously still shaking down," says Northen, but the cost of implementation and running a hosted solution are so much less that it's a calculated risk. If you can get up and running with a mid-market solution that requires no servers, no IT, and no database administrator in a matter of days, that competitive advantage significantly outweighs the risks. Many companies who had been prepared to spend $250,000 before are going away. If they get the same solutions for 10% of the cost, that appeals to them."