Time Has Come To Take The ASP Model Seriously

Earlier this month, Siebel, San Mateo, Calif., said it will offer software written specifically for delivery over the Internet and hosted at IBM's data centers.

With that announcement, customers who had never before considered using a subscription service now can view ASPs as a valid software source, industry observers said. Vendors with road presence such as Siebel can have that effect on a market.

But why would Siebel deliver software as a service, given CEO Tom Siebel's past loud protestations that his company would never enter the ASP market? One reason may lie with the numbers.

Market-research firm IDC, for example, reckons that U.S. companies will spend 25 percent more this year on enterprise software as a service than they did in 2002 and will increase their spending nearly that much again in 2004. IDC also predicts that U.S. spending for enterprise software as a service will hit $3.45 billion in 2007, up from $1.17 billion in 2002.

"Tom made the right decision, given the market's upsurge," said a large Siebel customer in the health-care industry who requested anonymity. "People keep harping on him changing his mind, [but] he would have been crazy not to."

In fact, vendors from a range of software categories are eyeing the ASP model as a critical method for attracting the hottest customer segment right now: midsize companies. Many vendors, such as professional services provider Exigen Group and CRM purveyors Salesforce.com, NetSuite and Upshot, rely exclusively on the Internet to deliver their software. Large established players, including Oracle, SAP and Siebel, view their service as an entry point that they hope will lead customers to buy costly perpetual licenses.

Regardless of the vendor's ultimate goal, delivering software over the Internet changes how solution providers make money. With nothing to install, implementation services disappear. So, too, do hardware and software margins. "Our revenue will shift from short-term service revenue to long-term recurring subscription revenue," said Steve Chipman, president of CRM solution provider Lexnet Consulting Group, San Francisco. In addition to traditional CRM apps, Lexnet sells Upshot, which provides a percentage of its monthly subscription fees to channel partners that sell the software. Chipman said selling a service as opposed to licenses does not change the types of companies Lexnet sells into.

It probably will change how Lexnet and other solution providers sell themselves to their customers, however. Nearly all observers agree that solution providers selling ASP software must assume an even greater role as business advisers who help customers change and refine how they conduct business and manage cultural changes.

"With an ASP, the channel has to rethink its areas of opportunities," said Greg Gianforte, CEO of RightNow Technologies, Bozeman, Mont., which hosts customer-service and support applications. "One area is in business-process redesign, where an integrator has a deep understanding of a vertical's operational practices, and helps a client redesign the way it runs a process. And nothing about the ASP model removes the opportunities related to integration work," he said.

RightNow currently has formal channel programs in Asia and Europe. Gianforte said the company is actively looking for partner relationships in North America.

RightNow is seeking solution providers with a mindset similar to that of Fred Reede, principal of CRM Solutions, North Canton, Ohio. Reede said he welcomes the ability that ASPs provide to focus on customers' business processes, rather than their infrastructure.

"Customers like to pay for value, and they see value in our helping them work more effectively," Reede said. "This raises my value to my customers because I'm raising the value of what I'm offering."