John Hagels book Out of the Box (published in 2002) has an extensive discussion on ASPs, what the early companies did wrong, and how it can be done right. He writes: ASPs in many respects presented a false start in the efforts to break out of the enterprise straitjacket. In particular, few of them adopted Web services architectures as their technology platform. Instead, they attempted to build businesses on the Internet using traditional technology architectures. This proved a significant flaw in the early ASP model.
Hagel first outlines the ASP promise:
Capability Leverage: ASPs offered the promise of access to world-class capabilities from specialized providers, rather than an enterprises having to develop them internally.
Economic leverage: Many ASPs claimed to reduce substantially the total cost of ownership of enterprise applications by providing customers access to large-scale and highly specialized (and therefore presumably lower cost) operations and facilities.
Speed and Flexibility: Since customers would forgo the time-consuming tasks of hiring specialized operations staff, preparing facilities, and installing complex application software on their premises, ASPs appeared to be able substantially reduce the extensive lead times involved in implementing enterprise applications.
Hagel then discusses the ASP reality:
Product Complexity and Lack of Flexibility: Traditional enterprise applications were designed to meet the complex needs of a large enterprise. Small- and medium-sized enterprises rarely needed the full complex functionality embedded in these applications. As a result, the applications proved unwieldy in smaller enterprises they were slower and more complicated than necessary. [Also,] applications designed using conventional technology architectures presented major challenges when businesses tried to customize them or connect them with their existing applications.
Product Performance Concerns: Within the firewall, CIOs had much better control over performance. Outside the firewall, they worried about both technical and corporate performance.
Vendor Performance Concerns: ASPs were new start-ups, with a very limited track record. CIOs found that ASPs had very limited operating history to provide reassurance that their management processes had been tested successfully in high-volume, mission-critical environments.
Challenging Vendor Economics: Customer concerns about ASP performance and the lack of compelling product benefits contributed to much higher customer acquisition costs than anticipated. Sales cycles were also longer than anticipated. [As a result,] ASPs found themselves caught in a potentially life-threatening economic bind.
Among the lessons learnt from the first wave of ASP failures:
Leverage is Essential but Not Sufficient: Companies must be assured that they will be able to trust the applications supporting their most important business activities.
Customization and Integration are Key: Customers will need more customization and integration over time, not less. Competitive pressures are forcing companies to develop distinctive approaches to the market, but also to customize these approaches to the needs of individual customers.
Business Focus Enhances Viability: The first wave of ASPs generally tied to do too much, especially in the early days…which had the perverse effect of increasing risk, rather than reducing risk.
Application Functionality Needs to Rapidly Evolve: [ASPs need to] easily develop new functionality in one part of an application without worrying about malfunctions of existing applications created in other areas. ASPs will also [need to] enhance functionality of existing applications by identifying creative new applications developed by others and plugging them into their existing applications.
Hagels key point: the Internet is not simply a new distribution channel. It often requires a fundamentally new set of products and technologies if a business is to exploit its full potentialWeb services architectures are the key to unlocking the full business potential of the Internet.
That is the starting point for rethinking ASPs. But theres a lot more to ASPs than web services. We also need to rethink the markets they address. We will begin by looking at whats sparked off the renewed interest in ASPs in the developed markets.
Next Week: The Coming Age of ASPs (continued)