System Transformation Portal

Using An ASP Need Not Mean Losing Control

by William M. Ulrich

Originally published in Computerworld on 9/19/2000

Last year, a real estate management executive told me that his and several other real estate companies, were forming an application service provider (ASP). The ASP would handle IT functions for these firms, allowing them to eliminate in-house applications, IT staff and related infrastructure. The business plan stipulated that a dozen executives from several real estate firms would join the board of the new ASP. They planned to take it public based on projections that hundreds of companies would sign up for its services. While the executive who talked with me felt the ASP was beneficial, he had some concerns.

This increasingly common ASP business model exposes clients to certain risks. The executive wondered: What if the company were to unfairly cater to the companies of the founding directors? Of greater concern was the potential for the ASP to establish a large client base, but fail to provide acceptable services. And, if the founding directors companies didn't suffer certain problems, the problems might be ignored. He envisioned a worst-case scenario where the ASP failed and left countless clients with no backup processing capacity.

ASP risks are real, but why are they more significant than those in other IT relationships? Every software license or service agreement has some associated risks, but the ASP model magnifies the impact of those risks. Using an ASP to handle processing requirements means that you'll be curtailing in-house processing capabilities. And, a failure in a traditional outsourcing agreement might cause a company to reassert control over its information infrastructure. But in the case of an ASP, companies eliminate or downsize information infrastructures and shift most IT functions to the ASP. And the risks increase as your processing infrastructure shrinks and dependence on the ASP grows.

The case of Pandesic (Page One, Aug. 21) helps support these concerns. The announcement of a shutdown and subsequent layoffs at Pandesic caused major concerns among its customers. Fueling these concerns was the fact that Pandesic's CEO didn't respond to their phone calls.

Given that many ASPs are still in their infancy, it's unclear how large the ASP market and the associated risks might grow. But as more companies look to ASPs, they're being told to take certain precautions. ASP clients have been warned to audit ASP's financial statements, build contingency plans in case of ASP failures, ensure that company data doesn't end up in bankruptcy court, and obtain the rights to an ASP's source code for the applications being used.

But these precautions only treat the symptoms of a business model in need of retooling. If you're looking to form or join an ASP, consider that traditional ownership models, where investors fund a startup and take it public, offer clients little control over their future. An ASP assumes control of your information management function, an element of your business you may not want to manage, but need in order to survive. Given the high stakes, you should consider a scenario in which every client has ownership rights in the ASP and input as to how it functions.

Shifting the ASP business model to a member-owned entity allows clients to have access to decisions impacting their future. Consider these two ideas:

• Forming a member-owned ASP involves creating a privately held corporation and distributing ownership rights among current and future clients. Clients would exercise control by placing representatives on a series of regional boards.

• Profits could be filtered into a publicly held entity, split among the ASP's employees or reinvested in new ASP offerings. This decision depends on numerous factors, including who owns the assets, market potential and third-party vendors who provide services on behalf of the ASP.

If you're shopping around for an ASP, or being asked to help form one, consider the benefits of having control over the future of your information-processing capabilities. An ASP is an extension of your virtual enterprise and you should consider this when establishing these ASP relationships.