Small ERP Vendors Missing The ASP Boat

Event Summary

Regardless of whether the future of a hosted/application service provider (ASP) business model is going to be rosy or not, there seems to be an apparent, although not immense, need for it. Based on TEC's experience from conducting dozens of ERP software selection engagements in the US, approximately 25% of smaller enterprises, first-time ERP buyers, opt for this type of service. Much more surprising was the fact that more than 60% of incumbent mid-market vendors like QAD, Intentia, Glovia, ROI Systems, Lilly Software, to name but a few, which were initially identified as good functional fits and therefore sent a request for proposal (RFP), have chosen not to bid because they do not currently support the ASP delivery model.

As a result, in all ERP software selection gigs where ASP delivery was a critical criterion, the usual suspects that made the final round were the Tier 1 vendors, lead by the ubiquitous SAP, and some nimble mid-market vendors like IFS. Our belief is that the majority of smaller vendors have, therefore, been handing over a big piece of opportunity to their bigger brethren by taking the wait-and-see attitude. Incidentally, we also discovered that some vendors that feature an ASP offering often provide less than minimal customizability and decidedly ungenerous service level agreements. These facts could mitigate those inactive vendors' predicament and should keep the customer on a high alert.

Market Impact

The advent of ASP offerings for enterprise applications and its acceptance, particularly in the mid-market, is one of the recent market trends (for more information, see Essential ERP - Current Market Trends - Part II). A vast majority of vendors have been positioning their offering to take advantage of this trend. This is particularly true for Tier 1 vendors that have seen this as another opportunity to provide a value proposition to the fertile, yet to be penetrated lower end of the market. This is yet an additional quandary for the smaller vendors who are already having a rough time as they continue to expand their products' functional scope, re-architect their products, clarify their value proposition in a morphing and confusing market, and defend their turf from each other and from ever more intruding bigger vendors, while coping with much scarcer resources.

In discussion with TEC analysts, many smaller ERP vendors justify their bland ASP initiative by citing a timid market response and lack of enthusiasm for this business model. To that end, vendors have often put this initiative on a back burner, and jumped on resolving other burning issues like Web-enablement of their products and products functionality enhancement. While this decision makes sense (fat-client architecture is often prohibitive to a viable applications hosting model), it may backfire on them in the long run as the ASP market matures. Vendors who include an ASP solution display an awareness of market requirements that should result in increased opportunities and success. ASP laggards may then well realize that 'it is devil take the hindmost'.

User Recommendations

The decision of going for hosted applications service or not requires due diligence as with any other decision of strategic importance. This is pertinent to both vendors and potential customers. Although the promise of reduced implementation risk and time, lower upfront costs, etc. justify the ASP model, this brings an entire new set of issues for the mid-market organization to consider. Some of the issues that need consideration include the technical capability of the ASP to administer the program, the ASPs' industry focus, applications customizability, the ability of the ASP to guarantee connectivity, the pricing model chosen, and how to negotiate a service level agreement (SLA). These issues need to be addressed in conjunction with evaluating the capabilities of the software package, and understanding if the ASP offering differs from the traditional licensed offering.

More comprehensive guidelines for determining if you should consider the ASP model along with thoughts on selecting an ASP can be found in The ASP Decision.

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