ASPs: Just Another Business Risk, So Do Your Homework

By SmallBusinessComputing Staff | Posted March 27, 2001
By Maria Medina

When application service providers (ASPs) came into the new economy along with other dot-com ventures the idea was praised, and for small business owners it became revolutionary. An owner of a small business could buy a monthly subscription to an ASP rather than spend time and risk huge costs in hardcore technologies that carried a big price tag. In return, the ASP provided customers with all the hardware and software they would need to run these applications.

Harve Tannenbaum, industry analyst for Boston-based Summit Strategies says, the ASP-appeal was access to IT resources that small business owners just could not afford on their own. "If I were a small business owner, I'd use an ASP in a second," he says.

"The little guy can now have quality and infrastructure just like the big guys." But with all the shine wearing off, after failed business ventures, buy-outs, and hundreds of lay-offs, ASPs became just another risk in the small business game if you did not have a back-up plan.

As a result, vendors say within the past few months more small business owners are doing their homework when it comes to choosing an ASP.

"We have, in the last six months, seen a huge increase in customers that want to find out more about our financial information and status," says Lew Moorman, chief marketing officer for Rackspace Managed Hosting, a San Antonio, TX-based application service provider. "It's really smart what they are beginning to do," he says.

Moorman says business owners have been asking a slew of questions such as, how profitable the company is, who funded the company, when the company was last funded, how much money the company has, before making their decision.

These are legitimate concerns, according to Moorman. If owners turn their business over to someone that's going to go out of business, then they could wind up being pulled down as well, he says.

While business owners search for all the right answers, some experts say most ASPs have not reached profitability and the key to choosing an ASP is to be realistic about your expectations.

"You have to look at where there money is going," says Tannenbaum of Summit Strategies, "profits might not be visible." Tannenbaum says, you have to look at the quality of the offering, the infrastructure, and interview the company a couple of times before making your decision. Most importantly, "Make sure you [the business owner] own the data and there is a way to get it back," he says.

Amid the uncertainty, Tannenbaum believes, the ASP market will remain a viable market. "Like most other things the enthusiasm swung too early," he says, "but we still believe it's a wonderful market."

However, according to Tannenbaum, we have not heard the last of these failed ventures. While this continues to happen, some business owners feel that as long as you have a back up plan, when it comes to an ASP, you can survive a failed partnership.

Barnaby Zelman, president of Delta Z Knives, a designer and manufacturer of sporting and collectible knives and tools, based in Studio City, CA, recommends business owners get a back-up vendor, "someone they can turn to if something goes wrong," he says.

For over a year now, Zelman has been with E-Store Manager , an ASP offering e-commerce solutions for small to medium sized merchants. He can move his business to another ASP overnight if he needs to. "It doesn't necessarily mean you are ever going to use your back-up, but it's there if you need it," he says.

"I know what happens when a company goes out of business," recalls Zelman. "You'll find out they are out of business when you call one day, and all you get is an answering machine. They don't go out of business slowly," he says. "No one tells their clients, we're going out of business.' You're on your own, and you have to expect to be."

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