Hot market, cold facts

webbusiness.cio.com –

Everyone agrees that ASPs are hot. Zona Research reports that more than 80 applications are now available through ASPs. But how hot should they be? What, exactly, is the ROI from an ASP and how can it be measured?

Many application service providers are less than a year old, and most of their three-year contracts have yet to run their course. Observers won't know for years which are sustainable businesses and which are the most beneficial for customers.

"As this new breed of provider struggles to find its identity," cautions Adam Braunstein of the Robert Frances Group, "CIOs will find varying levels and types of expertise, capabilities, infrastructure, personnel and quality of service guarantees."

Caveats aside, there are a few things one can do to estimate the ROI from a deal with an ASP. Researchers and analysts from the Concours Group, Hurwitz Group and Robert Frances Group have agreed to share their advice with WebBusiness.

ROI -- Measurability Varies by Company Need and Longevity

Dr. Ed M. Roche, a senior researcher with the Concours Group, says an ROI estimate can be made for some, and only for some, ASP agreements. These agreements are differentiated by the company's needs. Roche suggests examining three needs: quick implementation of desktop applications, inexpensive integration of an ERP system and diminished time to market.

A company considering using an ASP to provide an application such as Lotus Notes can estimate potential ROI relatively easily, Roche says. The typical measurement Roche recommends for desktop applications is cost per seat: a user estimates the cost per seat of its in-house application and weighs it against a per-seat bid from an ASP.

An ASP customer with no ERP system seeking complete service -- and not an upgrade to an existing ERP application -- can also estimate the ASP's value with relative ease. By comparing the cost of a typical ERP installation with the smaller fee charged by the ASP, the company can see how much it stands to save by using an ASP. If the money saved can best be used developing a product or in another investment, the company will likely want to outsource its ERP systems.

Companies who use an ASP to speed time to market, however, will have a much harder time trying measure ROI. Unless they can accurately predict the cost of letting competition gain market share, they can only be certain that its better to get to market sooner than later.

Identifying Priorities Aids ROI Measurement

Adam Braunstein, a research analyst with the Robert Frances Group, says an ASP customer can estimate ROI best if it identifies priorities first. Braunstein says that any formula for measuring the value of an ASP over an in-house application would initially deduct the cost of the ASP over the agreement's lifetime from in-house costs for network and system purchases/upgrades, and personnel hiring and benefits over the application's lifetime. The company would then add to this figure, if possible, the value of any nonmonetary criteria such as functionality.

How does a company figure the value of such criteria? Braunstein believes such value can be determined by diligently weighing the importance of functionality, availability, fast time to market, low up-front cost and in-house resources. Identifying such priorities will also help a company find the best ASP and know when it's time to end or amend an agreement.

Look Beyond Cost and Consider "Return on Opportunity"

Bill Martorelli, a research annalyst at the Hurwitz Group, says he can measure criteria such as availability and fast time to market -- decision factors that Roche and Braunstein suggest that companies evaluate -- with something he calls "return on opportunity" (ROO) measurement. The Hurwitz Group believes that the ROO measurement is so accurate, in fact, that it trademarked the term, which brings us to the inevitable question: How do you measure ROO?

Martorelli reports that he measures potential ROO by asking a company questions that force it to identify its application priorities -- criteria similar to those Braunstein identifies. In answering these questions, the company identifies, among other things: if it anticipates the application becoming the basis of an interorganizational capability; if it can apply its application operation staff more profitably toward a customer-facing application; if it has extensive support for remote and mobile workers; and if scarcity of capital or accounting preferences weigh against a purchase decision.

Martorelli would like all companies seeking to measure their own ROO from an ASP to consider the criteria above. After they probe their own opportunity needs and come up with answers like those Martorelli produces, he believes, they will have a better understanding of what opportunities they stand to gain or lose.

In the end, estimating the ROI from ASPs seems only slightly less confusing than the acronyms themselves. While some application service agreements for newer companies, especially those for applications such as ERP, provide a measurable ROI, many deliver companies nonmonetary benefits. A company's ability to measure these opportunities vary by a company's longevity, reason for outsourcing and, most importantly, willingness to continually reevaluate priorities in the relation to the ASP's level of service. After all, ASPs will stay hot only as long as they make companies hot.

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