Joe Alsop: Progress Software's CEO argues why and how ISVs will come around to the ASP model

December 27, 2000 —

Application server and tools vendor Progress Software has got the ASP bug. Whereas many software vendors are uneasy about selling their applications on a subscription basis, Progress sees it as an extension to its independent software developer network. Progress CEO Joe Alsop recently spoke with InfoWorld Executive News Editor Martin LaMonica about how application vendors will make the switch to application hosting.

InfoWorld: Progress is built around an indirect sales model. Why is that an advantage in the ASP market?

Alsop: Because we think that the success in the ASP market is going to take a combination of things. The technology has to work, and you need some services and partnerships to go with it, but the indirect model that we've grown the company into, something around a third of a billion [dollars annually], is very much built on partnerships with our ISVs, our independent software vendors. And in essence, we build the business around a recurring revenue model, rather than big quarter-end deals, and that's one of the big advantages that we have. The combination of partnerships and the willingness to accept some of the referral of revenue on a subscription basis, spent out over time associated with the ASP model, gives us a big leg up in the marketplace. Essentially, Progress doesn't need the big quarter-end deals to make its numbers. And that puts us in a real advantageous position when approaching something that we think is a long-term win like the ASP model.

InfoWorld: How many of your ISVs have actually become ASPs?

Alsop: There are over 150 that have signed up for the apps and [Progress ASP enablement] program. Now that's the ASP-enablement program, meaning they're getting into the program and there are about 50 that are in market with 70-plus applications, which we believe is the largest number in the industry, along with such statistics as 10 thousand seats deployed among 200 end-user accounts.

InfoWorld: What does an ISV need to do to become an ASP?

Alsop: In general, the application has to be Internet-ready, and they have to be prepared to deal with a business model. And I think the business model is the most challenging part; business model which emphasizes recurring revenue over time rather than a large upfront payment. And if they don't have the financial strength and stability to do that, they will have a bigger challenge. In the long run, I think the ASP model is going to be more rewarding for the vendor than the up-front payment model that we've gotten used to over the last 10 or 20 years, but initially, it's a challenge.

InfoWorld: What are some of those business challenges? Rewarding salespeople would seem to be something that people would need to address.

Alsop: Yes. I think that begs a deeper issue, which is if you apply the old sales and marketing model to a new business, you won't succeed. So you have to seek out new channels in the broader sense of the word, maybe moving from a highly compensated field sales force to telesales or moving to some form of Web marketing or some form of associate marketing. In other words, you have to rethink your business model, and I think one of the big challenges for the large ERP (enterprise resource planning) vendors is going to be twofold. One is going to be the nature of the complexity of their technology. The second is going to be that when you have a business model -- which is built around very expensive field ssales forces -- it's going to be a big challenge to move to an entirely new channel, one that we're pretty comfortable with, but one that will be a pretty big challenge for some of the big ERP vendors.

InfoWorld: Doesn't an indirect sales force preclude the high-end customers, such as the General Electrics of the world?

Alsop: I think that [the] ASP [model] is going to take hold for us as follows: One, it will take hold for us in the midmarket in general as a generalization. Why? Because those are the people that are most IT strapped and have done less in terms of operations than has a big company, right? If you've already got money in and applications running, you're not going to switch to ASP. That doesn't make much sense. If you've already bought the car, you wouldn't then lease it after the fact; you do it upfront.

The second thing that's going to happen is smaller applications within larger companies. I'll give you an example. If one of our ISVs sells a customer-response system that's specifically meant for dealing with complaint letters and inquiries that our large consumer-goods manufacturers get, we're not talking about a sales force automation system; we're talking about something that handles their phone calls and letters and e-mails. And that's an application that's only used by a small fraction of the company. That is not like an ERP system, an order entry system. So that's the sort of thing that's going to get outhosted or 'ASPed' first in a large company. The last thing that's going to get ASPed is the big central systems in a large company. So we think that it's essentially much like the PC 20 years ago. We've got to creep into the thing, from the less strategic application first, moving to the more strategic and the smaller companies first, moving then to the larger.

InfoWorld: Do you think all ISVs will eventually become ASPs?

Alsop: I'm not sure. I think that a large fraction of the delivery of software functionality, let's say in the range of 10 to over 50 percent, is going to move to this model. Whether all of it will move to the model, I can't say.

InfoWorld: Is Progress interested in being an ASP?

Alsop: We are interested in assisting our ISV partners to become ASPs, but as much as we chose not to be directly in the applications business as a supplier of enabling technology, database, app servers, development tools, and monitoring tools, we choose also not to offer the functionality of the application directly. But we're doing everything in our power to assist our partners to take advantage of what we see as a big business opportunity, and to the extent that we participate in the revenue flow that goes to our ISV partners, that will accelerate our growth rate and make us even more successful.

InfoWorld: One point of confusion in the market right now is defining what is an ASP, and who do you buy application services from. Who do you buy them from? Is it the ISV? Is it the VAR? Is it an ISP, or a Web hosting company? Which of those categories will emerge as the application hoster?

Alsop: As the application supplier, let me define it this way: We generally describe the ASP as the organization that directly holds the relationship with the customer. And in our view, the application functionality itself -- that is the business application -- is the most important piece of the puzzle, rather than the platform on which the application is deployed, meaning the outhosting center, the communications bandwidth, the network service provider, and so on. So our view is that the ASP is the one that holds the customer relationships, and in most cases involving more than trivial applications, it will be the ISV, because of the support requirements and so on, who will end up being responsible for the customer's success for the application.

InfoWorld: What if the customer wants several applications?

Alsop: To the extent that certain ASPs become essentially systems integrators, then, you know, they may end up playing a bigger role in it. But my view is that of all different components of delivering a total solution to the customer -- the application itself, its functionality, support of the application -- the ongoing upgrades and enhancements is the single most important piece of the puzzle, and much of the rest is plumbing. It's plumbing that has to be highly reliable and secure, but nonetheless pretty standardized over time. But the real competitive advantage will to the organization that delivers the application and supports the application on an ongoing basis.

InfoWorld: Do your ISVs typically create customized versions of applications?

Alsop: Absolutely. That is one of what I call the ugly secrets with ASPs: What happened to all the customization? Did the need for it just go away? Typically, business applications delivered by our ISVs are customized, but [they] typically require a lot less customization effort than the very large-scale ERP kinds of situations. In other words, they might require a quarter of the customization of a big SAP or Bann installation. Nonetheless, we do see ongoing need for customization. And then you have the issue of integrating upgrades to the application into the customized version of the product. So we see that as a tremendous opportunity to further enhance our toolset and give our tools and give our ISVs an even greater competitive advantage where they already have a strong competitive advantage in terms of speed of deployment. The ASP model, as it's been presented today, kind of ignores the customization issue, and the customization issue is not going to go away.

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