Last summer, the flavor-of-the-month business plan among technology startups was ASP, or “application service provider.” In theory is makes so much sense it was impossible to see how it could fail.

        But for many of those startups, that flavor is looking like a meatless recipe. The recent layoffs at Synchrony Communications in downtown Cincinnati and cutbacks elsewhere point up some interesting and difficult questions about ASPs.

        An ASP essentially rents software. The application is hosted on a central computer, and customers use the software via the Internet. The ASP accepts all responsibility for updating and maintaining the software. The customers pay a subscription fee, and reaps the benefit of not having to hire a small army of administrators to maintain a roomful of computers.
       

Seems ideal

        It seems to be an ideal strategy for a range of businesses, especially for small- and medium-sized businesses.

        “Companies are focusing more on core competencies. Theoretically everything else should be outsourced,” said Rick Kieser, a principal at River Cities Capital Funds, a venture capital firm.

        Companies should focus on “what you do best, what you're world class in;(and) you outsource your accounts payable, your HR staff, your e-mail support.”

        The Internet makes it possible to run a business application from a distance. But that's only a technological hurdle. The taller one is selling the service.

        “That was all the rage when we started out,” said Larry Steinberg of eSpecto, a Cincinnati company whose software monitors Web-site responsiveness and performance. “I find it tougher to sell to the small- and medium-sized guys.”

        “These guys tend to come to market thinking about functionality, and thinking less than they should about who their customers are and how they propose to get to them,” said Arthur Williams, senior industry analyst at Giga Information Group. “This is particularly dangerous with the mid-market,” because mid-sized companies need the personal attention of a salesperson, but don't generate enough revenue to justify the cost of the sale.

        In addition, large companies want to control their software and data, on in-house computers, so they're not interested in ASPs.
       

The Synchrony experience

        That's what happened at Synchrony, which cut its mid-market sales force, farmed out that market to a third-party ASP company and rewrote its customer relationship management software so it could be sold in a box to big companies. It now will concentrate on developing its business among Fortune 1000 customers.

        Chief executive Mark Richey said having Synchrony's software two ways — on an ASP, hosted basis, and available for sale on a licensed basis — allows customers to run it as a trial, and then buy it if they like it.

        Giga's Mr. Williams said ASPs are here to stay, based on the revenue growth of publicly traded ASPs such as US Internetworking, Corio and Interliant.

        Mr. Steinberg also agrees smaller businesses will eventually get on board. “Once they have that outage or an issue (with their Web sites), it makes it much easier to sell to them,” he said.

        E-mail John Byczkowski at johnb@enquirer.com or call 768-8377. Find a list of local New Economy companies at http://enquirer.com/neweconomy/.
       

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