Application Service Providers: Condemned to Repeat History

Change casts a shadow long before it arrives. Sometimes the shadow signals a coming event or a breakthrough of monumental importance, perhaps altering forever the way we work and live…. Most times that shadow is nothing more than a consultant doing finger puppets in pursuit of yet another trip to the trough.

I had a history professor in college of whom I was very fond. Professor Donworth was everything I aspired to be in my golden years: a high-energy, chain-smoking octogenarian with a lightening-quick mind and the vocabulary of a drunken sailor. When he was born, they threw away the mold. (Unfortunately, some of it grew back.) The professor was fond of saying that “what we learn from history is that people never learn anything from history.” He didn’t simply believe that those who forget history are condemned to repeat it; he believed that we are condemned to repeat history because we always, always forget. Memories of catastrophic mistakes would be forgotten (at least at an emotional level) within two or three generations. He was saying this in the early ’70s. I’m sure that Professor Donworth, like the rest of us, could not have imagined how the cycle of change has shortened since then, and with it, apparently, so have our memories. We seem now to be on our way to repeating catastrophic errors two or three times in a single generation.

Have you picked up a technology or business magazine lately that didn’t contain yet another tiresome article about the virtues and investment potential of application service providers? Neither have I. When I read these rags, I have the paralyzing suspicion that they’re trying to be funny. Faced with an IPO party about to close the bar and software license revenues in free fall, the investment community and key ERP players have teamed up to bring us the biggest misuse of human energy this side of the WWF (World Wrestling Federation). And the shame of this silly, transparent, embarrassing money grab is that just like the phony solutions that came before (reengineering/downsizing, ERP systems, knowledge management), when this foolishness burns itself out, guess who’ll be left holding the water bag. That’s right, Gunga Din, you! Assuming that you’re not selected to be the sacrificial goat, you’ll be expected to pick up the pieces and once again explain to the powers-that-be that competitive differentiation comes from systems that provide a unique advantage—not from systems that everyone else and their brother have access to.

Just in case you’ve been living in a cave these past few months, allow me to give you a short primer on ASPs and debunk a few of the more outrageous claims. Everything you need to know about what an ASP is can be summed up in two words: service bureau! Yup, that’s it. The technology to do what an ASP does has been around and available since the ’60s, except that ASPs in their current form are not likely to work nearly as well as service bureaus did 40 years ago (more on that later). Service bureaus weren’t a big idea back then or in the ’70s or ’80s or ’90s, but now, magically, they are.

The excitement is being generated by software companies looking for new ways to sell licenses, cheered on by venture capital groups looking for new IPO opportunities, and aided and abetted by journalists looking for something new to write about. The juju here is the Internet. Beyond that, I don’t know what the hell the excitement’s about.

Among the more interesting claims being made about the virtues of ASPs is that instead of paying a lot of money up front for software that will soon be obsolete, companies may opt instead to pay a monthly fee to rent applications and have them run from a central location.

To begin with, when was renting anything ever cheaper in the medium term or long term than buying? The fact is, what is being characterized as an ASP offering by companies such as Oracle, PeopleSoft, SAP and Siebel is nothing more than the same old software licensing deal, except that the license price (plus interest) is divided by the number of months the customer wants to use the software. Then the customer is expected to hire an operations service provider (OSP) or the vendor itself to manage and support the applications on a back-end Internet server. Even PeopleSoft admits that this is nothing more than a financing arrangement. So, you can either buy a license up front—which, in most cases, gives you perpetual rights—or you can rent it and have no rights to use it after the rental period. Sound good?

This same justification is being used for hardware. Instead of paying a lot of money up front for servers that will be obsolete in three years, you can instead pay a monthly fee and have it all taken care of for you.

Huh? Whether purchased and amortized, leased from the manufacturer or third party, or rented from an ASP, the difference in annual costs to your company won’t vary by more than a few percent. That’s because servers become obsolete for different companies at different rates depending on the circumstances, and those rates of obsolescence are unaffected by the financing scheme you employ. But, just like software, buying and amortizing hardware means that you own the equipment and can often use it for free, so to speak, for many years after it’s fully depreciated.

ASP proponents point out that customers will no longer need to shell out huge sums of money to software integrators like IBM Global Services and Andersen Consulting, and spend more than a year trying to install these complicated ERP systems, because the software is already up and running. All you need to do is “patch in” via the Web and pay a subscription fee.

This exceptional piece of nonsense completely overlooks the fact that, by far, most of the costs and aggravation of implementing ERP software are incurred in the process of converting data, modifying internal processes, training users and migrating. These activities will occur regardless of whether an ASP is involved or not. Furthermore, these are the points at which most ERP implementations fail. Do you suppose the ASP will let you out of the contract if your implementation doesn’t happen on schedule?

These other objections aside, “patching” into the Web to access applications seems like the ultimate deal breaker. To see what I mean, log on to the Internet and go to Amazon.com. Now, pretending that you’re an order taker for your company’s sales department, call up a friend and take an order for a book. Granted, the screens are not optimized for call-center order entry, but just the propagation delays between screens ought to scare the pants off anyone interested in productivity and customer satisfaction.

Back in the ’60s and early ’70s, IBM and industry experts were predicting that in the entire country there would be a dozen or so mega data-processing centers that every small and midsize business would access to help them run their operations. And during those early years, it certainly seemed to be going in that direction. The problem for the midsize businesses that headed down this path was that they were required, in no uncertain terms, to strictly adapt to the demands of the software.

Then, in the mid- and late ’70s along came minicomputers manufactured by companies like Alpha Micro, Digital Equipment, MAI and Qantel Technologies. At that point, the mega data-processing center concept was finished, not because the minicomputers were cheap, but because they were affordable. These highly adaptable machines allowed small and midsize businesses to run the software instead of having the software run them. Even in those early days, there were visionaries out there who realized that creative, unique, custom-developed applications could help them drive their productivity and customer service well ahead of their competition.

PCs and client/server networks have replaced the minis, but the promise of competitive differentiation through systems remains the same.

So here we are again, at that proverbial fork in the road. Do you entrust this precious resource to your most talented employees, those who have an emotional and financial stake in the business, or do you turn it over to the same characters who have broken so many promises before, those who have no real interest in your success beyond your ability to pay their invoice?

Professor Donworth would say that doing so would make you nothing more than a tool of your tools. The professor always did have a way with words.