The ASP approach. What's it all about
02.11.2001

As companies look for ways to invest in new technology more easily, many are turning to Application Service Providers. Instead of buying their software upfront, they can rent it from ASPs on a monthly basis. Sounds great in theory. But how does it actually work in practice? And how can established vendors keep pace?

According to Larry Ellison, CEO of Oracle, the idea of renting software a month at a time is nonsense:

"Oracle applications take months of work to configure to each customer's needs, so it wouldn't be economic for anyone to rent them on a short-term basis. Renting out traditional, client server and enterprise applications just isn't practical".

In reality, the contracts customers sign with enterprise ASPs are more like leases than short-term rental agreements. The customer still effectively buys the software. They just pay for it in a different way, by spreading the cost over a three or five year term.

Larry refers to this as "subscription outsourcing". This is much like traditional outsourcing, except customers pay a pre-set, monthly price, which goes up and down in proportion to the number of users signed up each month.

There's a lot to be said for this approach. ASPs make outsourcing much more palatable, and bring top-tier enterprise applications within the reach of a whole new brand of potential customers.

But what does this mean for established vendors? How can they compete effectively in this new ASP-driven world?

For many software vendors - including Oracle, SAP and Peoplesoft - the answer is to opt for a lease rental model. They don't have to rewrite their licences. They don't have to adapt their sales incentive schemes. They don't even have to re-engineer their software.

A quick spot of fancy financial engineering with lease rental agreements, a bit of PR, a collaboration agreement with CCL and hey presto. They have a ready-made ASP strategy.

Ultimately, if established vendors are to really compete with ASPs, they need to act quickly. By partnering with CCL, they can. And enjoy all the benefits of the ASP model - without having to take any of the risks or change they way they do business.