Application Services Healthy and Growing

There was a time when companies specializing in ASP and application management services weren’t exactly rising stars in the IT services industry. But the times they are a changin’. According to two reports released recently by IDC, the worldwide markets for application management services and software as a service (SaaS) are not only healthy, they are gettting stronger.

IDC’s Worldwide and U.S. Application Management Services Forecast and Analysis, 2003-2007 and Worldwide and U.S. Software as a Service Market Analysis and Forecast, 2003-2007: Beyond ASP) paint a positive picture for the next five years.
Driving that growth and presenting new opportunities are technologies such as Web services and business models such as subscription pricing for software, IDC reports.

SaaS vendors are those companies that offer either their own software or a partner’s software as a hosted service. According to IDC, in 2002, the SasS market represented $2.3 billion worldwide. The Framingham, Mass.-based market research firm expects that spending to grow at a 28-percent five-year compound annual growth rate (CAGR) and reach $8.0 billion in 2007.

“This growth will come from midmarket companies or divisions of large organizations that are looking to focus on their core competencies and reduce the cost of running applications,” said Amy Mizoras, program manager for IDC’s AppSourcing research program.

Growth projections for the U.S. market are slightly less than the worldwide forecast. The biggest growth is expected to come in the Asia/Pacific region, which IDC said will enjoy a 45-percent CAGR.

One key for SaaS success is that it take an open standards approach. In a world where old software must work with new software, SaaS offerings must lessen, rather than add to, integration concerns, IDC reports.

It also predicts that in-direct sales will become an increasingly important part of service providers’ businesses. However, it warns that business models will need to take into account things such as how to share recurring monthly revenue and deciding who owns the customer relationship.

In the larger application management services industry, revenue was about $12 billion in 2002. IDC predicts the five-year CAGR worldwide will be 10.7 percent, reaching more than $20 billion by 2007. In the U.S., growth will be a bit more modest, increasing at an eight percent CAGR (reaching 10.6 billion by 2007). As with SaaS, the biggest growth, IDC forecasts, will come in the Asia/Pacific region.

“The spending for application management services in 2002 represents a healthy nine-percent increase over 2001,” said Jessica Goepfert, program manager for IDC’s AppSourcing research program. “Given the growth and resiliency of this market, it’s no wonder vendors from all walks of IT are clamoring for a piece of the pie.”

Those vendors include independent software vendors (ISVs) themselves. After all, IDC says, ISVs know their applications better than anyone, so why not offer the management services as well. ASPs are also attempting to tap the application management market. Many have had to deal with customers reluctant to part with their servers so providing management services seemed like a natural extension. IDC does caution ASPs to carefully develop pricing models and to keep its ASP and application managements services separate.

Overall, the reason for this increase in management and provisioning of applications software is two-fold, IDC said. While the demand for low-cost, quickly implemented services has increased, vendors’ offerings have also matured.

It appears to be an ideal marriage. While customers are struggling to cut software costs and management complexity, software suppliers are eager to increase overall product and services revenues and develop long-term income streams that are more predictable than one-time license.

Do you have a comment or question about this article or the ASP industry in general? Speak out in the ASP Discussion Forum.

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