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Virtual Extension

Taking a Flexible Approach to ASPs

In 2001, subscription-based application service providers (ASPs) represented the new paradigm for application deployment. It was anticipated that ASP spending would reach $7.8 billion by 2004,a and a 2001 survey conducted by PMP Research revealed that 23% of respondents said they would likely use an ASP in the future.b However, this turned out not to be the case. By 2004, spending on ASPs had increased only to $4.2 billion.c

Over the past few years, there has been a revival of the ASP model through the notion of cloud computing and "software as a service." The market for cloud-based services was $16 billion in 2008, and projections estimate the market for spending in this area will reach $42 billion by 2012. However, this still only would represent 9% of overall IT spending.d These services have traditionally targeted larger companies instead of small or medium-sized businesses (or SMEs). Companies like Oracle, Siebel, and Ariba claim that nearly 60% of their business comes from companies that have annual revenues exceeding $1 billion.e However, the ASP model provides the same or greater benefits to SMEs, including lower costs, greater choice, simpler installation (and no related fees), and the ability to access applications from any internet-connected computer.8 ASP subscribers also often receive "24 by 7" technical support. This access to IT expertise (without maintaining an in-house IT staff) results in further savings for businesses.5

Despite the benefits, small businesses have not readily adopted ASPs. The reasons for this lack of adoption include the reluctance of SMEs to replace their existing systems with untried ASPs and the inappropriateness of the "one-size-fits-all" approach that doesn't take in to consideration specific industry or firm requirements.2 This makes the SME a significant untapped market for companies operating in this space.

The purpose of this article is to more fully understand the SME market for ASPs through an analysis of the factors that are most important to likely adopters. While previous work has broadly investigated adoption by SMEs3 and the general adoption of ASPs,7 this study combines both perspectives and proposes the new construct of "flexibility" as influential in the adoption decision. We surveyed 101 SMEs that had not yet adopted ASPs and asked them to rate the importance of several factors that would affect their decision. Correlating likelihood of adoption with the importance of those factors yields several important insights into how ASP vendors should position their product offerings.

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Role of Flexibility

Cost, capability, and security all may have an effect on the adoption of an ASP. However, we propose that another important reason for their lack of adoption (especially by SMEs) is their lack of flexibility. The ASP vendors decide which features they will provide (with little or no customization) and then price their products accordingly. The ASP determines upgrades and when an application can no longer be supported. On the other hand, traditional software vendors offer industry-standardized software, which is often much more sophisticated than their customers need and more expensive than they can afford.10

Small businesses need solutions that are cost-effective, yet can be customized according to their needs.6 Accordingly, ASPs would benefit by offering customizable product offerings. Customizability is considered to be an essential objective in a software process; one way to provide this is through mass customization.11 Mass customization has been defined as "providing products to the customers that fulfill their individual needs through unique combinations of modular components."4

However, mass customization of ASPs is different from the mass customization of other goods, such as Dell's customization of computers. While the fundamental concept is similar, its implementation is necessarily different. Next, using Dell's approach as a starting point, we will explain why a different approach is necessary when customizing an ASP-based application and how customization can be applied to ASPs (see Table 1).

Type of Customization. Dell uses a customized standardization approach, which can be defined as "final assembly of modules according to the specific customer requirements."4 For example, Dell offers a standard version of a notebook computer which customers can modify based on their personal needs. This modification takes place at the point of sale (such as's online store).

However, this approach doesn't fit the ASP model. In this case, a tailored customization4 approach, which includes "customer-specific components and modules in the final assembly," is more appropriate. ASPs may fulfill the needs of small businesses, but most businesses do not use all its features and capabilities. Businesses must rent a complete application when they actually only need a few modules. An alternative would be to offer application components and allow SMEs to pick and choose the modules and functions they want to use. Therefore, it can be said that the notion of an ASP's flexibility is characterized by its ability to provide tailored customization.

Approaches to Customization. There are four distinct approaches to customization: cosmetic, transparent, collaborative, and adaptive. The cosmetic approach to customization is to alter the packaging and the marketing of the product for different market segments.4 This is not applicable here – the goal is to customize the product itself and not its image. The transparent approach is when the product has already been customized but the customer doesn't realize it.4 This is also not applicable – we advocate customization driven by the customer, not by the vendor. Dell is recognized for its collaborative approach to customization – they help the customers identify product offerings that fulfill their needs.

However, most appropriate to the case of ASPs is the adaptive approach. In this approach the product is designed so that the customers can alter it dynamically to suit their needs.4 For example, a business might decide specific application modules are no longer needed. They would be able to replace them with other modules that are more appropriate. The ASP subscription fee would be the total of the subscription fees for the modules the SME is currently using.

Customization Strategies. A central feature of customization is the strategy used during the production and design phase of the product. Customized standardization uses the postponement strategy in which high percentage of parts are used across many different products in the design and manufacturing process, and the product is assembled at the last possible moment.4,11 Postponement works best when there is a standard platform to which customers can add extra features. For example, Dell has a laptop product platform to which customers add additional features.

The tailored customization approach requires ASPs to adhere to modularization, a product design strategy to create a highly customized product. In this design strategy, the product is divided into various components (modules) and the product is developed by assembling modules chosen by the customer. This strategy allows for maximum individual customization.4,11 An ASP can offer an application with a minimum set of modules, to which the customer will add modules based on their needs. For instance, a business could choose a human resource application that tracks employee information, but not a payroll module (which may already be outsourced to a third party).

Customization provides several advantages to vendors of ASPs, such as increasing product scope (functionality added to the core product) and variety ("mixing and matching" modules). Customers attach a higher utility (such as value) to a mass customization configuration1 as the product is more suited to their needs. Because SMEs are likely to be searching for low cost, tailored application solutions, customization should encourage SME adoption of ASPs.

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An Integrated Model of SME ASP Adoption

We propose that flexibility through customization is an important predictor of ASP adoption and should be integrated into existing adoption models. Our proposed model of SME ASP adoption (see Figure 1) includes "flexibility," along with constructs from two other models. The first, the Electronic Commerce Adoption Model,3 focuses on factors that affect adoption of e-commerce by SMEs. These factors include perceived usefulness, perceived ease of use, and an increase in productivity. The second model, developed by Sursarala et al.,7 addresses overall satisfaction with ASPs, and includes factors such as functional capability and prior Internet usage.

Perceived increase in productivity. IT has been shown to have a positive impact on both managerial and business productivity because it facilitates communication, allows access to information, and aids decision-making.3 However, small businesses often cannot afford to hire and retain an in-house IT staff. ASP vendors can provide IT expertise to SMEs at an affordable price.5 ASPs can also help small businesses adopt business applications that are suited to their needs.5 Therefore, likely adopters of ASPs are likely to see an increase in productivity as an important factor.

Perceived ease of use and perceived usefulness. Perceived ease of use and perceived usefulness are established determinants of intention to use a system.3 Perceived ease of use refers to user friendliness of the system, the ease in learning the system, and the help features provided by the system.3 Therefore, we can infer that a user-friendly ASP is more likely to be adopted by small business. This user-friendliness could be operationalized as context-sensitive help or an intuitive user interface. Therefore, we propose ease of use will be perceived as important by likely adopters of ASPs.

Perceived usefulness refers to the value provided to the individual by the technology. A few of the benefits of adopting an ASP are accomplishing complex operational tasks quickly and efficiently, improving job performance, and increasing productivity, all of which can add value to the business.3 In the model, perceived usefulness is operationalized elsewhere by flexibility, an increase in productivity, and functional capability.

Cost. In the case of ASPs, costs refer to subscription fees and the savings generated by using the ASP.7 A business can lower its costs by not purchasing a full suite of applications and can realize lower in-house maintenance and labor expenditures. The potential savings in total costs have been estimated to range from 30% to 70%.5 Therefore, we propose that likely adopters of ASPs are likely to see cost as an important factor.

Functional Capability. The capabilities of ASPs are both business-oriented and technological, which include understanding client's business requirements and the ability to deliver the promised applications.10 The stability and financial soundness of the vendor is another component of functional capability.7 The strength of an ASP's capabilities also influences the level of trust the customers have in the ASP.10 Therefore, functional capability is likely to be more important to likely adopters of ASPs.

Experience. Experience-based norms are "the standards upon which consumers rely to assess performance."7 Consumers often compare prior experience with similar services or compare capabilities of the service with the alternative services.7 Small businesses are more likely to perceive ASPs as useful and adopt them if they have previous technology experience. The ease with which a business could use an ASP's services depends partially upon their familiarity with the Internet and web-based applications.7 We propose that likely adopters of ASPs are those organizations with greater technology experience.

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Survey and Data Analysis

We conducted a survey to test the associations described in our model (see sidebar). Subjects were asked to rate the importance of the six factors listed in our model as influences on their adoption decision. They were also asked to rate their likelihood of adopting an ASP in the future. We targeted small and medium sized businesses in the Northeastern United States (defined by The Small Business Administration (SBA) as businesses "having less than 500 employees"). The survey was Web-based and sent to 1,800 businesses. As an incentive to complete the survey, a $200 gift certificate was given to a randomly chosen respondent.

There were 113 respondents to the survey. Most (96%) were small businesses with less than 100 employees. The rest had between 101 and 500 employees. Most respondents felt that they had high levels of experience with the Internet (85%), email (90%), and using a Web site (80%). Only 30% felt that they had high levels of experience with online banking and purchasing from suppliers. Because we were most concerned with those SMEs who had not yet adopted ASPs, the number of respondents used for the analysis was 101 (descriptive statistics are provided in Table 2).

We used a multiple regression model using the subjects' assessed importance of each factor as independent variables, and the likelihood of adoption as the dependent variable (see Table 3). We found that the importance of cost is positively associated with likelihood of adopting an ASP. Further, we found that the importance of financial stability of the ASP, the ability of the applications to support relevant business functions, and service reliability (the three components of functional capability) are positively associated with the likelihood of a small business to adopt ASPs. Contrary to our expectations, those small businesses that saw flexibility as important were less likely to adopt an ASP (as indicated by that factor's negative coefficient). We found the importance of increased productivity is also positively associated with the likelihood of adopting an ASP (although marginally significant). Ease of use and experience were not significant, which may imply the ASP adoption decision is not driven by these factors.

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Recommendations for ASP Vendors

Based on the results of our study, we propose three recommendations for ASP vendors. These recommendations are intended to increase the attractiveness of ASPs to small businesses by making the applications and the services provided by the ASP more valuable to them.

Recommendation #1: Add flexible product options while retaining vendor-supplied configurations The most likely users of ASPs appear to see flexibility as less important. However, our analysis also shows that the likely users of ASPs see functional capability as important. Specifically, these users see the ability of applications to support relevant business functions as important over those users who are less likely to adopt. This may simply reflect the perception that ASPs aren't flexible (which is true with regard to most ASPs), and therefore those who value flexibility are less likely to adopt an ASP.

This represents an opportunity for ASP vendors by increasing the flexibility of their products and communicating this to their potential customers. An array of product offerings that support various business functions would allow customers to create a product tuned to the specific needs of their industry. For example, in the highly regulated health care industry, an application that addresses those regulatory requirements would help those SMEs maintain compliance. Those who do not require this level of flexibility could always rely on vendor-determined configurations.

Recommendation #2: Marketing financial stability as a key differentiator We found that those who are likely adopters of ASPs consider financial stability an important consideration. In the past, this has been an issue with ASPs – many went bankrupt, leaving businesses using their services without mission-critical applications. Therefore, promotional material for ASP vendors should emphasize their financial stability. This may include making the results of financial statement audits (where the auditors attest to the financial stability of the firm) accessible to customers. An ASP that is financially stable is more likely to win the trust and the confidence of small businesses.

Recommendation #3: Provide clearly defined service level agreements (SLAs) Service reliability is more important to likely adopters of ASPs and a way to provide assurance of reliability is through Service Level Agreements (SLAs). A legally binding contract between the ASP vendor and the small business is a tool for setting price and performance requirements, increasing trust and confidence in the ASP.

The SLA should also provide clear guidelines that they will follow in case of a system failure. Those guidelines should also describe the procedures followed by the ASP to backup the data of the system and restore that data in case of a system failure. This should increase the confidence in the ASP vendor, resulting in a higher perception of service reliability. Walsh9 recommends that to build confidence in an ASP, their disaster recovery (and general security) policy should be subject to auditing and certification by a third-party.

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Areas for Future Study

This study opens up two areas for further investigation. First, future work should investigate how the need for flexibility may vary depending on the application. For example, a word processor (such as the one provided by Google Docs and Spreadsheets) would not require the same level of customizability as an ERP system.

Second, while this study's focus were the preferences of those who have not yet adopted ASPs, it may be useful to look at organizations who have already adopted ASPs to see how potential adopters compare to actual adopters. This would show whether pre-adoption preferences translate to an actual adoption decision.

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SMEs represent an untapped market for application service providers. In this paper, we make the case that the core of an ASP vendor's SME strategy should be flexibility. Flexibility appears to be most important to those who currently are the least likely to adopt ASPs, implying that potential customers who want flexibility may be avoiding them. This represents an opportunity for ASP vendors by providing customized and affordable applications that address the specific business needs of SMEs. Consistent with prior literature, we also recommend an ASP marketing strategy that emphasizes financial stability and service quality, because the most likely potential customers of ASPs see these factors as most important. This can be implemented by clear communication, both through the financial health of the vendor and in the service level agreement provided to customers.

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1. Dellaert, B. and Stremersch, S. Marketing mass customized products: Striking the balance between utility and complexity. Journal of Marketing Research 42, 2 (2004), 219–227.

2. Seltsikas, P. and Currie, W. L. Evaluating the Application Service Provider (ASP) business model: The challenge of integration. In Proceedings of the 35th Hawaii International Conference on System Sciences, (Waikoloa, HI, 2002), 2801–2809.

3. Grandon, E. and Pearson, M. Electronic commerce adoption: An empirical study of small and medium U.S. businesses. Information & Management 42, 1 (2003), 197–216.

4. Mikkola, H. J. and Skjott-larsen, T. Supply-chain integration: Implications for mass customization, modularization and postponement strategies. Production, Planning & Control 15, 4 (2004), 352–361.

5. Patnayakuni, R. and Seth, N. Why license when you can rent? Risks and rewards of the application service provider model. In Proceedings of the 2001 ACM SIGCPR Conference on Computer Personnel Research (San Deigo, CA, 2001), 182–188.

6. Schubert, P. Personalizing E-commerce applications in SMEs. In Proceedings of the Ninth Americas Conference on Information Systems (Tampa, FL, 2003), 737–750.

7. Susarala, A., Barush, A., and Whinston, A. Understanding the service component of application service provisions: An empirical analysis of satisfaction with ASP Services. MIS Quarterly 27, 1 (2003), 91–123.

8. Tao, L. Shifting the paradigms with the application service provider model. IEEE Computer 34, 10 (2001), 32–39.

9. Walsh, K.R. Analyzing the application ASP concept: Technologies, economies, and strategies. Comm. ACM 44, 8 (2003), 103–107.

10. Yao, Y. and Murphy, L. Client relationship development for application service providers: A research model. In Proceedings of the 35th Hawaii International Conference on Systems Sciences (Waikoloa, HI, 2002), 2780–2789.

11. Yao, Y., Watson, E., Chen, Y., and Houston, A. An integrative model of clients' decision to adopt an application service provider. In Proceedings of the Ninth Americas Conference on Information Systems (Tampa, FL, 2003), 1664–1668.

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Farheen Altaf ( is an associate auditor at Ernst & Young.

David Schuff ( is an associate professor of Management Information Systems at Temple University in Philadelphia, PA.

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F1Figure 1. Proposed model of SME ASP adoption

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T1Table 1. Customization approaches of Dell and the ASP Model

T2Table 2. Descriptive statistics for variables used in the model

T3Table 3. Association between importance of factors and intention to adopt

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