Companies delivering application management (AM) services currently dominate the application outsourcing market. While they share the market with the newer application service providers (ASPs), they dwarf the young entrants in market share (see Figure 1).

While there are strong similarities between the two business models, there are also important differences. Figure 1 Application Management and Application Service Provider Worldwide Forecast ($B)

Two things about the application management business bear directly on the ASP industry.

First, companies doing AM business tend to have longer track records than the ASPs, they have more experience, much higher brand recognition, and more resources. Some of the names in AM are deities in the IT services pantheon and include IBM Global Services, Accenture, EDS, and Cap Gemini Ernst & Young, to name a few.

Secondly, several of these AM companies, including Accenture, have already moved to offer ASP services themselves. This is natural because both ASPs and AM companies are driven by the same kinds of business needs:

* Both involve the management of applications and the assured delivery of application functionality at a time when the role of IT is evolving to become a much larger and more central aspect of the way business is conducted.

* Both tend to be driven by businesses' need to focus on core values rather than IT-related issues. They are also both employed to help husband a business's IT resources to help meet critical objectives. Some Differences

* Unlike ASPs, the AM business model often involves extensive, far- reaching, and lengthy engagements ranging from the custom development of applications to onsite participation by consultants, developers, and others from the AM company. AM solutions are frequently one-to-one solutions serving the needs of a single client with a custom product.

* Unlike the ASP model, the AM business plan usually involves the care and feeding of applications already owned by the end-user company. For ASPs, the opposite is true. In the typical ASP model, the ASP owns the license and provides access to the application to only the end user so costs associated with application ownership are spread out over the lifetime of the contract, thus lowering the up-front entry costs. In recent iterations of the ASP model, however, the license is sometimes sold separately to give the end user a more secure relationship with the software's creators.

* Unlike AM companies, the ASP brings a relatively instant deployment of the "total solution" approach, including infrastructure and anything from a single application to a vertically tailored, integrated suite of applications. Speedy deployments are due in part to limited customization and integration efforts.

* While AM companies can manage applications either from the clients' location or remotely, ASPs, by definition, deliver their services and manage applications remotely from a centralized site. Standardization and centralized management allow ASPs to apply economies of scale within a one-to-many delivery model.

Right for the Times Mergers, acquisitions, and consolidations can be expected to produce new business entities. Some of these will exist within old entities, and some will be totally new, but taken together, they will represent diverse IT imperatives.

In some instances where legacy systems need to be revamped, integration and large-scale implementations will require longer engagements - favoring the large, expensive AM solutions. Evidence of this relationship is provided by recent IDC survey results, which show that the average contract size for AM companies is some $6.6 million, whereas for ASPs the values are between $400,000 and $1 million.

Price points can be expected to exert substantial pressures in a softening economy, yet the need for IT capabilities will continue to fuel demand. Some market experts regard a slowing economy as potentially beneficial to the ASP value proposition.

In addition, for entities charged with developing a new business or business focus, time to benefit can be a compelling driver favoring the ASP approach. The Ultimate Question What analysts can't say for sure is whether the AM companies will choose solely to develop in-house ASP offerings or whether they will partner with existing ASPs.

AMs may do both, but what everyone wants to know is:

What are the implications for the ASP businesses in the field today?

Logically, there are few barriers for AMs entering the ASP space, but the reverse is not true for any but the largest of the ASPs. AMs may decide to go bargain shopping, choosing to acquire or partner for the ASP capability. Doing so may be easier, cheaper, and faster than developing them, and, as was the case for dot-coms before them, being acquired can be better for ASPs than going under. In any case, the shadows of the AM companies loom large on the ASP landscape. --

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