It didn't seem like such a risky move at the time for Michael Osborn, the vice-president for sales and technology at eVineyards.com, an online wine shop. Two years ago, he hired Pandesic, a joint venture of tech giants Intel Corp. (INTC) and SAP (SAP), to run his company's e-commerce systems. He was "sure SAP and Intel would never let it go under."
Bad bet. They did exactly that. Frustrated by their inability to make money off the service for small- to medium-size companies, the two announced Pandesic's demise last July. They didn't abandon customers overnight, instead giving them five months to find a new supplier. "We could have just shut it down. But we didn't do that," says Eric Rubino, chief operating officer of SAP America Inc. Still, it irks Osborn. "Was it the best time to do it, right before the holidays?" asks Osborn. "I don't think so."
Only a few Web-site managers have had to live through an application service provider meltdown, but Osborn is expected to have plenty of company before too long. Market researchers expect up to 60% of the 500 or so ASPs to fail within the next year. If your ASP goes out of business, you could face a nightmare of expenses, lost data, and, potentially, days without crucial computing systems.
If you haven't signed up yet, think hard about whether it's a good idea. If you decide to go ahead, protect yourself. For starters, pick a company that's well funded and headed toward profitability. It's probably safest to go with an ASP that's already public, since you can see their balance sheet. Get a guarantee of service in writing--and make sure the ASP is on the hook to pay a penalty if they're not up to snuff. As the ultimate fallback, have a strategy in place, including financial insurance, should an ASP tank. "We're working with our IT department...to back us up if there are any problems," says Carey Eisenhower, Internet marketing manager of Hershey Direct, which buys services from USinternetworking Inc. (USIX)
The warnings came too late for eVineyards.com's Osborn. He ended up O.K., moving over to Intel Online Service Group Inc. Unlike Pandesic, Intel's customers buy their own software, which Intel hosts for them at its data centers. It's a proven strategy. SAP claims to have learned from the Pandesic flop, too. Let's hope so. Last month, it started its own ASP.
By Jim Kerstetter in San Mateo, Calif.