ASPs: Where are They Now?

ASPs: Where are They Now? Once regarded as 'the next big thing,' ASPs find gaining law firm support challenging. by John Caldwell Oct/Nov '01 Issue ASP Chart in PDF	Internet & Intranet Tools Utilities
The rise and fall of the dot-com boom carried with it many industrious entrepreneurs who claimed to be able to solve the world’s ills while garnering a great deal of consumption with simple Internet services. What they often failed to consider was the need to answer some pressing questions before throwing a lot of money at an idea. In many instances, the basic business model was cast aside as Internet pioneers rushed to jump aboard and ultimately failed or moved on when the money inevitably ran out. The rise of Application Service Providers (ASPs) followed along as a subset to that boom. Even Bill Gates touted ASPs, which rent software applications over the Internet, or an extranet, on a subscription basis, as the future of technology. And he could be right — someday. A couple years ago, ASPs were the hottest new solution for the legal industry. Funded with money that flowed from a seemingly endless supply of venture capital companies that asked too few questions about potential success, ASPs popped up in a variety of forms amid astounding hype. Entrepreneurs, along with many existing software companies, scrambled for a piece of the legal ASP pie. And as with so many dot-coms, the very hallmarks of a successful business, including focus, customer service and profitability, were often ignored. Numerous well-funded startups such as Red Gorilla, a time and billing solution, and Serengeti Inc. (formerly ELF Technologies), the first ASP dedicated to the legal market, proposed to change the way law firms did business. But Red Gorilla has since gone belly up and ELF laid off about half of its employees earlier this year, and now has less than 10 employees. Those that have survived, however, might still prove to be the changing face of legal technology — if they can hang on long enough for lawyers to become comfortable with what they are selling. Just like the contracting e-commerce industry, which is only now starting to see widespread willingness among consumers to buy things with their credit cards over the Internet, the legal ASP industry is looking for definition while dropping all the hype. Surrounding some fallen start-ups, myriad survivors are focusing their efforts or scaling back, holding fast to the belief that the industry has a certain future. Many of the ASPs launched one or two years ago are still in business and are hailing their own success. Conversely, however, few lawyers are claiming to ever have used one, and many say they have no desire to. Those lawyers are posing their own set of roadblocks for burgeoning ASPs, many of which are now being adequately addressed before any more money is spent on sales and marketing. Issues intrinsic to the legal industry prove difficult hurdles for those wishing to sell the idea that applications and the data contained therein could be hosted outside of the law office for a monthly fee. Lawyers are not only leery of giving up control of their information, they are vigilant about using unproven technology to change how they handle their practice. “It’s my understanding that ASPs have been completely unsuccessful,” said M. Kelly Tillery, head of the intellectual property group at Leonard, Tillery & Sciolla in Philadelphia and an adjunct professor in the legal students department at Drexel University LeBow Graduate School of Business, adding that he doesn’t know a single lawyer who has signed up with an ASP. “I’d have to say that there’s no future in them.” That sentiment is shared by many small-practice attorneys and is reflected in this year’s AMLaw Tech survey, which looks at the nation’s 100 top-grossing law firms. It reports fewer than half are using ASPs. But that figure might be misleading as many of the respondents are IT managers whose employers are sometimes using ASPs without their knowledge. Despite some amazing benefits to signing up with an ASP, especially for small- and medium-size firms, lawyers in general are standing back due to concerns over some important issues. Holding on Tightly When a law firm hires an ASP, the firm must hand over responsibility for a variety of concerns formally managed in-house, including around the clock access and adequate security. Without a doubt, data security ranks high on the list for most law firms, whose very businesses are based on the acquisition and protection of sensitive information. ASPs targeting the legal market are finding their services a tough sell as they encounter a general perception among lawyers that security with an ASP could never be adequate enough. “One of the challenges for ASPs is to make their service simple,” said Alan Brooks, vice president of marketing for CaseCentral, a litigation extranet service provider based in San Francisco. “Law firms simply want to be sure the vendor has done all the right things to ensure security.” CaseCentral is touting itself as the poster child for surviving ASPs. It has managed to hang on by focusing on large law firms handling complex cases. Its litigation support infrastructure allows multiple law firms involved in large cases access to documents anywhere, anytime. CaseCentral has addressed concerns by preparing materials that show the existence of adequate security beforehand. Brooks said ASPs in general could mitigate anxiety by providing an open-door policy, including offering tours of facilities, documenting processes and allowing attorneys to talk with the staff members who work behind the scenes. “The answer should be that it’s more secure and more redundant than you can do yourself,” said Grover Mundell, director of product strategy for RealLegal based in Aurora, Colo. He suggested addressing security-wary attorneys by getting them to examine their own behavior. “If you step back 90 years, people were afraid to put their money in a bank,” said Mundell, adding RealLegal never sees the encrypted data, which is backed up every night to the client’s in-house server — a now-common practice among ASPs. RealLegal has continued to grow by offering a combination of desktop, Internet and extranet applications. Mundell said they have not had an “overwhelming” number of sign-ups for their purely ASP products, but they have been able to leverage some of their desktop business into their ASP service, thereby adding value to their desktop offerings while growing the ASP offerings until more lawyers decide to sign up. According to Mundell and others, it might simply be too early in the game for most attorneys, who are not ready to trust a new system with their valuables. Despite the presence of a vault, they still prefer a mattress to store their data, in which they don’t have to allow unseen people to have access to it. “In the legal industry, they [ASPs] still have to do a lot of convincing,” said Chaudhry Manzoor, owner of Economic Computers & Data Systems, an IT management company in Pennsylvania. “Law firms are extremely concerned about security.” Manzoor’s company, and others, has suggested ASPs might never be able to fully overcome this obstacle and might be forced to modify what they are offering by hosting applications on their own server while storing it at the law firm where the lawyer can see it and touch it. In this model, ASPs would become a kind of applications provider and IT manager. But this has yet to catch on, Manzoor said. “We have yet to find a law firm that did not do business with us because of security concerns,” said Ed Grubb, president of Network Alternatives, an ASP targeting the legal market based in Langhorne, Pa. His company also replicates data back to the law firms on a nightly basis while delivering their services via multiple T1 network connections, not the Internet. He added that lawyers, when considering handing over responsibility for protecting sensitive data, should ask themselves if they ever really had control over their data to begin with. Network Alternatives has developed its own client base by outsourcing applications and offering brand-name products such as Microsoft Office and Outlook to small- and medium-sized firms while setting up in-house technology for larger firms. It offers total desktop management via Internet or T1 connections. Reliability in an Unreliable Environment Access to information is equally important to lawyers because they must be able to get at it when they need it. When sensitive legal documents can only be accessed via a phone line or Internet connection, reliability becomes a major issue of concern. “The concern for small firms is losing control over their critical processes,” said Fred Blumer, the head of a small-practice firm with three attorneys in Atlanta. “Too many people have had trouble in the past accessing dial-up connections.” Indeed, computers and their connections have developed a bad reputation for being unreliable. For many nonlegal businesses, the risk of losing access isn’t enough to dissuade them from the incredible savings reaped from Internet services. But that is simply not the case for law firms. “I can’t tell you what it would do to my law firm to lose access to my files,” Tillery said. “I can’t risk losing a client. It would be irreparable harm for me to lose my data.” Numerous ASPs are addressing reliability concerns by developing systems that lawyers can take solace from. Backup data centers, secondary and tertiary network systems, and established software applications can act as soothing agents for anxious attorneys. As ASPs focus more on the hardware and software, and less on advertising, more reliable systems emerge. “Too many ASPs spend their money early in the cycle on sales and marketing instead of their infrastructure,” Brooks said. “The bottom line is that it is technology. There are going to be situations where something [bad] happens.” Another aspect to the access issue is the apprehension lawyers have over the potential loss of data should the ASP go under. In light of Red Gorilla, and several other ASPs that have gone belly up, many law firms are asking: Who owns my material when its not on my server? “You have a jurisdiction issue,” said Andrew Adkins, director of the Legal Technology Institute at the University of Florida Levin College of Law in Gainesville, Fla. “Who owns it and when do they release it?” Many serious questions arise in the discussion of data held by a company that declares bankruptcy. Who owns the data? What are the individual state laws? What happens to backup disks? “What happens from a legal perspective is causing people to stand back,” Adkins said. “From a user perspective, you have to protect your data.” An important consideration when looking at an ASP, and a familiar one for legal professionals, is the establishment of a solid contract. Along with the delineation of important issues, including the description of services, technical specifications, maintenance and adequate security, the contract should clearly outline provisions for data ownership. Non-disclosure of sensitive information, storage locations, who will have access to it and what exactly will happen if the company goes under, should all be carefully negotiated prior to signing up for an ASP. Contracts can help to protect ownership in light of a bankruptcy, but they must be supported by reliable systems and documented processes. Many ASPs now employ a routine practice of placing all the client’s source code in escrow at third-party server farms where the courts can’t get at it should a bankruptcy befall them. But that still fails to address every possible contingency, such as backup tapes that might float away, and is far from enough to convince attorneys like Tillery who continue to be leery of the ASP model. “Having a contract is only as good as the people behind it,” he said. “Employees come and go, that can never change.” More than the Bottom Line Difficulty in determining the financial benefits to subscribing to an ASP also might be keeping some law firms at bay. Before signing up, lawyers should first understand how much their current technology costs them. According to Adkins, when a law firm makes a significant technology upgrade or new purchase to replace the existing system, about 50 percent of the investment is hardware, about 20 to 25 percent is software and 25 percent is in the “soft dollars,” such as installation, implementation, configuration, training, maintenance and support. The difficult and daunting task, he added, is determining how much it costs to run technology over time (salaries and benefits for IT staff, etc.). A cost analysis covering a three-year period is necessary to get an accurate monthly per-user cost, which can then be compared with the monthly fees charged by most ASPs. Grubb pointed out that ASPs, by providing immediate software updates, are a much better value, removing the burden of having to purchase and install endless upgrades. He claimed that Network Alternatives could reduce overall technology expenses at a law firm by 25 to 30 percent. But accurately determining technology costs is an inexact and tedious process, which some attorneys are unwilling, or not motivated enough, to apply. For other, usually smaller law firms, the potential benefit in cost might be obvious, but may not be enough to spur a radical change in their technology practices. “I don’t like to pay monthly fees,” Blumer said. “Perhaps it’s more expensive to buy software, [but] I don’t want someone supervising my programs and charging me.” Blumer looked at WestWorks, the ASP division of West Group, about a year ago, and decided it made no practical sense to use it for his firm. After a brief analysis, he determined it wasn’t cost-effective enough to replace his existing software. WestWorks, an integrated Web-based service targeting small- to medium-sized firms with a suite of legal-practice applications, also is hanging on through slow and changing times. Its ASP, which currently handles about 80 clients, is still considered a pilot program by West Group. “We have slowed down on some of our advertising,” said Kyle Christensen, senior communications specialist for West Group. “It’s a new product for the market. From our perspective, ASPs are clearly viable.” ASP representatives in general agree with Christensen; most report similar reductions in marketing to new customers. Including the aforementioned companies, all 14 ASPs covered in “The ASP Craze” feature in the October/November 2000 issue of Law Office Computing are still in business, although some have moved out of the legal industry (please see the ASP chart on Page 64 of this issue). Some, such as Elite.com, an ASP for time and billing that targets the legal industry, have benefited from industry shrinkage. When the Internet start-up Red Gorilla, a service that was non-fee based, went under and laid off all of its 90 employees last year, it handed over operation of its Web site to Officetool.com, an ASP in San Diego. Shortly after, Officetool gave the site over to Elite.com, who kept Red Gorilla online so its users would have access to their data until Elite.com could convert its customers over to Timesolv, their own Web-based time and billing application. “We saw quite an increase when Red Gorilla went out of business,” said Radovan Zivojinovic, operations manager for Elite.com. Zivojinovic said Elite.com has managed to keep its client base growing by adding new features as well as emphasizing its performance and security. Waiting for the Future to Take Hold Investigating what the future holds for the legal ASP industry leads into a bit of a conundrum as most providers take an optimistic view while potential customers don’t. “It’s probably too early for it,” Blumer said. “Its time has not yet come. I think it’s a matter of who has deep enough pockets to survive. I do think we will see a lot of them [ASPs] that go out of business.” But that view is never espoused from behind vendor lines. ASPs do, however, commonly admit that a re-thinking of sorts is underway. A second generation of ideas includes increased focus and more legal-specific products, creating vertical markets that carve out specific niches within the legal industry. “As in any industry, there are strong companies that survive and less fortunate ones that fail,” Grubb said. “Unfortunately, with so many companies calling themselves ASPs early on, when one fails, the stronger ones like ours pay the price of negative publicity.” And those failures have had the most profound affect on customer attitudes and investment cash flow. Overall, the dot-com crash, in which well over 300 e-tailors have gone under since January 2000, has affected the ASP market, which is now all but devoid of investors looking to fund eager young start-ups. “There was simply too much investment money in the last two years,” Brooks said. “Too many bad ideas got funded.” He echoed a sentiment shared by Mundell and others in the post-boom ASP era — have a plan. ASPs can’t simply exist because they are ASPs. They must be able to do something that can’t be done with traditional means. Brooks and Mundell said their service solves a specific problem, and that gives it potential. Most surveys, Brooks added, indicate that customer service is the most important feature for consumers. “Too many ASPs had no services behind the product,” he said. “The easiest thing is to get a customer. The hardest thing is to keep them.” The legal ASP industry’s ability to adjust to the nature of the lawyer customer, one who is exceedingly relation- ship-oriented, relies heavily on references and seldom jumps on a bandwagon, might determine its fate. Small law firms offer the largest potential and promise, Brooks said, but they also are the hardest for vendors to serve.

A B O U T T H E A U T H O R JOHN CALDWELL is a freelance writer based in Los Angeles.