Buyout wave pushes ASPs into deals with big vendors
dsUsers anticipate increased efficiencies and lower costs

2005-03-21

By Patrick Thibodeau

About a month ago, Mumbai, India-based Mphasis BFL Ltd. contacted Victor Rodriguez, CIO at Carolina Care Plan Inc., to discuss its business process outsourcing (BPO) services. Mphasis officials also asked Rodriguez about Eldorado Computing Inc., which provides the health benefits management system used by the Columbia, S.C., company.

It was the first time Rodriguez had heard from Mphasis, and he suspected that the call was part of an effort to feel out Eldorado's customers about a potential partnership between the two companies. But it turns out there was more to the call than that. Last week, Mphasis announced that it has agreed to purchase Phoenix-based Eldorado for $16.5 million. Although it is a relatively small deal, the acquisition is nonetheless part of an accelerating merger trend in which large IT services vendors are buying application service providers (ASP). Rodriguez said that at least in the case of the Mphasis/Eldorado deal, he sees potential benefits for users like him. "We have the possibility for Mphasis and Eldorado to leverage a partnership and bring a more cost-effective organization," he said.

Carolina Care uses Eldorado's Healthware ASP service for its core benefits management application, and the company outsources its claims processing work to a separate BPO vendor. Bringing those two activities together under one vendor may bring some efficiencies and lower costs, Rodriguez said. He added that he will closely monitor Eldorado's performance and that he thinks its service levels "may take a hit" as the details of the planned acquisition are ironed out. But Rodriguez said he doesn't anticipate any major problems with the ASP. In a related development, IBM last week said it had completed a $182 million acquisition of Corio Inc., a San Carlos, Calif.-based company that deploys and manages ERP and CRM applications. IBM plans to use Corio's operations to broaden the application services portfolio offered by its Global Services unit. And in January, Sun Microsystems Inc. bought SevenSpace Inc., an Ashburn, Va.-based managed services firm that remotely supports enterprise applications and other technologies on systems from Sun and rival vendors.

Checking the Pulse

ASP customers should "do a pulse check on that relationship," said Meta Group Inc. analyst Dane Anderson, who recommended that IT managers review their service-level agreements and consider preparing contingency plans in light of the recent acquisition activity. Joseph Sorisi, CIO at Platform Learning Inc., a New York-based company that provides tutoring services to some 50,000 students around the U.S., said that even in a situation where an IT vendor buys an ASP and wants to move its offerings to a different hardware platform, users should still have some power under their contracts. "The customer has control over the timelines," Sorisi said. Platform Learning has used hosted software from Nsite Inc. in Pleasanton, Calif., to automate many of its paper-based business processes. Sorisi said the ASP model has saved him from having to hire new IT staffers and to invest in maintaining and supporting applications internally.