WHEN OUR TECHNICAL TEAM CALLS THE Oracle helpdesk, they know that the situation warrants total, immediate attention,” claims Ravi Kulasekaran, co-founder and CEO of Fremont, CA-based Appshop, probably the largest independent ASP focused solely on Oracle E-Business Suite. Prashant Prahlad, the other co-founder, likes to fondly portray their success story as “two men with a fax machine who left the comforts of consulting jobs to venture out on their own.”

Oracle founder-CEO, Larry Ellison once declared that his product suite would be ASP-enabled only over his dead body. And only recently, in March 2002, did Oracle officially launch it’s new avatar. To achieve this objective, the software giant has had to reinvent itself from the inside. This type of repositioning is no small feat for a once nimble company grown fat on literally hundreds-of-thousands of customers worldwide. While all this was in progress, Appshop was up, away and running, implementing over a hundred projects, yet staying very clear of the Oracle channel sales. “Customers don’t need Ellison’s permission to ask us to manage their enterprise application,” says the duo.

In 1999, Prashant Prahlad and Ravi Kulasekaran quit Oracle and put up their shingle in the Valley, Simplify Inc. Soon, projects flowed in from the middle market. As Prahlad recalls, “One of our clients looked at our business model and recommended that we seek some funding and expand.” The duo was quick to found another company, Appshop, and brought in good seed funding. Simplify merged with Appshop.

What began as a small consulting shop in 1999 has flourished into a 150-strong team, with data centers in Colorado and California, and a 24x7 development, support and service center in India. Successful? Yes. Smart? Yes. Strategy? Now you ask. “Focus, focus, focus,” says Kulasekaran. “In the starting days, clients couldn’t get enough manpower to meet their needs. It would have been very easy to become a bodyshopping outfit. We steered wide and clear of that model, and persisted in offering a total implementation solution. Clients quickly called us back to offer us the management and maintenance jobs, post-implementation.”

Both Prahlad and Kulasekaran came with strong Oracle experience. “We began with offering Oracle implementation solutions, and now offer only that. On the one hand, you had the big five firms who threw bodies at implementation projects and clocked big time fees, and on the other hand you had these small-to-big players who were finding immigration loopholes and building bodyshops.” As a two-team firm off the street, says Kulasekaran, they offered fixed bids on implementation projects, confident that their expertise and domain knowledge would pay off. “This was like Bechtel offering a fixed bid on an oil refinery!” says Prahlad. “Many clients hadn’t heard of this before and were quick to take us up on our offer.” And pay off it did. Today, Appshop is probably one of the five largest independent Oracle ASP. While many of the ASPs in the market are floundering without a viable business model, Appshop has managed to grow, and grow steadily. In November 2001, the company closed a second round of funding, with $15 million. New investor, 3i,led the round that included previous investors, El Dorado Ventures, Menlo Ventures, Osprey Ventures, RSA Security and Walden TDF. “We were one of the few companies in the U.S. who managed to close a second round of funding in the fourth quarter of 2001, post the 9-11 tragedy,” recalls Kulasekaran. While the valuation was flat, the second round managed to attract new investors.

“While our competitors are struggling to integrate so-called best-of-breed solutions from multiple vendors, we believe the development, maintenance, upgrade and integration costs far outweigh the benefits in a best of breed system; that’s why we’ve gone best-in class with Oracle. Another differentiator is that our customers, not Appshop, own their Oracle Applications licenses. This helps us develop the superb working relationship with Oracle that keeps our consulting practice and customer support so strong,” says Mike Jennings, Vice President of operations at Appshop. Appshop has a clear advantage, says Lou Hollerbach, a senior analyst for the Aberdeen Group, because “it isn't trying to be all things to all people, and it's able to keep costs down because it's just focusing on Oracle.”

“Best of breed is like tying three elephants together by their tails, and trying to make them dance,” laughs Kulasekaran. “Three products, built from three totally different philosophies, are never going to be comfortable with each other.”

“We use partners for implementation in other geographies other than the Bay Area,” Prahlad adds. “We are now trying to move our consulting to other geographies.” Appshop’s plans to offer pure consulting and implementation services has helped the company spread the fixed cost of its professional services staff as well as help keep their skills current. But it may have trade-offs.

“The professional services staff represents an expensive fixed cost. Keeping it fully billed out is important, but doing so is also a distraction. So that is a Faustian trade-off,” says Art Williams, a director at Giga Information Group in Cambridge, Mass. Professional services account for about 75 percent of Appshop's revenue. Although ASP services offer customers the option to spread their investments in information technology over a longer period of time, it is unlikely that ASPs will emerge unscathed from the current slowdown in the United States.

“The impact of the slowdown could, in principle, have either sign. That is, ASPs certainly make information technology investments less lumpy, and capital investments can be avoided,” Williams adds. “It’s also true, however, that the principal gating factor for ASP uptake is buyer inertia, which increases in the face of financial uncertainty. I think inertia will win.”

Appshop expects to double revenue in this fiscal year, according to Prahlad, but margins are likely to be under pressure. New products introduced by Oracle are also likely to increase the company's costs on fixed-price contracts, as more time gets spent on fixing bugs in the software. “We can’t say we won’t do a fixed bid because that is our whole philosophy of doing business, and the customer is not going to pay for fixing bugs,” Prahlad says. “So we have ended up doing more work trying to fix these issues, and that affects our margins.” This prompted the team to quickly set up the India office in Bangalore, which now plays a critical role in the company’s projects, 24x7 support, and innovation.

Kulasekaran points out the company’s efforts in innovative ways of project execution. “We have tried to build manufacturing style project teams.” Typically, a bodyshop team will create a team for a specific client and the team works only for that client. However, this may not be the best of methods, says the CEO, as the skill sets are not fully utilized, nor available for other client projects. “At Appshop, we looked at building a team of skill sets, which could be deployed efficiently across different client projects,” points out Kulasekaran, “which means vertical expertise and domain depth is available to all clients.”

Another differentiator for Appshop is that the company dedicates a single hardware server to each customer. Appshop finds this to be a more efficient way to organize a configuration than to use different hardware servers for each software server need. Every client has one and only one production server, though many have development, test and training servers as well.

What has clearly helped the company is its leveraging the Internet. “We have been developing our own support products, which, deployed over the Internet can duplicate client screens at our support centers. This is critical, when clients need to perform mission-critical operations and come up with problems in either generating a form or completing a task. Our support team based anywhere can simply pull up the same screen on his or her monitor and step the client through final execution.” This could not have been possible five years back, says the duo.

Oracle credits Appshop with developing the Demand Creation Execution program and hosting 32 events and national initiatives surrounding customer relationship management (CRM) implementation and references in the past year. These campaigns, Oracle reports, have resulted in more than 130 new registered leads and millions in revenue for Oracle and Appshop.

“The trigger is different for every customer,” says Prahlad. “We have six points of entry—in planning, implementation, deployment and so on, and it depends on which stage the client needs help.” Understanding this entry need has clearly helped the company refine its marketing strategy. With over 14,000 install-base of Oracle customers right now, Appshop seems to have found a very lucrative market. “For some time to come, we will stay in this space. We own over 65 percent of the market in the Valley alone, and many of them are multi-million dollar projects,” says Kulasekaran. “Right now, we are fine tuning all the end points in our offer. We want to be the best in this space, and it will be easy to scale the model to offer services in the other spaces. When some customers offer us a deal to manage their other products, we are asking them to hold the thought. We will be there very soon.” Oracle need not sell one single license this year, yet there is business for Appshop, says Prahlad.

With cost control assuming greater importance in the CIO’s IT budgets, outsourcing such big projects seems the sensible way out.Appshop has had sequential sales growth for the past several quarters and is focused on that growth, Kulasekaran says. Appshop hasn't been immune to the upheaval among Internet companies and has learned from its own mistakes. Now the company targets its sales effort on larger companies, typically those that can generate revenue for Appshop of at least $10,000 per month. In the short-term, the company is gearing up in the Middle East, where it just opened an office. “That's all Oracle country,” Kulasekaran says. The probability of wins is a lot higher.

“We were not high up in the Oracle ladder when we quit; just two middle-level managers,” says the duo. “All we did was to remain focused on what we were good at, share our dream with our employees, and work our backsides off. Finally, this is paying off. We could have sold out a long time ago. What keeps us going is the fact that the opportunity before us has been explored only at the surface level.”

While doubts persist about whether ASPs will survive as stand-alone models, or simply become part of a larger outsourcing business, like EDS or IBM, Appshop has beaten the trend well.