The application service provider (ASP) industry is a fairly young entry into the IT and automatic identification and data capture industries. There are various types of ASPs: EASP (Enterprise ASP) provides enterprise-class software and applications such as CRM (customer relationship management) and e-procurement and B2B (business-to-business) exchanges; FSP (full-service provider) provides full service systems integration and IT management services in addition to ASP service; and VASP (vertical ASP) which targets a vertical industry such as a financial services industry. Strategy experts predict that those ASP companies that will not only survive, but will thrive, are those companies that become "business solutions partners" with their customers. ASPs become such partners through enhancing a company's value. Using Porter's generic value chain and cost analysis concepts in the development of competitive advantage, this paper examines and models the nature of how ASPs add their own value to a company's overall competitive strategy by reducing costs within the company's value chain.