Part 2: Outsourcing -- ERP's Future?

Outsourcers are taking on new ERP worlds, but there are roadblocks ahead before this concept will work on the Web

Rent, don't buy, that's the sales pitch a new breed of application service providers (ASPs) will be making to midsize companies about enterprise resource planning apps this year.

The business argument is compelling. With an outsourced infrastructure and a lower cost of entry, more companies will be able to afford industrial-strength financial, human resources, manufacturing and accounting software packages. But before we proclaim renting apps over the Web the future of ERP, there are a few kinks to be worked out: Hosting companies need an airtight security model to service multiple customers on a single server and a completely Web-enabled set of apps to bring networking costs down.

ERP packages are business-critical software solutions from vendors such as The Baan Co., J.D. Edwards & Co., Lawson Software, Oracle, PeopleSoft Inc. and SAP AG.

Traditionally, a single license for these software packages can cost thousands of dollars per seat, but the real expense is in building an IT infrastructure that supports the complex applications. Finding and retaining experienced programmers to customize and maintain the apps is a bear, and many companies need their projects completed immediately to maintain their competitive advantage. For any company outside the Fortune 1000, spending $20 million to build a data center and eight months implementing a full ERP solution is hardly feasible.

Now, by signing up with ASPs Corio Inc. and USinternetworking Inc. (USi), midtier companies can rent access to ERP apps without having to buy licenses and hardware, and spend thousands of man hours implementing and maintaining the software.

Rental fees, often as much as $1,000 per month, per seat, include software customization, integration with other back-end systems and ongoing maintenance of the apps at fault-tolerant data centers. Often, the data center has an agreement to use the telecommunications backbone of a networking partner, and customers only need a dedicated T1 line to hook in.

Vendor Bonanza
This new model is a boon to software vendors that can now sell their ERP packages outside the Fortune 1000. "We've got tremendous interest all over the map," says Farrell Griswold, manager of outsourcing at PeopleSoft. "Companies are saying, 'Our core competency is in making tires, not in managing applications. Let someone else who has world-class experience managing applications deal with this.' " PeopleSoft has partnered with Corio and USi to make its human resources and financial applications available on a pay-as-you-go basis.

Other companies are jumping in to offer rentable applications, whether or not they have the partnerships or resources to offer full hosting services. According to analysts, the potential payoffs are causing a wide range of service providers to get ahead of the technology-and the market.

"This whole ASP marketplace brings to mind the phrase 'build it and they will come,' " says Rita Terdiman, vice president and research director at Gartner Group. "All the interest lies on the vendor side. I have yet to get a single call from a user who wants to use this. But I've been called by many vendors that want to figure out how to get into this market."

There is already a huge market for consulting and outsourcing services for ERP packages, which include manufacturing, human resources, distribution and financial applications. The software requires specific programming expertise to be installed and customized for large corporate clients, and it requires a stable IT infrastructure to guarantee reliable performance and scalability.

Large integrators Andersen Consulting, Ernst & Young and PricewaterhouseCoopers have made healthy businesses managing those applications at client sites, including the initial setup and integration with other back-end services. But removing the hardware, software and network services to a remote location introduces a whole new level of complexity-one that requires networking expertise, knowledge of the applications and a robust, fault-tolerant data center.

The business opportunity for off-site ERP application hosting is enormous. Forrester Research Inc. estimates the market for rentable financial, customer-relationship and human resources applications will top $6 billion by 2001. That figure also includes low-end, Web-based solutions from software manufacturers Employease Inc. and Genesys.

Today that market is negligible. To get a slice of the market, hundreds of integrators and ISPs that host Web sites and e-commerce applications are reinventing themselves as ASPs, with or without experience with sophisticated enterprise applications.

Reality Bytes
The reality is that getting the technology working and the business model in place to outsource ERP is expensive and time-consuming, and only a few companies are positioned to pull it off.

Both Corio and USi have made heavy investments in their infrastructures with the help of venture capital funding or partnerships with technology companies. IBM Global Services and Electronic Data Systems also are taking an interest in expanding their existing outsourcing contracts to include renting packaged applications and have forged relationships with application vendors Great Plains Software Inc. and SAP. These four companies will be making additional strategic alliances this spring with software vendors and network providers to reach midtier businesses, typically defined as companies with less than $500 million in annual revenue.

Even with the complexity of the business model and the technology, more players will join the fray in coming months.

"By midyear, there will be a good dozen companies out there," says Tom Gormley, senior analyst at Forrester Research. For the end user, all these pieces of technology will appear as a unified whole. A user will open a Web browser or client software on his PC and interact with the application and data in real time. The whole system will function seamlessly as a networked application that can be accessed remotely and has disaster-recovery capabilities that a local network can't provide.

ASPs are providing these services by partnering with software vendors and networking companies. Corio is more of a consulting company and relationship manager than a technology company, which packages software from PeopleSoft with the network and data services of Exodus Communications Inc., a Web-hosting company.

For example, Corio has access to 10 Exodus data centers via lines leased from MCI WorldCom and Qwest Communications International Inc. This lets Corio accommodate a client that's rapidly outgrowing its own IT setup.

"We've grown fairly dramatically over the past couple of years, to the point where we needed enhanced financial and manufacturing systems," says Richard Heaps, chief operating officer at Clarent Corp., a telecom equipment provider and Corio customer.

"When we went to see what was available in the marketplace, outsourcing our systems maintenance and implementation was an interesting concept,'' Heaps says. "We were able to get much higher-end applications than what we would have been able to deploy ourselves."

For others, renting applications is a way to stabilize their IT overhead. It may not save a lot of money at the outset, but it will provide a means to control spending on IT projects, where costs can spin out of control.

For instance, Charles Warczak, vice president of finance at Sunburst Hospitality Corp., was looking for a way to centralize the accounting and payroll services for 87 hotels nationwide. But he didn't want to hire database administrators and PeopleSoft programmers, spend a year implementing a new system or spend millions of dollars on servers and software licenses. And, he wanted longevity from his investment.

"If you do a straight cost analysis [of renting vs. buying], it's almost a wash," Warczak says. By signing up with USi, Warczak has offloaded all the applications management tasks to USi's data center, and he has the piece of mind that any technology hurdles-from data conversion projects to software upgrades-will be handled as part of his monthly subscription fee.

Initially, the fees for this service will be high. Subscription costs will vary widely, from $450 to $1,200 a month per seat, depending on which applications are included and the level of customization, support and training the client requires.

One reason the costs are so steep is that the apps are running over secure, dedicated networks, not the public Internet. Software vendors are rearchitecting their applications to scale over the Internet, but right now a Web-only implementation has limited functionality and does not approach the efficiency of applications that run within a corporate enterprise, where 1,000 people can typically use a single application.

On the high end, USi has some interest in selling outsourcing services to large companies that are too busy to grow or maintain their ERP solutions. Year 2000 woes and the ongoing shortage of trained programmers have caused some corporate clients to fall behind on their business solutions. USi is partnering with software companies to provide e-commerce solutions, HR, financials, sales force automation, data warehousing and Web site management in its data centers nationwide.

The next step for Baan, PeopleSoft and SAP is to Web-enable their software to run efficiently over the Internet, a move that will lower connection costs and foster ubiquitous access. Since most ERP apps run effectively only over more costly, dedicated networks, just a few companies can play in this market.

"If you're looking at running an outsourced application over a frame relay line, EDS has that sewn up already. If you try and go into it, you're just going to get [beat] by EDS," says one company executive, who asked to remain anonymous. EDS leases lines from MCI WorldCom, as does Exodus.

Once the technology falls into place, any ISP will be able to offer rentable apps to low-end customers. Although smaller ISPs are not going to take on $500-per-seat manufacturing solutions, they will become a viable market for a whole new set of apps that can be set up cheaply on the Web. Of course, a year from now, companies such as Corio won't have the jump on the competition, which is sure to be fierce.

"We don't believe that just renting ERP apps is going to be a differentiated business 12 months from now,'' says Corio's Lee. "Everyone's going to come in. In the next 18 months, we're going to deliver industry-focused, cross-vendor application sets.''

Outsourcing Hurdles
But before that happens, ASPs have a lot of kinks to work out of their business models. One of the most formidable problems is security: For example, how will the outsourcers structure information in a database with the proper access controls and partitioning so it cannot be accessed by an unauthorized person using the app within the company?

"It's one thing to have the technology to host a network. It's another to build an application and an infrastructure that will scale to thousands of customers. The biggest issue is the security model," says Connie DeWitt, director of marketing for Concentric Network Corp.'s Application Services Division. Concentric has adopted a "wait-and-see'' attitude and has no immediate plans to offer ERP applications as part of its virtual private network services to corporate clients.

DeWitt worries that ASPs are getting so caught up in the excitement that they'll generate unrealistic expectations in their early customers and possibly stall the emerging market.

"There's an awful lot of hype going on. I don't like it, because it sets everybody up for thinking that this is going to happen in the next two months," she says. "It's not."

So, until the ERP vendors deliver products that can scale over the Web and the security issues are ironed out, it will clearly be several months before this outsourcing model proves itself as ERP's future.

Judy DeMocker is a technology journalist based in San Francisco. She can be reached at jdemocker@sprynet.com.