In-Depth

ASPs: Headache or Cure?

• January 1, 2001

Veteran ERP giants see gold in the ASP business. While IT units can cut hardware and personnel costs aplenty, the ASP model inhibits customization and raises security fears.

Craig Kinyon calls it "the Tylenol factor" — the headaches his organization avoids by outsourcing its enterprise applications to an application service provider (ASP). "We don't worry about hard drives failing, memory being adequate or server speed," said the vice president and chief financial officer at Reid Hospital and Health Care Services, Richmond, Ind. "We don't want to employ and retain database administration people, and we don't want to worry about operating system obsolescence. We don't want to own software, we just want to use it for a while," said Kinyon.

Reid Hospital is "using" Lawson Software's enterprise resource planning (ERP) software, in a LawsonTone-hosted model, through Lawson partner Shared Medical Systems (SMS) Corp., Malvern, Pa. Kinyon's organization is among a small but growing population that is choosing to outsource the hosting and management of ERP applications. The move allows internal technical staff to focus on the core business rather than wrestle with the 10,000-pound gorilla that an ERP implementation, with its ongoing maintenance and upgrades, can represent.

Top-tier ERP players, like Lawson Software, St. Paul, Minn., PeopleSoft, Pleasanton, Calif., SAP, Newtown Square, Pa., Oracle Corp., Redwood Shores, Calif., and J.D. Edwards & Co., Denver, have all jumped on the ASP bandwagon. With the exception of Oracle, most of the ERP players' initial forays into this model are via partnerships with "pure play" ASPs such as Corio Inc., Redwood City, Calif., and USinternetworking Inc., Annapolis, Md. However, throughout the first quarter of this year, ERP vendors have announced significant and aggressive enhancements to their offerings in this space, with some now offering hosting themselves. They, like many start-up companies in this young market, are hoping to capitalize on what Framingham, Mass.-based International Data Corp. (IDC) projects will be a $7.8 billion market by 2004, growing leaps and bounds from just $296 million in 1999.

Small- to mid-size companies, along with "dot.coms" — which lack the infrastructure, technical know-how and personnel, as well as the time for a lengthy ERP rollout — are a natural fit for the ASP model. "The interesting thing about the ASP approach is that it gets industrial-strength, enterprise-level applications down to much smaller organizations," said Terry Rollo, vice president of sales and marketing and business development at Oracle Business OnLine (BOL), an application hosting service that Oracle launched just over a year ago.

However, the ASP model can also appeal to large companies as well. "Our target is all across the board," said Rollo. "If you take the rapid time-to-market hypothesis, clearly there's lots of appeal for dot.coms — they have no IT infrastructure, they've got a Web page but they need back-office applications to do order management, etc. We link into the back end of these sites and provide, on a hosting basis, the back-office stuff. Large organizations are also interested in our hosting approach. A lot of them are tired of the internal IT development cycle: You wait nine months, spend $700,000 and end up with not what you asked for. Rather than doing the departmental thing, they're saying, `Why don't we push out into a hosted environment, and get [application development] done quicker and faster?'"

For PointClick.com Inc., an Internet shopping portal founded in 1999, Oracle BOL enabled the company to get up and running quickly with enterprise-class software — and without breaking the bank. PointClick.com was already running the Oracle database for the back end of its Web site, and was looking at Oracle Financials. "We knew we needed something at the Oracle level, but we were unsure how we could afford it," said Craig Brown, CTO at the American Fork, Utah-based firm. "We were five guys and had limited financing."

PointClick.com did a cost comparison between bringing Oracle in-house or having it hosted. "Up front, at least a 50% cost savings could be realized," noted Brown. "We could save $60,000 to $70,000 in hardware costs, plus personnel costs. At the time, I didn't have a lot of manpower." In addition to a hosting fee, Oracle BOL requires customers to purchase the software license. PointClick.com was able to finance that fee by spreading the cost out over time, said Brown. PointClick.com's BOL contract runs for three years, which is pretty standard for an ASP model. Brown said the firm also has a standard service-level agreement, with scheduled downtime. "If they [Oracle BOL] incur other outages, we get a monetary rebate," he said.

Most impressive, said Brown, was that the barrier to entry had been lowered. "There were five of us sitting down with Oracle, telling Oracle what great and wonderful things we'd do some day," he said.

With the services of Oracle Consulting, PointClick.com's basic installation took about two weeks. Accounts Receivable, Accounts Payable and General Ledger are now in place, with plans to bring Asset Management online as well.

Oracle BOL is a single-vendor solution today and does not offer any third-party products; nor does Oracle allow other ASPs to host its products. "It's our stated policy to do that ourselves," said Rollo at Oracle BOL. "It's hard to support a range of applications written by a range of people. The advantage of BOL is that these are all Oracle applications, and we are the best people to support them; plus, we back it up with Oracle Consulting for implementation and customization. We're coming as close as possible to a one-stop shop."

Brown said PointClick.com has had a good relationship with Oracle BOL to date. "When we were negotiating, we wanted [Oracle BOL] to understand where we're trying to take this thing," commented Brown. "They've given us the confidence that they can handle it. If they can't, since we have the licenses already, we can bring it in-house at our discretion [for an early cancellation fee]. So I've got my options."

The value proposition

Dot.coms may focus on speed of installation as the selling point for going with hosted enterprise applications, but for small- and mid-sized brick-and-mortar companies, reduced risk of failure is another compelling factor.

Stratum Med Inc. is a two-year-old physician management company in Champaign Urbana, Ill. The company has 14 physician groups as shareholders and, initially, each group had a different business system. Bob Mulcahey, COO at Stratum Med, said the company decided it was time to standardize its HR, materials management and financials. Initially, Stratum Med intended to host its new PeopleSoft applications at one or two of its own larger sites, starting with the clinic in Springfield, Ill.

"Through our experience at Springfield, we determined we ought to look at an outside source," said Mulcahey. "It was more complex than we thought, and it was dif-ficult to recruit database administrators. There's nothing like having a test run. After about six months, [the CIO] said we needed to look at alternate models and cost it out. He was working a lot of hours himself and couldn't staff up to meet the demands of the product."

Stratum then did a five-year cost analysis of outsourcing, and talked to a variety of ASPs. They ended up going with PeopleSoft's eCenter app hosting program, launched this March. "We selected the PeopleSoft ASP because we felt most comfortable with their service attitude; they sold us on ... high-quality services," said Mulcahey.

"We're trying to provide mid-sized customers enterprise quality of service and a concierge level of service," said Deepak Gupta, vice president and general manager at PeopleSoft eCenter. In the ASP arena, PeopleSoft has a dual strategy, noted Gupta. The first is to continue offering its integrated suite of products through its established ASP partners like Corio. The second half of the strategy is to offer ASP services directly to customers through eCenter.

"The value proposition we provide is different than what partners provide; most partners provide multivendor solutions," explained Gupta. "eCenter is primarily PeopleSoft applications and some selected, complementary products. If a customer wants a combination of Siebel and PeopleSoft, they will go to [a] partner because we don't do that."

While this is Stratum Med's first outsourcing experience, all has gone well so far, said the firm's Mulcahey. "Any installation has problems," he said, "but the first couple of issues we ran into were resolved [on] a timely basis, which is why we went with PeopleSoft in the first place." Stratum Med already owns its license and pays a per-user, per-month subscriber fee. eCenter defines several levels of users, ranging from a $3-per-month self-service user to a $700-per-month power user. When the installation is complete, Mulcahey expects to have thousands of users.

But what about companies that may have tens of thousands of users? Are they looking to ASPs? Large companies today are "buying ASPs for a point solution; they're not giving the whole infrastructure away," said Gupta at PeopleSoft eCenter. "For point solutions, they're looking for a credible player with good financial backing. People confuse an ASP with somebody running your machine. An ASP is running your business."

Tyco International Ltd., a global manufacturer and supplier of industrial products and systems, is a $25 billion company targeting four markets: electrical and electronic components, health-care and specialty products, fire and security services, and flow control. Tyco, with U.S. headquarters in Exeter, N.H., operates a number of businesses, many of which have ERP solutions from SAP AG, said Brad McGee, senior vice president. One difficulty, noted McGee, "is our ability to drive scale. It's difficult for us to build an SAP application in some of our smaller divisions."

For that reason, Tyco decided to go with a hosted solution for its smaller businesses, hosted by SAP partner HostLogic Inc., Boca Raton, Fla. "They do the implementation for us, and we pay a fixed price per seat," said McGee. "We can get some technology in the ERP area without having to make a large-scale commitment ourselves."

He continued, "We've gone through SAP implementations, and I can tell you war stories. It nearly crippled our health-care business last year." Once up and running, however, Tyco can make an investment in a SAP implementation pay off quickly for large-scale operations. "But to replicate that in a smaller business or the international pieces, the scale isn't quite there," said McGee. "[Hosting] prevents us from having to replicate knowledge across the company. There's a tendency to believe [a large company] is a homogeneous entity, but we have businesses within that are fairly independent."

In addition to hosting the software, HostLogic also provides expertise to Tyco in vertical areas of business, noted McGee. Another critical factor, he added, is that "HostLogic is not married to SAP."

HostLogic is one of eight certified ASP partners offering SAP solutions. The others are Corio; EDS, Plano, Texas; eOnline Inc., Cupertino, Calif.; IBM Global Services, White Plains, N.Y.; Interpath Communications Inc., Research Triangle Park, N.C.; Qwest Cyber.Solutions, Denver; and Siemens Business Services, Mis- sissauga, Ontario.

SAP also offers mySAP.com Application Hosting through its own newly formed global solutions-hosting company in St. Leon-Rot, Germany. Announced in Feb- ruary, SAPHosting offers two service models. In the Application Hosting model, customers buy and own the software license. In the ASP model, customers will be charged on a per month/per user basis and do not have to purchase the license.

SAP, J.D. Edwards — through its recently announced JDe.sourcing program — and Lawson Software allow customers to "rent" their software rather than own the license. Oracle and PeopleSoft require customers to buy the software license at this time.

Whether a company rents or owns its software license, there is no agreement on whether or not an ASP model can save a company money over the long run.

For Spyder — a Boulder, Colo.-based manufacturer of ski apparel, as well as a sponsor of the U.S. ski team — outsourcing its JDE solution through hosting partner Prentice Technologies Inc., Englewood, Colo., saved the company "$100,000 worth of hardware," said IS Manager Kevin Smith. It also saved Spyder from hiring another IT staff member and "decreased our risk of project failure," noted Smith.

Decreasing project risk was also part of the cost factor for Stratum Med's Mulcahey. "We decided the risk swung more the other way; it was riskier for us because there was no one with PeopleSoft experience in our locations," he said. "It's probably slightly more [expensive] to outsource, but you have to calculate the cost of hiring and training in this job market. Retaining [people] is becoming a challenge. There is less risk associated [with outsourcing] as long as you have the proper controls in place."

He jokingly added, "People who are least likely to like outsourcing are chief financial officers — they want to go downstairs and hug their server every night before they go home."

Reid Hospital's Kinyon said that when you factor in personnel, "Over the long run [outsourcing] is definitely cheaper. Consider the salaries, benefits and recruitment of database administrators, then how many years before the operating systems and hardware would need to be replaced. The technology curve has gone wild."

A look at the underbelly

While taking the ASP route can tame the technology beast for many companies, there are some trade-offs and risks associated with outsourcing critical business applications.

To make the ASP model cost-effective, as well as speed implementation, providers often encourage customers to minimize application customization and stick to a more vanilla implementation.

"Our philosophy is that no two customers are the same," said Gupta at PeopleSoft's eCenter. "A template version is not going to fly; but at the same time, the ASP business is about economy of scale, so we need a balance. We categorize customization into four areas. At the highest is configuration; everybody needs that and we support it 100%. The next is extensions, such as reports; everybody needs that and we support that 100%. Then there are modifications, where you start modifying the functionality of the application. We don't encourage that. The fourth is interfaces, application A to application B; we support all interfaces. So we support 95% of their requirements.

"It's not that ASPs don't want to support customization," added Gupta, "but you cannot provide the highest quality of service. If things fail, it takes time to figure out what happened. If you start customizing, it's difficult to scale operations." That is OK with Stratum Med's Mulcahey. "We made a decision that we wanted to standardize the groups' activities and remain standardized. We're holding firm to a plain vanilla installation. The [PeopleSoft] software is very robust anyway, more than we need. It is causing us to change business practices, but that's good. We had people doing things all different ways, so this fits with our objectives." Security is also a concern for those looking into the ASP model, and most are going with a private network connection to the ASP host. But Reid Hospital's Kin-yon said an ASP can be more secure than an in-house shop.

"Some think it must be less secure because someone [else] is hosting your data," said Kinyon. "But once you see that [providers like] SMS are set up like Fort Knox, and they have staff in place look- ing at every blip in the screen, then you look at your own shop and say, `We're a cakewalk if someone wanted to do something to us.' We feel secure about who's guarding our data. Once our group took a look, everybody was extremely satisfied that it was a good move for our security position."

Of course, there is the risk that your ASP could go out of business or be acquired — especially if it is a start-up — or that the relationship will not work out. Taking this type of risk with something so core to your business can be disconcerting to some, said Spyder's Smith. "People may ask, `How can you outsource something core to your business?' Well, the buildings are also core to [our] business, and we rent those. Through our [ASP] agreement we try to make sure we're covered, the same way as with a building lease."

Part of the contractual agreement that PointClick.com's Brown sees evolving is the service-level agreement (SLA). "I think you'll see stronger SLAs coming into market. To me, SLAs will be a bar that will be raised as a differentiator."

But no venture is risk-free. "I'm not sure you can ever eliminate that risk; it's the nature of the relationship," said Tyco International's McGee.

Looking ahead

Where will application hosting lead? ERP vendors targeting this area are placing a stake in the ground in two areas: software distribution and delivery, and online trading communities.

The immediate value proposition for companies includes cash flow benefits and infrastructure savings, said Oracle's Rollo. But he said software delivery is another compelling benefit of ASPs. "The whole software industry is locked into an 18-month development cycle, where people `beaver away' for 18 months, install it, etc., then beaver away for another 18 months and do it all again. The ASP model opens up the possibility of changing that.

"We at Oracle believe software will be delivered in an ASP model, not on a CD-ROM," added Rollo. "We're looking at this as the next delivery mechanism. You can make enhancements to a software product and deploy them very quickly in the ASP model. You can impact a huge number of users with small changes. We think this is a superior mechanism, and will all but eliminate the 18-month rhythm the industry has got itself into."

PeopleSoft's Gupta agrees that both the Internet and ASPs are making software distribution a different game. But he also sees ASPs evolving toward e-business hubs. In PeopleSoft's case, "eCenter is a platform for e-business; it's where we want to connect all employees, customers and suppliers. It's definitely a portal play. ASPs will become the hub of e-business activities," said Gupta.