ERP vendors stake claim to application outsourcing market: Page 3

Posted September 1, 1999

Philip J. Gill

(Page 3 of 4)

Leaving Their Mark

In laying claim to a piece of the ASP action, the ERP vendors join a growing list of more than 80 participants, according to recent research from Zona and "ASP News Review," a U.K.-based online newsletter. Some analysts believe ERP applications will prove key to the emerging industry. "ERP vendors will provide the backbone infrastructure that will drive the ASP market," says Steve Bonadio, a senior analyst at Hurwitz Consulting Inc., in Framingham, Mass.

Zona's Marshall disagrees. He says his firm's research shows those ASPs offer a wide variety of applications and services, including Web hosting, e-commerce, personal finance, storage services, excess processing capacity, and more. Because of the great diversity of offerings, he doubts ERP applications will drive the market.

"Companies that need to establish a quick Web presence for e-commerce will continue to drive this market," says Marshall. ERP applications will form an important secondary product category, but they don't drive the market forward.

The evidence so far is mixed. At USinternetworking Inc., a pure-play ASP, the company's $95 million in revenues for 1998 breakdown evenly into four areas: 25 percent each for PeopleSoft ERP, Seibel Systems Inc. CRM, e-commerce, and complex Web hosting and management, says USi's Stalder.

Dataquest's May says e-commerce and Web hosting may be what pulls in customers but, very quickly, those same companies will see a need for CRM applications for sales automation, order entry, customer management, and customer service. And, once those customers have e-commerce and CRM in place, they'll very soon realize they need to tie those into ERP applications.

Still, analysts admit it's not altogether certain that the target audience will buy into the ASP market in large or significant numbers, despite the rosy market research forecasts.

Zona's Marshall, for one, says many companies simply won't want to give up control of what they perceive to be mission-critical business applications to an outsourcer, no matter how low the cost or how good the service.

The biggest danger some analysts perceive for ERP vendors in the ASP market may be how it could alter the economics of their existing marketplace. Hurwitz's Bonadio, for instance, says it's a distant but definite possibility that ERP vendors could inadvertently create a commodity market by driving down prices to reach a broad base of potential ASP customers.

USi's Stalder agrees. He predicts that over the next ten years or so, the ERP software market "will become one in which the majority of business transactions are rentals rather than purchases."

If that comes to pass, says Bonadio, the key to making money will be the services end of the business, not the rent-an-app segment. And if that's the case, the Oracle approach of going direct and providing all the applications and services itself could end up being the right one for long-term profits, says Bonadio.

That would be a major change of direction for an industry that has been driven so far by technology and products. It would likely pose significant challenges to companies unprepared for such a shift in focus.

Or it could be that some ERP applications might become commodities, and not others. General ledger applications aren't strategic and aren't generally customized, making it more likely they could become commodities in the ASP market, while others, such as CRM, would not.

Dataquest's May disagrees. "The emerging and small company market space is a large enough opportunity not to commoditize application sales." Handling the transition to annualized subscription sales will be the real bump in the road for ERP software vendors, says May. "The real question for ERP vendors is how they will manage the transition from licenses sales to subscription revenues, and how those software companies going to recognize the revenues," May adds.

And while subscription revenues should smooth out some of the ups and downs ERP software vendors have suffered, providing a continuous stream of rental revenues may not resonate immediately with Wall Street investors.

No matter what challenges await, the ERP vendors see the ASP market as too big an opportunity to pass up. PeopleSoft's Griswold sums up a common sentiment in the ERP software vendor community, "I take those market forecasts with a grain of salt," says Griswold. "All I know is it's going to be a big opportunity."

Philip Gill ( is a San Diego-based freelance writer.

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