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Early adopters of ERP outsourcing services |
Women wearing capri pants and teens in bell-bottom pants were the first signs I noticed that signaled the return of the 1960s. My daughter wanting a lava lamp for her birthday was another sign. And the forthcoming Paul Simon and Bob Dylan concert tour is yet another key indicator that 1960s fashions, music, and attitudes are back in vogue. But the clearest sign that we’ve gone back to the hippie days of my youth is the resurgence of time-sharing computer systems. (see July 1999 article, “Rent an app and relax” in Datamation)
Today, it’s labeled ERP outsourcing, and the companies are called application service providers (ASPs), but the basic concept is the same as the old-fashioned time share. Instead of hiring an IT staff, buying a lot of software and hardware, and praying for a miracle, an organization buys the processing tasks it needs from a third party on a per-seat pricing basis. The outsourcer–EDS Corp., Hewlett-Packard Co., IBM, Oracle Corp. and others–sets up the application, trains your staff, runs the software on its boxes in its data center, and upgrades the software when needed.
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Thanks to three things–the Internet, widespread interest in ERP as a solution, and vendors desperate to penetrate a suspicious middle market–the lease-rather-than-buy approach is all the rage these days. Software vendors, implementation consultants, market analysts, and publishing companies can’t pump out enough material praising the concept, and market researchers forecast ERP outsourcing revenues of $4 billion or more by tomorrow afternoon. For example, the ASP subset of ERP outsourcing–applications and transactions presented over the Internet by a third party hosting the software in one system for multiple clients–will become a $2 billion a year business by the year 2003, according to International Data Corp., of Framingham, Mass. (see chart, “ASPs on the rise”).
A short history lesson
The time-sharing approach, also known as a service bureau, grew out of two basic factors prevalent three decades ago. One, the buyers needed the technology but were afraid of the costs and complexities of “electronic data processing”–that’s what IT was called in those days. Two, the EDP sellers–IBM and the BUNCH (Burroughs, Univac, NCR, Control Data, Honeywell) couldn’t find enough customers to buy their iron, so they rented the systems by the minute or second, hence the name, “time sharing.” Here’s the Reality Check: Time sharing was all about risk avoidance, otherwise known as risk management.
By the end of the 1970s, though, the EDP risk-management equation changed. The technology had matured. More EDP priests were available to run the systems. System prices began to drop in the 1980s, due to competition, government intervention, and improved technology (there’s a reason why dumb terminals had that name). Except in a few industries or functions-the securities industry and payroll processing–time sharing became passe. CEO manhood was symbolized by having your own data center and MIS department–only wimps shared systems. Managers perceived that the risk of not owning and controlling the technology was higher than the risk of owning it.
Fast forward to 1999. Client/server ERP systems are introduced; it’s a new software technology on a new hardware base. The fledgling technology acquires a reputation as money and time sinkholes. CEOs hate spending money on any new and unproven technology–look at the success of the AS/400 to this day. Yet the appeal of an integrated suite that is Y2K compliant and is used by your customers and suppliers is strong. So the cautious CEOs listen to the pitches from EDS, Hewlett-Packard, IBM, Oracle, SAP AG, and the dozens of other companies offering to reduce the ERP risk by renting you a complete solution.
The risks of a risk-avoidance strategy
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When you read between the lines of comments from senior managers who have outsourced ERP, you really are reading about risk avoidance at companies unwilling to commit scarce capital. Tom Nance, IS vice president of Borden Foods of Columbus, Ohio, and Alan Fraser, president and CEO of Vertical Networks Inc., of Santa Clara, Calif., among others, acknowledge that cost is a key factor (see the May 1999 story “erp Outsourcing” in Managing Automation). Since Fraser has already outsourced manufacturing of his network gear to a contract manufacturer, it made sense for him to outsource the software as well.
I understand their enthusiasm for this ERP risk avoidance strategy, but here are some downsides to this “solution:”
Many vendors want a five-year commitment. If your CEO or CFO thinks this kind of fixed-price approach looks like the ultimate in risk management, you need to have a long talk with him or her. Within five years, an ERP system could be bundled with a PC and given away inside Cracker Jacks boxes.
Loss of flexibility. The features and performance specs you’re buying today from an ERP outsourcer may be irrelevant in your business tomorrow. Think of all the manufacturers that, seemingly overnight, have had to build a direct-to-consumer infrastructure because of the Internet and the Web. (Mattel will be selling Barbie via the Web by the end of this year, I’ll bet.)
Loss of core competency. Manufacturers that outsource their core ERP processes to a third party are launching themselves on a slippery slope to oblivion. Remember when General Motors outsourced its IT to EDS? It has taken GM years to rebuild that infrastructure. Keep that agony in mind as you start to negotiate with an ERP outsourcer.
Clueless providers. In mid-April, I exchanged e-mails with a Web hosting service that was hot to go into the ASP business. Top managers figured that since they could build a Web site with a transaction server, they were ready to offer ERP transactions. The fact that no one in the company had ever used an ERP system, let alone configured one, was only a temporary impediment. Would you want to be this company’s guinea pig?
Don’t get me wrong–ERP outsourcing and the ASP subset may make sense for some companies in very specific circumstances (See the recent analysis by Martin Butler of the Butler Group). But don’t get overly enthusiastic about the latest fashion in technology management. You could end up with the IT equivalent of a closet full of leisure suits. //
EARLY ADOPTERS OF ERP OUTSOURCING SERVICES
Larry Marion is an editor and consultant with more than 20 years of experience in the use of computer technology in manufacturing and finance. He is the former editor of Datamation, Electronic Business, and LOTUS magazines. He can be reached at lmarion@mediaone.net.
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