ERP vendors stake claim to application outsourcing market

For a monthly fee, companies get a quick ERP solution at a fraction of the cost.


How to Help Your Business Become an AI Early Adopter


Posted September 1, 1999

Philip J. Gill

(Page 1 of 4)

Small firms may have pioneered the application services provider (ASP) market over the past few years, but big-name vendors are now catching on to the notion of renting out core enterprise resource planning (ERP) applications. In diving into this new market, these established players might finally bring it to maturity as a service-driven business. But the cost model of the ASP market could cannibalize their existing ERP profits in the process.

Although it's been around for a couple years in the form of Web hosting, the ASP or application hosting market didn't get much notice until this year. That's when the notion of renting core ERP applications, such as accounting and human resources (HR)--or outsourcing the hosting and management of these business resources for a set monthly fee--suddenly began to catch on.

"The ERP vendors jump-started the ASP market," says Asha May, an industry analyst with Dataquest Inc.'s Littleton, Mass., office. In their search for new revenue streams and a piece of an emerging market, ERP vendors have given the new ASP market credibility and respectability, say industry observers. Enough respectability, at least, to convince an initial set of customers to outsource their ERP solutions instead of turning to in-house experts or costly consultants.

Now, ERP software vendors want something in return--a piece of the action in what looks to be shaping up as one of the next Internet gold mines. The ASP market is estimated to top $6 billion by 2001, according to Forrester Research Corp., in Cambridge, Mass.

This potentially lucrative market has already attracted start-ups, including so-called "pure-play," ASPs. These include USinternetworking Inc. (USi), in Annapolis, MD.; Corio Corp., of Redwood City, Calif.; and Biztone.com, a San Jose, Calif., startup. Now, all the major ERP software vendors, including Baan USA, J.D. Edwards & Co. Inc., Oracle Corp., PeopleSoft Inc., and SAP America Inc. are joining the fray. In addition, some of the smaller players, notably Great Plains Software Inc., and Lawson Software Inc., are looking for a piece of the action.

Analysts agree that ERP vendors have a role to play in the emerging ASP market. But, since the market is so new and immature, the experts say it's hard to tell how it will evolve, and what role ERP vendors will ultimately play as it matures. "We'll have a better idea of how this market will play out a year from now," says Dataquest's May. "Today, all the ASPs have customers numbering in the tens." Predicting the ASP market's future will be easier when the vendors' customer bases are much larger, May says.

Even the ERP vendors themselves aren't quite sure how it will all shape up. "We're getting into this market now because we want to be a part of it," explains Jim Traynor, director of new business development for Great Plains Software Inc., a second-tier ERP software vendor based in Fargo, N.D. His company wants to be in place if and when the industry takes off.

As the market develops, ERP vendors will face many issues. They're looking to turn a profit of course, and so are interested in pricing. There's also the necessity of distinguishing their ASP offerings from rivals. Over the long term, observers wonder if the emergence of a low-cost, "rent-an-app" approach will create a commodity market in ERP software, and so reduce profit margins for the entire industry.

Creating a new channel

For ERP vendors, the ASP market represents a new channel to help them reach a customer base they've had trouble selling to before, largely for economic reasons. The target audience for this new channel consists of start-up enterprises and small and medium-sized companies, the latter defined by ERP vendors as companies with under $1 billion in annual revenues.

The traditional audience for ERP software, $1 billion-plus companies, including the Fortune 1000, can afford the millions it takes to purchase, implement, and maintain these systems, but such a price tag remains beyond the reach of most firms. Hence, the basic value proposition for customers hinges on the economies of scale inherent in the ASP model. The new approach opens up opportunities for the ERP software vendors, as well as others chasing Web hosting, e-commerce, and dozens of other applications and services that lend themselves to the Internet computing model.

"The ASP model allows ERP vendors to amortize the cost of applications, service, and maintenance over more companies, and presumably deliver applications at a lower price point," says Martin Marshall, a director of research at Zona Research Corp., a Redwood City, Calif., market research firm. Such an approach offers users uncertain but possibly significant savings.

The new breed of ASPs:

Traditional software Vendors join the fray

Baan USA
Reston, Virg.
ASP offering: A separate outsourcing division within Baan USA with profit and loss responsibility offers the Baan IV application suite. Customers can rent or purchase software.
Business model: Partnerships with ASP/application outsourcing companies selected on a regional basis with the intent to achieve global reach. Current partners include Metamor, Productive Online, and Premier Systems in U.S.; Hong Kong Productivity Council, Southeast Asia; and Groupe Bull, France and Europe. Division is not yet profitable.
San Jose, Calif.
ASP offering: Proprietary ERP software written in Java called Biztone.com ERP. Applications rented on a per-transaction basis. Service includes applications, application hosting, support, and maintenance.
Business model: Start-up company, "pure-play" ASP with direct sales. Not yet profitable. Developing own ERP apps, beginning with financial suites, and offering them only through its own ASP data centers.
Great Plains Software Inc.
Fargo, N.D.
ASP offering: Application hosting and management based on Dynamics ERP suite.
Business model: Business unit with P&L responsibilities within existing corporate structure to provide ASP services through alliances with existing network of 1,400-plus resellers. Most will resell ASP services hosted by IBM Global Services. A few select resellers with the right facilities will become ASPs in their own right.
J.D. Edwards & Co.
Denver, Colo.
ASP offering: World and OneWorld ERP suite application hosting and management via IBM Global Services. Other existing resellers with data center capabilities will provide vertical market specialization, such as World Technology Services of Seattle, which targets the construction industry.
Business model: Outsourcing business division within existing corporate structure. Not yet profitable.
Lawson Software Inc.
Minneapolis, Minn.
ASP offering: Application services based on Lawson Insight II ERP suite.
Business model: Alliances with USinternetworking Inc., which will add Lawson Insight II applications to existing ASP product offerings.
Oracle Corp.
Redwood Shores, Calif.
ASP offering: All modules of Oracle Applications Suite v. 11.0 are available on an outsourced basis to Oracle Business Online customers.
Business model: ERP software vendor with its own ASP business unit. Oracle's Business Online is the exclusive ASP for Oracle applications. Also established iHost to allow its ISVs to offer ASP services that combine third-party apps with Oracle ERP modules.
PeopleSoft Inc.
Pleasanton, Calif.
ASP offering: PeopleSoft application suite available on an outsourced basis with customization and maintenance services.
Business model: Partnership with two ASPs: Corio and USinternetworking
SAP America Inc.
Newtown Square, Penn.
ASP offering: SAP R/3 application services, customization and maintenance available through partners.
Business model: SAP is establishing a select list of partners that have very targeted markets. All partners have primary and secondary target markets. Primary markets are based on revenues, i.e. Eonline's primary target market is start-ups with $200-300 million in revenues. Partners Qwest and Hewlett-Packard target companies from $200-300 million to under $500 million. Electronic Data Systems targets companies over $500 million in revenues.

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