Dij` vu all over again: The return of time sharing

Thursday Jul 1st 1999 by Larry Marion
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Risk management is the name of the game as ERP outsourcing becomes the fashion du jour. Watch out for the leisure suits.


In this article:
ASPs on the Rise
Phone company as an SAP ASP?
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.


ASPs ON THE RISE
By 2003, offering ERP services over the Web will be a $2 billion business, as more than a dozen applications service providers (ASPs) jump into the market.

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

PHONE COMPANY AS AN SAP ASP? THE MIND BOGGLE!
BusinessManager, British Telecom's offering to the insatiable, techno-hungry small and medium enterprise (SME) market in the U.K., is intended to allow smaller companies to run cut-down versions of state-of-the-art ERP software. Historically, this software has only been available to the most wealthy of organizations.

BusinessManager initially provides the basics of the SAP R/3 accounting and payroll modules on a per-seat rental basis. The service will be provided via ISDN lines and BT supplied routers from the server farm at Bletchley (near London), to quality standards reputed to be such that the data owner is rendered oblivious to the fact that he or she no longer actually owns the data!

Plans to extend the program to encompass other business processes by utilizing different vendors are already well underway. Interestingly, BusinessManager also provides a route to millennium compliance and euro support for smaller companies that may still be struggling to rationalize the onerous associated costs.

The big picture

Small to medium-sized companies could previously only dream of halcyon days of operating a major ERP product, such as SAP. Such daydreamers will no doubt stir when they catch scent of BusinessManager, which follows the American trend of hosted applications. By offering SMEs access to such products, BusinessManager levels the playing fields of business and industry further still, allowing SMEs to leverage the competencies of ERP systems that large enterprises have enjoyed for many years now. This has obvious ramifications for the SME market and will no doubt change the way in which such companies are able to compete.

Butler Group analysis

This move by BT demonstrates, if there was ever any doubt, its commitment to the development of a rounded e-business strategy. It is also indicative of the trend to provide scaled-down enterprise solutions and services to the relatively untapped waters of the SME market and may give a boost to the flagging ERP market.--OpinionWire, Butler Group

Source: April 1999 Butler Group. For further information, contact Mark Towse.

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.



EARLY ADOPTERS OF ERP OUTSOURCING SERVICES

Here's a sampling of organizations that have publicly announced their use of ERP outsourcing:
Customer Vendor Services provided ERP suite, modules Payment structure Date announced

Block Drug Co., of Jersey City, N.J.

Hewlett-Packard Co.

Application maintenance, systems support

SAP R/3

Not available

1998

Borden Foods Corp., of Columbus, Ohio

Litton Enterprise Solutions, of Woodland Hills, Calif.

Application development and integration, maintenance, enhancement, support, data center operations

PeopleSoft Inc. financials, distribution, manufacturing, i2 supply chain planning; other applications

65 months, $28 million

February
1999

Delphi Automotive Systems Group, of Troy, Mich. (GM unit)

Hewlett-Packard Co., of Palo Alto, Calif.

Infrastructure and implementation support, hardware, operations management, disaster recovery

SAP R/3

Three years, $25 million

April
1999

Energetic Solutions Inc., of Dallas

Origin Technology in Business Inc., Murray Hill, N.J.

Application management and infrastructure

SAP R/3

Not available

1997

Vertical Networks Inc., of Santa Clara, Calif.

Corio Corp. (acquired by PeopleSoft Inc., of Pleasanton, Calif.)

Application hosting and management services

PeopleSoft Inc. financials, The Baan Co. manufacturing

$750/user per month for access

April
1999


Source: Vendor announcements and literature search


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