It’s not core so outsource it

6 mins read

Outsourcing is back on the agenda again as companies continue to force the focus back to their core business competence. The latest model is application service provision, but is it as hot as he hype suggests? Frank Booty reports

It’s high on today’s corporate agenda – outsource everything bar the core business. Outsourcing is said to be becoming more popular. ASPs – application service providers – are springing up constantly, and some are aimed at the manufacturing sector. Computer industry analyst Xephon surveyed IS managers at 90-plus large enterprises world-wide, most using mainframe, Unix and NT servers. While their operating sectors are diverse, 15% of them are manufacturers – the rest retail, financial services, government and health care. Many large organisations plan to spend significantly more of their IT budget on outsourcing services – but there are serious concerns over hidden costs. Indeed 62.5% had either looked into outsourcing or had already put out part of their IT function to third parties. Over 50% of these expect to spend more of their budget on outsourcing up to 2002. Why outsource? Several reasons. The need for application skills, especially in web and e-business areas, and to allow internal staff to focus on strategic projects; 33% of respondents considering outsourcing intend to use service companies for some of the application development work over the next two years; 25% are seeking to farm out web and e-business development, desktop management, network management and intranet/extranet management. One drawback is seen as costs hidden from view during contract negotiations, plus concerns over losing control of strategic systems. Xephon research director Mark Lillycrop says, “What’s kept internal are systems management, database management and data centre operations. The database traditionally holds the core asset of customer data and commercially sensitive information.” “Few of the organisations in our research see cost savings as a major reason for outsourcing. With internal efficiencies and declining cost of hardware and software, it’s becoming more and more difficult to make a case for outsourcing based on cost alone,” says Lillycrop. “But the requirement to take advantage of rare e-skills is a much more compelling reason to make the move. We expect to see a boom in partial outsourcing up to 2002 with web-related activity handled by service providers, and infrastructure and data management remaining in-house.” Global outsourcing authority Peter Bendor-Samuel gives a unique US spin on the wave of ASP. “The early Christians get the best lions,” says Bendor-Samuel. “In the SAP ERP (enterprise resource planning) ASP segment, there’s one company - E-online - that’s signed up 16 customers. EDS is another player, while Plaut in Germany has signed up four. For the market today there must be up to 50 deals going. Today in ASP if you have more than 10 ASP deals, you’ll make it. Next year that’ll be over 20.” States-side? Who is adopting? Typically in the manufacturing sector it’s the ERP mid-tier companies, ie those with turnovers in the range $20 million to $2 billion. Bendor-Samuel points to US filing cabinet maker Hersch which adopted the ASP model because it could get ERP in quickly, for a lower implementation cost, and go live with a package as a predefined standard. “Remember, you need sophisticated Unix or NT environments to run ERP, and manufacturers don’t want to have to put that in place,” says Bendor-Samuel. “Just think – getting SAP in and using it in under two months. ASP is for real and it’s working.” Jan Dorbach, SME solutions manager, SAP UK, says, “We’re already strong in the upper market segments – we expect the SMEs to be looking now. Complete service solutions are now provided through ASPs such as BT, Origin, Hostlogic and I-Fusion. With ASP under the initiative, customers get flexibility to access services depending on business requirements. It’s now purely a business decision rather than technology.” Simon Bragg, senior analyst, enterprise applications at analyst ARC Advisory Group, says, “ASP is new and the vendors are selling superior service – better availability, reliability, we handle all your problems, etc. When marketing people talk better service, it translates as ‘we’re going to be expensive’. No-one really understands application cost of ownership, so suppliers are starting with high prices like £300 to £1,200 per user per month to see if there are any takers. They then hope to lock users into five year contracts.” Bragg opines ASP does have real advantages and the market will develop – and prices for users will fall. “Currently, vendors are hoping to pick the low-hanging fruit – the mugs,” says Bragg. “Users are in a stronger negotiating position, and should calculate their cost of ownership, and look for savings in that figure from the ASP vendors. The ASP model makes sense at the right price. “Manufacturers do need to focus on their core competence, which is not running IT systems and doing all the back-ups and systems administration, and helping users when they get stuck. The latter problem is going to get worse as increasingly the latest ERP systems allow users to configure screens to their requirements – and that means support people’s difficulties multiply,” he adds. According to research for the 400 company strong ASP Industry Consortium by consultant Ovum, 66% of businesses/organisations in the UK and Germany expect to purchase application services from an ASP over the next 18 months. Manufacturers were conspicuous by their absence from the research. “IBM is changing its model to face the new ASP market,” says Michel Duponchel, IBM’s director of telecoms and netgen industrues, EMEA. Big Blue is offering three packages. One is intended to assist start-up/small ASP companies market their services, attract independent software vendors (ISVs) and provide market analysis. Another focuses on assisting ISVs and ASPs configure their applications so they can be delivered over the Internet. The third concentrates on assisting data centre service providers to guarantee application users the levels of accessibility and stability needed in the e-business world. “In the AS/400 market, we expect a significant number of existing ISVs looking to increase their customer base to aggressively pursue the ASP model, eg Infinium,” says Duponchel. Nick Goss, technical director at Digica, says, “Much is being talked about more than one customer sharing the same server. While this may be appropriate for smaller applications which are non-business critical, we would not recommend it for large business-critical software suites like ERP systems. We would run only one customer on each server. Although server partitioning is technologically possible, from a security point of view, we would prefer not to do it.” Goss points out that servers are specified and bought to suit the needs of the customer depending on type of applications required, number of users, etc. In other words, data centres are not stuffed full of servers waiting for customers. “One of the times we would not recommend outsourcing – traditional or ASP – to a company is when they have a system that is genuinely unique to them and their skills sets,” says Goss. Enterprise software vendor Fourth Shift is offering an ASP facility to its customers and is making its full suite of Microsoft-based supply chain management software available as a leased or outsourced service running over the Internet. Steve Waddington, product marketing manager for Europe, says, “We’re expecting connections to be over VPNs but really it depends on what the market wants to do. We’re finding customers are more concerned with ‘which bit of e or ASP do I do first?’.” Waddington concedes that “only a small amount” of business is being done in Europe, but adds “we expect 50% of business over the next two years in the Middle East to be ASP, due to skills shortages there”. Fourth Shift also expects a key sector to focus on will be hosting suppliers to the SME market. Business development director at OpenConnect Ed Weaver says, “What’s driving the market is enterprise businesses rushing to deploy e-business strategies. Companies have few options for rapid deployment of hosted enterprise integration other than moving to a service provider model.” “There’s no disagreement manufacturers know their systems best. The demands to deploy e-business strategies and the lack of available IT resources create an intersection which leaves little room for error in the choice of how to move forward,” says Weaver. In IDC’s white paper ‘The ASP revolution’, analyst Euan Davis concludes: “the ASP phenomenon will be a threat to ISVs only if they choose to ignore it”, and believes: “ASPs will force fundamental change in the way applications and associated services are delivered and priced”. But bear in mind that in 18 months of vendor hype, there are precious few customers out there yet.
  • Application service provision “Application service provision is a new category of IT outsourcing,” says Jan Rydningen, president and CEO of TeleComputing, which lays claim to be the ASP pioneer. Definition? Nick Goss, technical director at Digica, part of enterprise resource planning (ERP) DCS Group, says, “ASP is the delivery and support of a service, or application, to the end-user, from a central point – commonly a server in the supplier’s data centre – over a secure network connection. Most applications available in the ASP model are offered on a price-per-user-per-month basis, while some are priced on usage.” The size of the market in Europe (there aren’t many end-users accessing ASP services yet) is expected to be valued at up to $1.5 billion by 2003, according to analysts at GartnerGroup, IDC and Durlacher. The number of ASPs is growing. They focus on different industries, have different business models and push different solutions. But they should all have common aims: the service needs to be implemented fast and delivered at an equivalent or lower unit cost than could be achieved internally. ASP is about delivering service over a wide area network, not necessarily the Internet. ASP is about remote delivery and management of an application or service over a fixed (typically three to five year) term and is not necessarily about rental. The service has to work within the end-user’s business and be integrated where necessary. ASP models do not remove the need for business systems to be properly integrated, but can reduce the time needed to see a return-on-investment when integrating complex systems from different vendors. The ASP also has to be the single point of contact for all support-related issues – and must manage all service elements directly.