news.com. Software makers see gold in rentals
[See bolded section. Expect similar ISLD deals]
By Kim Girard and Melanie Austria Farmer
Staff Writers, CNET News.com
July 22, 1999, 12:15 p.m. PT
news analysis Business software makers are finding that their future may lie in
rentals.
Advocates say applications outsourcing and hosting--the option to rent access to
software online instead of buying it--is expected to explode among mid-sized firms
because they can save money and avoid managing complex systems themselves.
Service companies in this market, also known as Enterprise Resource Planning, or
ERP, are beginning to ponder the impact that applications outsourcing could have on a
$10 billion industry that's in flux as it searches for new sources of revenue.
The outsourcing trend could be just what ERP companies have long been searching for,
a way to reach the smaller companies that cannot afford to buy their software, which
can cost millions of dollars.
That's music to the ears of companies like SAP, PeopleSoft, Baan, and Oracle, which
have seen sales dwindle in this area as the big-business market has become saturated.
These companies stand to collect a monthly fee from an outsourcing deal rather than a
lump sum charged in a sale.
Just one thing is needed to make this dream scenario come true: customers. So far,
few companies have been willing to gamble on application outsourcing, and analysts are
questioning how far it will go toward improving software makers' profits.
All ERP companies have reported lower earnings in recent quarters and are grappling
with new Web-based strategies and the switch to customer relationship management
software sales at the high end of the market. This week, SAP co-chief executive Hasso
Plattner blamed his company's financial troubles on the Year 2000 problem and a delay
in introducing Web-based applications.
"[Outsourcing] is a viable channel," said Hurwitz Group
analyst Steve Bonadio. "It's still very young, and there's an
incredible amount of interest. But not a lot of companies
are doing it today. Very little money is being made in the
market, but the potential is huge."
Research firm IDC expects spending on services offered
by application service providers, which offer the hosted
applications sold or licensed to them by ERP software
makers, to reach $150.4 million worldwide this year. IDC
predicts that the ASP market--which includes hosting of
e-commerce, email, and other business applications--will
grow to $2 billion by 2003, representing a 91 percent
annual growth rate.
Not everyone is sold on the concept. Jim Shepherd,
analyst at AMR Research argues that the numbers
analysts are churning out are "completely and utterly
absurd." He questions the limited appeal of "giving away
the family jewels" to a company that hosts your critical
financial and business data from a remote location.
Nonetheless, ERP software makers are partnering with
ASPs "just in case" the market takes off, Shepherd said.
"If this thing gets hot they want to be in a position where
they won't miss a beat," he said. "Privately, application
developers are just as skeptical as I am about whether this
is going anywhere. They aren't committing a dime. Their total development is writing a
press release."
It's true that in some arrangements between the ERP company and its partner, the heat
will be on the ASP to sell the service, not the software maker. Others are training their
sales forces to pass leads to the ASP or sell the service directly. In any case, channel
conflicts could arise.
"What I expect to see over the next year or so is a bunch of companies formed around
applications outsourcing will tank because the business isn't materializing and some of
the partnerships [between software makers and ASPs] will fall apart," Shepherd said.
SAP, PeopleSoft, Baan, and J.D. Edwards are still cutting deals with partners,
educating their sales forces and clients while preparing to market their new services.
Together, they probably have fewer than a dozen U.S.-based customers outsourcing
their applications, analysts said.
ERP market leader SAP has partnered with systems integrator EDS; PeopleSoft has
cuts deals with Corio and Usinternetworking; and Baan is now working with outsourcing
partner Bull.
By the end of next month, J.D. Edwards, which has been testing its ASP
business model for two years, plans to announce partnerships with a large
telecommunications firm that will host its applications and an ASP to run its new
business. The company is already working with IBM Global Services and some
smaller firms but has yet to sign any customer deals for outsourcing its core
OneWorld product line.
Deloitte & Touche and Arthur Andersen have also signed to host J.D. Edwards's
applications, the company said. Under J.D. Edwards' model, the outsourcer sells
the services and pays a cut to them to use the software.
Taking a different route is Oracle, which is hosting its own applications. The
company this week announced that it has signed its first dozen customers for its
Business OnLine hosting service. The service provides applications to handle
most business needs, including accounting, manufacturing, and procurement.
Customers pay a monthly fee to use applications through the Web or a leased
connection.
Another big question is whether ERP companies will be hurt by lost software
sales lost as more companies follow the outsourcing path.
Mike Connolly, J.D. Edwards business development manager for enterprise
application outsourcing, argued that deals won't cannibalize the company's
software sales but instead open a new distribution channel.
For Connolly, the market sweet spot is clear: $25 million to $250 million
companies to whom ERP systems are not considered "mission critical,"
meaning that they depend on the software for simple accounting needs, rather
than to give them an edge over a competitor.
On average, outsourcing will cost between $500 to $1000 per user, he said, with
the one-time cost to integrate the applications folded into the monthly fee
throughout a typical three-year contract. Connolly argued that the cost of
outsourcing, higher per user than a purchasing arrangement, cannot be easily
compared to the buying the software, as an ASP contract includes management,
support, and help desk services.
The company plans to target its outsourced services by industry, such as oil and
gas, health care, and real estate.
Connolly said top management has warmed to the idea of applications
outsourcing during the past six months.
"It could [happen], and we'll be there," he said. |
