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To: Sulcus Fan who wrote (2240)	10/3/1999 10:27:00 AM
From: Sulcus Fan	Respond to of 2257

Renter's credit - Application service providers are outsourcing ERP and CRM functions over the Web. redherring.com By Blaise Zerega Red Herring magazine From the July 1999 issue With Web applications increasingly incorporated into enterprise computing systems, startups are proposing that businesses lease the applications from them. The appeal is obvious: it's often cheaper to rent than to buy, and businesses are spared the headache and costs of implementation, maintenance, and upgrades. One substantial drawback to this business model: many companies will be reluctant to outsource all their computing systems and data, which is often their most valuable asset. The software outsourcing business is therefore most promising for purveyors of software that improves the functionality of large-scale enterprise applications, rather than for companies that rent out the backbone applications themselves. LEASE IS MORE Last year established enterprise software companies like Netscape, Oracle, and PeopleSoft began making noises about "renting out" their software but failed to follow through. Smaller application service providers seized the opportunity. USinternetworking has been rewarded for pursuing this strategy; the company's market capitalization tops $1 billion (Nasdaq: USIX), despite losses of $32 million on revenues of $4 million last year. Two companies are addressing the market in a more focused way: Niku, which leases applications specific to professional service companies like law firms and PR agencies, and Market-Touch, a developer of automated sales tools. Both companies will lease their software under a service model. Niku, however, also plans to sell software and expects its revenue stream to be split evenly between rentals and sales. Based in Redwood City, California, Niku was founded by its CEO, Farzad Dibachi, and has raised $28.5 million in venture funding from Venrock Associates and other investors. The company's application suite helps assign consulting staff according to their expertise, co”rdinate project schedules, and store intellectual property for later reuse. From this foundation, Niku will target vertical niches. "Over the next 12 to 15 months, we'll release solutions for specific areas like accounting, legal, and advertising," Mr. Dibachi says. Already, Niku has signed Sybase and Vantive as customers. According to Anil Gupta, Niku's vice president of marketing, the company is on track to bring in $11 million in sales this year. THIRD-PARTY LINE The potential market for an ERP-like suite of products for professional services is enormous. Chuck Phillips, a managing director at the investment bank Morgan Stanley Dean Witter, estimates that the "professional-service automation" market is worth $20 billion annually and that it, along with CRM, represents the next growth area for enterprise applications. Market-Touch, a San Franciscoðbased startup in the CRM market, launched its first product in April with $3.8 million in venture funding from Norwest Venture Partners, partnerships with Clarify and Phone.com, and customers like Informatica and Brio. Its service provides sales forces with precisely customized marketing materials available over the Web. Most CRM products offer sales forces some of Market-Touch's functionality, but they produce generic marketing materials. "I haven't seen any other selling aid or marketing tool that does the same type of customization," says Chris Fletcher, a research director at the Aberdeen Group, an IT consultancy. Application outsourcing will accelerate as Web-enabled applications become more common in enterprise computing. Internet computing offers significant cost savings and management efficiencies compared with client/server networks, and outsourced applications take those advantages one step further. "The idea is to help our customers outsource a single line of business," says Corey Sommers, Market-Touch's CEO. But whether the economics of leased applications will persuade corporations to outsource their entire computing systems -- doing away with corporate IT departments and entrusting their data to a third party -- remains, for now, the fancy of investors in companies like USinternetworking. Meanwhile, Niku and Market-Touch are pursuing narrower opportunities with a greater chance of success.