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December 7, 1998

ERP Services Solution

Outsourcing post-ERP support is paying off for many businesses

By Marianne Kolbasuk McGee

Illustration by Dan Yaccarino/SIS

he demand by IS shops for enterprise resource planning consulting and implementation services has been strong for several years. But many businesses, faced with a lack of IT staffing, are now turning to ERP vendors and services firms to help with the ongoing management and maintenance of their ERP software and hardware.

Post-implementation ERP services were a welcome solution for Denis Wilson, IT manager at Energetic Solutions Inc., a $230 million explosives company in Dallas. Wilson is Energetic's sole IT staffer. Because of its limited resources, Energetic outsourced the applications management and infrastructure operations of its SAP R/3 software to systems integrator Origin Technology in Business Inc. after Origin completed the R/3 implementation in the summer of 1997. "Without Origin, we would've had to hire more IT people to support the installation, and that wasn't part of our strategy," Wilson says.

Energetic's approach indicates an emerging trend, analysts say. Historically, most businesses have easily acknowledged the need for outside help to design and implement their ERP systems, but many don't initially realize that it's just as complex to manage these applications.

"Many companies just don't have the resources to manage their ERP systems," says Allie Young, principal analyst at Dataquest. "It's difficult to train internal IS people to do this, and it's even more difficult to keep them once they're trained."

This situation is fueling demand for post-implementation outsourcing services--either at the customer site, or through remote management. According to Dataquest, the U.S. market for post-implementation ERP management services will grow from $758 million at the end of last year to $3.7 billion by 2002.

Early Bird
Andersen Consulting recognized this trend early, and has offered its Design, Build, Run life-cycle services program for ERP customers since 1996. Under the program, Andersen provides design, implementation, and post-implementation ERP services. "Companies that tend not to outsource are looking more carefully at it for ERP because of cost and complexity issues," says Eileen Basho, a partner in Andersen's Enterprise Business Solutions practice.

Although the ERP services market is ripe for smaller businesses that can't afford to train and keep internal ERP talent, some larger businesses have also chosen to outsource the management of their ERP systems. For instance, Hewlett-Packard manages SAP implementations--hardware, software, or both--for more than 100 midsize and large companies.

HP recently began offering outsourcing services to Baan customers, and will also target Oracle and possibly PeopleSoft users next year, says Uli van der Meer, HP's global manager for extended ERP services. HP began offering post-implementation outsourcing services for SAP customers a couple of years ago, and the services have become increasingly popular, he adds.

Among the drivers for these services has been the year 2000 crisis, van der Meer says. "With stretched resources, customers are looking for ways to off-load their IT problems in order to focus on year 2000 fixes."

Van der Meer and others expect demand for post-implementation ERP services to continue even after 2000. "The pace of technology change will continue post-2000," says Tristan Hoag, director of ERP at Complete Business Solutions Inc., a systems integrator that offers life cycle services including ERP design, implementation, and post-implementation support.

Outsourcing, Hoag says, is a better solution for companies with limited IT staffs under any circumstance. "Just because the year 2000 crisis will be over someday doesn't mean everyone will be fat and happy," he says. "Things keep moving, and new demands on resources will continue." Complete Business Solutions expects ERP outsourcing services to contribute as much as 30% of total revenue in the next few years, Hoag says.

The need to focus its IT staff on more strategic jobs is why Block Drug Co., an $860 million health-care products maker in Jersey City, N.J., hired HP to oversee the daily operations of the computers that run Block's R/3 software, says VP and CIO Bernie Schumacher. To date, Block has two R/3 modules that have been in production for two years. It's implementing four more modules, and Schumacher realized that his IT resources were being stretched too thin.

Block decided to outsource the maintenance and support of its R/3 backbone, including computers, operating systems, and technical SAP upgrades, to HP. This frees the company's IT staff to focus on more strategic endeavors, including the implementation of four new R/3 modules and the management of the two existing ones. "This arrangement allows us to migrate our resources off care and feeding and onto application functionality," Schumacher says.

The desire to get the most out of their ERP systems is driving businesses to seek help from third parties. "An integrated ERP system is not something a company can run with the same low priority as the patchwork of business applications it had in the past," says Fred Fickling, director of SAP support services at Origin Technology.

Origin offers life-cycle ERP services, ranging from consulting, design, and implementation to post-implementation management. The demand for post-implementation services is growing: About one out of every three Origin customers is seeking such services, Fickling says.

Supplying Demand
The demand for life-cycle ERP services drove ERP software vendor Baan to introduce an ERP outsourcing program last July. Baan bolstered the program last week with a new outsourcing Web site that assists midsize customers with their ERP outsourcing decisions.

The idea behind Baan's program is to provide a solution that covers every aspect of implementation, as well as maintains the software and its infrastructure. "The objective is to take the risk of process management away from the customer," says Jim Worley, general manager of Baan's midmarket outsourcing. Although the company's outsourcing program is tailored mainly for midsize companies, it's also being offered to Baan's existing larger customers.

Baan is rallying its channel and service partners to help deliver these services. Worley says the company is close to signing deals with IBM Global Services and EDS, which would become "infrastructure" partners in post-implementation ERP outsourcing arrangements. Under terms of these deals, IBM and EDS would maintain the data center and infrastructure needed to run a client's Baan software. They would also run clients' call centers.

Under Baan's ERP outsourcing program, clients pay $600 to $1,200 per month per user for about five years. That covers the whole ERP project, as well as ongoing support, maintenance, and upgrades. Baan's goal is to get that price down to less than $500 per month, Worley says. Revenue from midsize ERP outsourcing deals is slated to contribute up to 30% of Baan's contract revenue within the next few years, he says.

Outsourcing the management of ERP systems helps businesses free IT resources to focus on the next set of technology and business challenges, such as Web initiatives and European currency conversion. "The rate of change for technology is high," says Vinnie Mirchandani, an analyst at Gartner Group Inc. "If companies can outsource operations related to their ERP systems to help IT resources keep up with other changes, many will."

Illustration by Dan Yaccarino/SIS