InformationWeek.com

Welcome Guest. | Log In| Register | Membership Benefits

February 21, 2000

A Question Of Convenience
Hosted ERP applications can be quicker, cheaper, and less risky than conventional implementations

By Alorie Gilbert and Jennifer Mateyaschuk

Related links:

ERP Vendors Move Into The Integration Market (12/6/99)

ERP Vendors Look For Rebound After Slowdown (2/14/00)

And from our sister publication:

Computer Reseller News ERP partnerships remain elusive for distributors (12/6/99)

Computer Reseller News ERP Integrators Target New Market (1/31/00)

Send Us Your Feedback

nterprise resource planning software implementations are as difficult as ever. Crown Crafts Inc., a $350 million maker of home textile furnishings and accessories, last week blamed a 24% drop in sales last quarter on kinks in its SAP R/3 system that caused manufacturing disruptions and missed shipments. And earlier this month, Tri Valley Growers, an $800 million farming cooperative in San Francisco, sued Oracle for $20 million, claiming it couldn't get Oracle's consumer-product-goods suite to run.

But ERP apps are becoming increasingly important as many companies struggle to cope with the high volume of data and transactions from their Web operations. Some businesses are turning to application service providers to get ERP functionality without all the hassles of a conventional implementation. Others say there's little cost advantage to hosted apps, and the ability to customize them is limited.

"The ASP model takes care of what I call the 'Tylenol factors' of applications-the maintenance, support, upgrades, and hardware," says Craig Kinyon, CFO for Reid Hospital & Health Care Services Inc. in Richmond, Ind. "And we don't have to find and pay for staff to handle the applications."

ERP vendors are moving to provide hosted options. SAP, which offers simplified versions of its ERP apps for small and midsize companies through seven ASP partners in the United States, this week will lease the package to multinational companies through Host Logic Inc. PeopleSoft Inc., whose applications are available through 10 providers, is expected to launch its own hosting service next month.

Syntra Technologies, a provider of international logistics software, this week will make several components of its suite available via the Web. And next week, Infinium Inc. will begin hosting its ERP applications for small and midsize businesses.

Some vendors are taking a wait-and- see approach. "If the market takes off, we're ready for it," says Jim Traynor, general manager of Great Plains ASP Services, which has 55 customers. "We think it will take off. We just don't know how fast and how far."

Analysts say the hosted option appeals mainly to small and midsize companies, because large businesses often want to tinker with the applications, something most ASPs don't allow. Most ASPs also aren't equipped to handle the complex integration work many large businesses require. Still, Oracle and SAP claim to have billion-dollar companies as ASP customers, though they won't disclose names. PeopleSoft says it isn't ruling out the high-end market, but will concentrate its efforts on companies with revenue of less than $250 million.

XL Capital Ltd., a $2.5 billion global insurance company in Bermuda, was planning to run and maintain its PeopleSoft ERP applications in-house. But after realizing it would have to hire up to five IT people to maintain the complex apps, the company chose to get them from USinternetworking Inc., an ASP. "The quality of the support we're getting from USinternetworking surpasses anything we could have done ourselves," says Peter Card, VP of financial systems.

Joshua Greenbaum, a principal at Enterprise Applications Consulting, says the benefits for midsize companies are more obvious. "If you're a small to midsize company, you can't afford to make a mistake on ERP implementations and suffer common fates like your implementation staff quitting," he says.

Authentica Inc., a privately held Internet security firm in Waltham, Mass., with more than 40 employees, ran into problems implementing financial applications from Great Plains Inc. After spending more than $100,000 for the license, Authentica bailed out on the project. Director of operations Gant Redmon says he realized Great Plains would be complicated to implement. It would also require the purchase of customer-relationship management, human-resources, and reporting software from other vendors.

"Creating links between the software packages we needed would have been a big challenge," Redmon says. "And the bodies to do that cost a ton of money." So last June, the company switched to Corio Inc.'s preintegrated, hosted Siebel Systems CRM and PeopleSoft ERP applications, as well as Seagate Technology Inc.'s Crystal Reports reporting software.

Other companies are taking the ASP route because it costs less. Reid Hospital recently began renting Lawson Software's ERP applications from Shared Medical Systems Corp. because it was less expensive to pay a monthly fee than to buy servers and hire staff to maintain the hardware and software. The hospital's 200 users access Lawson's general ledger, accounts payable and receivable, and materials-management applications over 512-Kbps dedicated lines. In the second quarter, Reid will add Lawson's activity-management and asset-management tools.

Renting ERP apps is still a new option. "There's very little ERP revenue passing though the ASP channel," says Jim Shephard, an analyst at AMR Research. Potential customers may be waiting for ASPs to show more customer success stories before signing on.

Thousands of companies use ERP software, but only a handful are running systems hosted by an ASP. In 1999, SAP claimed 39 customers using ASPs, Oracle 42, and PeopleSoft about 70. Those numbers may reflect the fact that hosted ERP apps come with trade-offs-for example, they usually can't be customized.

Nor do hosted implementations always go smoothly. Authentica's implementation, which Redmon says should have taken three months, took twice that long, largely because of problems Corio had with its network service provider, Exodus Communications Inc. Midway through the implementation process, Corio moved Authentica to Concentric Networks Inc., which has since become Corio's primary network service provider.

Had it stuck with the do-it-yourself approach, Authentica would have had more freedom to customize its apps. "From the first sales meeting with Corio, you're programmed about fast-lane implementation and how ASPs aren't for those who wish to highly customize the solution," Redmon says.

Overall, Corio's offering will cost a little more than the Great Plains implementation would have, but less than a conventional PeopleSoft implementation. Authentica pays $895 per user per month for the software, on top of implementation and customization costs.

It doesn't always cost less to run ERP apps from an ASP. In most ASP models, including those of SAP, Oracle, and PeopleSoft, the customer pays the same amount to license the hosted software or install it in-house. The monthly hosting fee, which the ASP collects, can run $400 to $1,000 a month per user, depending on the type of applications deployed. There are also installation and integration fees, which can run into tens of thousands of dollars.

PointClick.com Inc., an American Fork, Utah, E-commerce vendor, estimates it saved 50% on up-front costs by going with Oracle's ASP division, Oracle Business Online. "Oracle's original bid made me kind of sick," says chief technology officer Craig Brown. In the long run, PointClick.com probably would have paid the same had it installed the software itself. It pays $1,000 per month for each of its five users for the service. The company also pays for software licenses on a 12-month plan and paid $42,000 for the installation-plus $40,000 to $50,000 to integrate the hosted apps with its own data systems.

ERP vendors admit that software costs are no less with ASPs; they say the real savings come from not having to hire additional IT staff. But for Nantucket Nectars, a $50 million division of Ocean Spray Cranberries Inc. of Cambridge, Mass., even that wasn't an attraction. The company will deploy Oracle Applications 11.03 on March 1, including software, hardware, and installation, for less than $1 million with a two-person IT staff and the help of seven consultants. It doesn't plan to hire new IT personnel to support the applications. "The ASP model is ideal for a startup," says director of IS Drew Farris. "For a 10-year-old company with an existing infrastructure and IT talent, we just need to train our people."

Back to This Week's Issue
Send Us Your Feedback
Top of the Page