InformationWeek

The change in plans, to be revealed in the next few weeks, is evidence that Oracle's Business OnLine unit is still trying to find the right model for offering and supporting applications-and making money-in the emerging ASP market. Among the lessons that Oracle is learning: Its business customers want help with application integration; they often need some level of customization; and there's room for improvement in service and support.

Oracle isn't the only ASP with growing pains. A survey by InformationWeek Research earlier this year found that 59% of respondents were only "somewhat satisfied" with their ASP service.

When Oracle launched Business OnLine in 1998, it planned to manage the applications in-house and be the only vendor to lease Oracle applications. Ellison adamantly maintained that view, saying last fall that "unless they remove me from office, we will never sell to ASPs." Oracle has also insisted that its applications-hosting customers get standard versions of its software, without customization.

That's changing. Oracle will begin to pre-integrate popular third-party apps with its own, executive VP Gary Bloom now says. The vendor also plans to offer some level of customization. And Business OnLine is about to let many third-party ASPs implement, host, and customize Oracle applications for small and midsize businesses.

The first indication that Oracle was reviewing its policies came in March, when the developer let Portera Systems, a small company that offers its own hosted software to the professional-services industry, sell Oracle's financial and human-resources applications. Last week, startup Center 7 Inc. became the first ASP to offer Oracle applications more broadly, marking the start of a wider partnership effort.

"In some cases, we'll have branded Business OnLine partners, and we'll take advantage of their data centers, infrastructure, and services," says Bloom. Partners will be able to sell applications other than Oracle's, offering businesses a menu of applications from many vendors. And they can integrate multiple third-party applications and customize graphical user interfaces.

Analysts say the move will help Oracle gain market share because more companies will be offering its applications. What's unclear is whether Oracle will refer businesses that require integration or customization to its partners or handle them in-house through Oracle Consulting.

The strategy shift was inevitable, Oracle says. The ASP market "was slower in 1999 than we expected because of the educational process all the vendors had to go through," Bloom says. Certainly, Oracle had a few lessons to learn.

When Craig Brown, CIO at PointClick.com Inc., wanted to link his Web-site transaction data to the financial application that Oracle is hosting for him, "Oracle said it didn't have the resources to do it for us." Brown's IT staff had to integrate the apps on its own.

Other businesses have had trouble with Oracle's service. One customer who requested anonymity says he must identify problems on his own, then call Oracle to fix them. "We're still waiting for that pristine environment where Oracle proactively finds bugs and problems and then sends patches to all of its clients," he says.

Analysts say those problems are made worse by the fact that Business OnLine is having trouble retaining IT staff, and customers have seen several changes in upper management. PointClick.com's Brown, for example, lost his Oracle account representative without warning. "I called her one day and her voice mail said she had left," he says. "And the database administrator Oracle had working on our system was very inexperienced."

Customization is also an issue. "Oracle wanted one standard model for all its customers. So, for example, if you wanted to create invoices from a financial application and you did it with their out-of-the-box application, you'd have a pretty poor invoice," says a CIO of an electronics company that leases Oracle's enterprise resource planning applications via Business OnLine. "Normally, customers would want to change the way the invoice looks." The CIO says his contract with Business OnLine specifies that he can't customize any part of the software.

"Oracle felt no customization for its software was needed, when in fact even medium-sized companies need it," says Rod Johnson, services director at AMR Research. Bloom says Oracle is starting to provide some customization, but adds that nearly 75% of the vendor's customers lease standard out-of-the-box implementations. Ellison also insisted last fall that "no one needs customization."

That stance has cost Oracle some business. One midwestern dot-com startup selected a third-party ASP because Business OnLine wouldn't customize its financial software or integrate it with the company's homegrown applications.

However, other ASPs agree with Oracle on the customization issue-to an extent. "Most highly customized implementations I've encountered were a mess," says Kelly Phillipps, president and CEO of Center 7, which plans to offer limited customization. "The back office just doesn't deserve that much attention." Customization and integration also increase the price of ASP services.

Early ASP models for enterprise applications set the monthly per-user price at $200, Johnson says. With integration and customization, that figure jumps to $1,000. Oracle charges $150 to $895 per user per month, depending on the frequency and type of software access.

But software vendors are determined to make a go of being ASPs. "They're worried they'll lose brand recognition if customers begin to go to the ASP for applications," says Lew Hollerbach, a senior analyst at Aberdeen Group. Like Oracle, SAP and PeopleSoft Inc. launched internal ASP initiatives a few months ago. But they had together already partnered with more than 20 ASPs to sell their software.

Still, several analysts have their doubts about whether software vendors should be in the service-provider business at all. Two analysts say they've advised Oracle to shut down Business OnLine and partner only with third-party ASPs. And they're confused about SAP's and PeopleSoft's strategies. "They had the right idea when they partnered with other ASPs, and I still can't figure out why they want the pains of becoming a services organization," says one, who asked to remain anonymous. Many software vendors rely entirely on standalone ASPs to offer their applications for lease because, they say, they don't have the expertise to offer such services.

Deepak Gupta, senior VP and general manager for PeopleSoft's eCenter ASP division, spent eight years at Oracle and led the Business OnLine initiative. He says PeopleSoft is paying close attention to Oracle's mistakes to improve service to its own ASP customers. PeopleSoft has created pre-integrated application suites and offers several levels of customization, all in an effort to meet the needs of the midsize market. While at Oracle, Gupta says, he "gained a deep understanding of the complexities of the ASP model."