Need For Speed Drives Outsourcing
ASPs can ease competitive pressure, but critics say they're too plain vanilla
By JADE BOYD
E-business turned the corner when executives stopped asking who would buy things over the Internet and started asking IT managers how quickly they could rebuild the entire IT infrastructure to take advantage of the Web. Most IT managers find they have neither the time nor the resources to undertake the entire job in-house. Outsourcing is a fact of life in the Net economy.
InternetWeek's third annual Transformation Of The Enterprise survey of 1,000 business and IT managers found that
57 percent of IT shops are outsourcing some portion of their Internet initiatives this year, up from 53 percent in 1999.
But while the survey found more enterprises are outsourcing Internet work, they are still apt to outsource
project-oriented tasks and Web hosting rather than application service provision. For example, of the managers who outsource, 63 percent farm out Web design work, 51 percent have someone else host their Web site, and 50 percent receive outside help for application development. By comparison, only 18 percent pay someone to host ERP applications, and just 34 percent outsource any application hosting at all.
Market researchers and IT executives say enterprises are likely to bring in outside developers to create new Web pages, portals and e-commerce applications because the projects are short-lived and it doesn't make sense to keep developers on staff full-time for such infrequent projects.
"A lot of the companies, like the financial institutions, have been under pressure from dotcoms that, at least up until recently, were only motivated by brand recognition and market share," says Michael Drapkin, chairman of the e-commerce track for Columbia University's Advanced Information Technology Management Program. Pressure from online companies is leading many brick-and-mortar companies to focus more time and resources on developing online business strategies of their own, Drapkin says. For large, established companies in particular, that typically entails getting some outside help because e-business is "not their particular core competency," Drapkin says.
While industrial heavyweight Trinity Industries doesn't face competition from any dotcom start-ups, the $2.8 billion manufacturer of railcars, barges and industrial products says it significantly decreased development time by outsourcing its online catalog initiative to GoFigure, an ASP.
Trinity executives say their first Web catalog was rolled out two months ago for the railcar division, Trinity's largest unit. Based on GoFigure's GoCommerce platform, customers use the catalog to order and pay for new railcars via a secure Web site. GoCommerce automates order processing and order fulfillment, tasks that used to be handled manually by workers using phones and fax machines.
Trinity CTO John Phillips says the system is so new that it's too early to tell how much it will cost to operate. Rather than a monthly fee, Trinity pays based on transaction volume.
There also aren't good metrics yet on performance. But Trinity expects the application to streamline production by eliminating order processing and accounting paperwork and by reducing data entry errors. The system also collects valuable information about customer buying habits, and online order information will eventually be tied back into a new supplier access system that's being installed at more than 60 of Trinity's largest suppliers.
Phillips and other executives say the chief reason they decided to outsource the catalog system was speed. GoFigure was able to convert the GoCommerce application for the railcar line in less than six months, a much shorter time than it would have taken Trinity to develop a similar system on its own.
"[GoFigure] came to us originally with a turnkey solution for a catalog application that was primarily aimed at the B2C market," says Larry Silver, Trinity's director of business systems. "We saw that there was an opportunity to mold and shape the product to fit our needs, and to get up and running more quickly."
The biggest drawback to working with an outside application provider is that it begins a project with the assumption that business processes can be shaped to fit its application, rather than the other way around, Phillips says. Getting the GoCommerce catalog online at Trinity required a lot of customization. GoFigure had to learn Trinity's business in order to fit the application to the task at hand. This willingness to customize to fit Trinity's needs was what ultimately made the relationship succeed, Phillips says.
Customization is the biggest hurdle ASPs face with enterprises. Established companies have been reticent to let ASPs host applications like CRM, ERP and sales force automation, and experts say one of the chief reasons is that most ASPs are unwilling to provide the level of customization enterprises want.
Although InternetWeek's Transformation survey found that 27 percent of companies that outsourced used an ASP, it's instructive to consider what types of applications companies are farming out to ASPs. Market researchers have found that enterprises are far more likely to use ASPs to host communications applications such as e-mail and Web conferencing than to host critical applications such as ERP or supply chain management.
Analyst Greg Blatnik of Zona Research says the issue of customization is a double-edged sword for ASPs hosting enterprise applications. The ASP business model is predicated on the fact that the company will host the same application for multiple clients. That's where the economy of scale comes in. But ASPs are finding that most large enterprises aren't satisfied with vanilla applications, Blatnik says.
"Every enterprise uses these applications in slightly different ways," Blatnik says. "Instead of hosting 100 versions of the same application, the ASP ends up hosting 100 slight variations of the same application."
Since it requires more time to manage specialized versions of the same application, most ASPs simply decline. Instead, they focus on attracting high-growth, small to midsize businesses that want basic functionality fast. Most experts say this will change over time as software vendors and ASPs develop improved management systems that make it less labor-intensive for ASPs to manage application variants.
But some IT managers are skeptical that ASPs will ever provide the attentive service they need. For instance, Peter Strombom, CIO at Meriter Health Services, says he doubts ASPs will be economically viable in the health-care industry because the average hospital has 200 to 300 critical IT systems that must be managed around the clock.
"The tying together of all these systems requires individual attention to applications and interfaces, and I don't think an ASP is generally positioned to provide that level of care and feeding," Strombom says. "An ASP is more interested in volume of transactions."
ASPs are also vitally interested in getting clients provisioned quickly. In fact, one could argue that what ASP customers give up in the way of customization, they make up in speed; a tailored suit takes time, whereas a suit from the rack can be worn home. Since time-to-market is sometimes the most critical part of getting an application up and running, this is where application outsourcing shines.
For example, when Education Management Corp. decided earlier this year that it needed a CRM application to track information about potential students, the IT staff was given just 90 days to complete the project, says Ken Sutton, EDMC's vice president of MIS. Based in Pittsburgh, EDMC is the parent organization to The Art Institutes International, which operates post-secondary art education institutes.
The Art Institutes CRM system is used to create records for some 12,000 high school students that are contacted each year by The Art Institutes.
"It was one of the fastest turnaround projects we've ever done," Sutton says. "From the moment we realized we had to do it, to getting it into production, it was about 90 days."
The time line on the project was so tight, Sutton didn't have time to put out a formal proposal for the project. He looked instead for names and faces he was already comfortable with. Sutton chose FrontRange Solutions Inc.'s GoldMine CRM software because his staff was already familiar with the company's products, having used another GoldMine application on the help desk.
Sutton contacted a FrontRange consultant in the Pittsburgh area who had the capability to provide the server, software, training and hosting for the proj-ect. Sutton says finding one vendor to handle all aspects of the project was important due to the short deadline.
When faced with such a tight deadline, it may be tempting to go with the first vendor one finds, but experts caution against striking a deal with just any ASP. Most analysts expect widespread fallout among ASPs within the next 18 months.
"Most of these outside providers are less than 2 years old," says Perry Harris, an analyst with The Yankee Group. "Can they even run a company and stay in business? Are they going to be acquired? What would that mean to us? They're all looking for a minimum of three-year deals, or most of them are. What if they never make a profit and go out of business? Those are the types of questions that need to be asked."