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ERP outsourcing -- what's in it for the channel?

ERP outsourcing -- what's in it for the channel?

Before long, organisations interested in purchasing an enterprise resource planning (ERP) package will have an interesting new option to consider: lease the resource-hungry software instead of buying it, and have it maintained by a third party.

But while applications outsourcing is by no means a new idea, it is an emerging business model in the ERP market and one that is gaining more attention by the top players, all of which are either beefing up their outsourcing options or are in the process of adding new programs.

The scramble to offer applications outsourcing to the sales portfolio is driven by the need by ERP vendors to create new and predictable revenue streams and by communications companies looking to create traffic on their networks.

It also comes in response to companies demanding faster implementation times and lower ongoing ERP software maintenance costs.

Other market drivers include enterprise application vendor initiatives to tap small-to-midsize companies, and a shortage of IT professional services skills, according to vendors and analysts.

So where does the channel fit in?

SAP and JD Edwards already offer outsourcing options, while PeopleSoft and Baan are on the verge of announcing a series of agreements with industry partners.

Within a couple of months, Oracle will also announce its online ERP applications hosting plan, that will allow access to its entire suite of Oracle Applications ERP systems over the Internet.

While details of the plan are still sketchy, one Oracle insider who declined to be named said because Oracle's Applications are fully Internet-enabled, standard modem connections to the Internet will be sufficient to make it work for companies of all sizes.

It may sound too good to be true, but if it is true, Oracle has got it made, according to industry observers.

"I don't think it is quite that easy (as Oracle describes it)," said Judy Hodges, US-based research manager at IDC.

"However, outsourcing does pose some interesting new possibilities for customers that have very small IT resources and seek to lower cost."

Just ask Arthur Solbakken, executive vice president of JR Abbott Construction, a private commercial contractor that is using JD Edwards' financial, payroll and human resource applications through the outsourcing provider World Technology Services.

The applications, enhanced by World Technology for the construction industry, were ready to use out-of-the-box and will save the $US60 million company "chunks of $50,000" as the company grows, Solbakken predicts.

The example shows that if done right, ERP outsourcing may turn into a gravy train for the channel.

In fact, IDC predicts that over time, a whole new distribution channel -- which they have dubbed Applications Service Providers (ASPs) -- will emerge.

IDC claims the success of the new channel will be buoyed by the evangelising of telecommunications companies and Internet service providers (ISPs) keen to add traffic to their networks.

ERP vendors must consider this emerging breed of service providers as a potential channel for their own products or a potential source of competition, IDC and ERP executives agree.

Although all major ERP vendors are drawing up plans and are partnering with services providers around the outsourcing model, they all worry about how not to cannibalise their existing licensing businesses.

As the outsourcing channel matures, customers will get an increasing menu of pricing options to choose from, ranging from flat-fee access to monthly service charges to per-use or per-transaction pricing, ERP vendor executives predict.

"It's like a mating dance," a SAP spokesperson said. "Everyone wants exclusivity but we don't want to do that," he said, referring to the resellers and vertical solutions providers hammering down SAP's doors asking for exclusive deals with the ERP market leader.

"A very important question for all parties involved is where the balance of power will reside as the channel matures. The answer will depend on how contracts are negotiated with the ASPs and, perhaps more important, who the end buyer trusts to manage important corporate information in a secure, accessible, and cost-efficient manner," IDC said.


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