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Business app makers aim for small firms' needs

Service vendors are expanding their outsource offerings, while larger ERP vendors are aiming to sell affordable services to the small- to medium-size companies.

To lure the lucrative midtier market, service vendors are expanding their outsource offerings and tailoring their services to fit the needs of the not-so-giant.

At the same time, larger ERP vendors are realizing the benefit of selling affordable services to the small- to medium-size companies that comprise about 30 percent of sales.

"Deployment times are going down and costs are going down," said David Hofferberth, an analyst at the Aberdeen Group in Boston, Massachusetts, which released a report this week profiling the offerings of 20 ERP service providers.

In the report, Aberdeen found that a typical ERP implementation now costs between two to three times as much as the software. That's an encouraging change from just two years ago when SAP installation cost about 12 times the price of the software, he said.

"There's a lot of pressure on the vendors to change how they do business," to save time and money, said Josh Greenbaum, analyst at Enterprise Application Consulting in Berkeley, California.

Once a market that catered strictly to the Fortune 500, companies such as Origin Technology, Intelligroup, and Cambridge Technology Partners have stepped up to cater to mid-size business software support and maintenance needs of business software, including financial and human resource applications.

While a bundled ERP package or fixed price service contract is most common among midsized companies, outsourcing is quickly taking hold, Greenbaum said. Outsourcing--hiring a vendor to host all or part of an ERP project--is now offered by a range of companies including Origin, IBM, and Hewlett-Packard.

Through outsourcing a company avoids the pain of customizing a bundled software package on-site and the headache of managing the applications, Greenbaum said.

Origin's ERP outsourcing business, first offered in April, is "growing in leaps and bounds," according to Peter Lablans, vice president of marketing and business development at the company. That's because many companies began using ERP systems and quickly realized that implementation is not the end, he said.

Worldwide, the market for ERP services is expected to grow to $48 billion this year, an increase of 17 percent over last year, according to International Data Corporation in Framingham, Massachusetts. That's a fact that the larger ERP vendors can't ignore.

While posting software sales declines, ERP giants including SAP, Oracle, Baan, and PeopleSoft are reporting escalating revenue on the service side of their business--despite the fact that these companies typically pass these services on to consulting firms or their customers. PeopleSoft, for example, in its third quarter report claimed services were now 58 percent of its total revenues, while SAP reported a 76 percent increase in consulting revenue.