IBM tests hosting services overseas

But moving forward with its initiative, IBM this quarter began piloting new financial applications with database giant Oracle and German software giant SAP abroad, the company said.

The company currently works with two main partners--J.D. Edwards and Great Plains Software--to provide financial applications hosting to small- to mid-sized customers with 1,000 seats or less.

IBM is testing outsourced SAP R/3 applications for the auto industry in Brazil and Oracle financials applications with companies in Denmark, said Kathy Dodsworth-Rugani, IBM's director of hosted applications services.

The company will bring the outsourcing services to the United States, Dodsworth-Rugani said, but has not decided which applications will be released here. IBM is trying to determine which industries are best to target, as well as a suitable pricing model, she said.

"There's analysis going on to determine what our next play will be," she said.

IBM's applications hosting strategy began with a focus on financial applications and will likely next include electronic commerce offerings, Dodsworth-Rugani said. IBM has yet to announce an applications outsourcing deal with one of the ERP giants, who are scrambling to get their feet in the midmarket, where half of the industry's potential business now lies.

IBM rival Electronic Data Systems (EDS) recently teamed up with SAP, announcing an applications outsourcing pact, under which EDS will provide SAP's R/3 applications to joint customers. The offering, which targets midtier companies, includes core SAP R/3 applications, access to an EDS-managed operating environment, and continuing support services on a per-user, per-month basis.

Hosting services aren't expected to be the huge cash cow provided by the large, traditional outsourcing deals that involve turning over management of entire IT departments and systems to a vendor. However, the worldwide applications outsourcing market is expected to grow to $6 billion by 2001, according to Forrester Research, and these hosting services do provide alternatives to potential customers who can't afford to buy the expensive systems outright.

While applications outsourcing is new--and some say hyped--business management software vendors, start-ups called applications services providers (ASP), and applications providers alike are all quickly churning out offerings. Users are typically outsourcing a handful of tasks such as human resource, administration and payroll, data center management, procurement, and order entry.

Most of the major enterprise resource planning vendors like SAP, PeopleSoft, and Oracle are busy setting up their own outsourcing services or partnering with others for the jobs. Annapolis, Maryland-based ASP USInternetworking, for example, is managing PeopleSoft applications for customers who access the software across the Internet.

PeopleSoft's other outsourcing partners include another ASP start-up, Corio, as well as established services firms Computer Sciences Corporation and KPMG Peat Marwick.

Meanwhile, Oracle is building a networking system, called Oracle Business OnLine, which will allow the company to run applications and databases from its sites and let customers access them over the Internet.

IBM Global reaped between $300 million and $400 million from applications outsourcing in 1998, the company said. That's a drop in the bucket compared to the $29 billion in revenue IBM posted for its overall services business last year, though the company does expect the market to expand quickly.

"Today [application outsourcing] is trivial as a percent of the professional services market," said Jim Shepherd, analyst at AMR Research in Cambridge, Massachusetts. "There's a theory that it's going to be very significant but nobody really knows at this point what the market's response will be."

For one, many companies still carry bad memories of the time-sharing deals of the 1970s and 1980s. Before minicomputers arrived on the market, many clients ran their applications from a services company's data center, an arrangement that often led to complaints of exorbitant fees and unbreakable contracts, Shepherd said. While ASPs and software companies are offering greater flexibility and performance guarantees on these new services, the price is still high and a risk exists, he said.

"I think the real issue here is that it does take a great deal of control away from companies over what is their most important asset-information," he said. "That's a difficult thing for companies to come face-to-face with."