Building its strategy in the emerging applications outsourcing
Global Services is testing new hosting services overseas with several
business software giants.
But moving forward with its initiative, IBM this quarter began piloting new financial
applications with database giant Oracle
software giant SAP abroad, the company
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
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
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
"Today [application outsourcing] is trivial as a percent of the
professional services market," said Jim Shepherd, analyst at AMR Research in Cambridge,
"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."