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Outsourcing's hot, but no cash cow

Most major enterprise resource planning vendors have announced plans to either set up their own outsourcing services or partner with others for the jobs.

3 min read
SAP's doing it. Oracle's doing it. Even PeopleSoft's doing it.

It is outsourcing, or taking on the responsibility of running clients' business process and transaction applications.

Most of the major enterprise resource planning vendors like SAP, PeopleSoft, and Oracle have announced plans to either set up their own outsourcing services or partner with others for the jobs.

But don't look for the services to be a huge cash cow for the vendors, it's more a case of luring potential customers who can't afford to buy the $1 million plus systems outright.

"Ultimately, you won't see the whole application outsourcing services market being a huge revenue stream for the vendors, but rather an expansion of their channels and meeting the demand for it from customers looking for cures to Year 2000 problems," said Harry Tse, analyst at the Yankee Group in Boston. "It's a matter of if you don't do it someone else will, so why not hold on to those accounts one way or the other. It's also not clear if there is a clear-cut value proposition from outsourcing. People still argue whether it is better to buy or lease a car. Deciding whether to outsource some or all of your infrastructure is not going to be any easier a task."

Tse added that most companies won't outsource most of their processes, keeping the revenue possibilities low for the vendors.

"People do not give up their mission critical business processes easily," Tse said. "It's mostly psychological but they aren't willing to turn over critical business--like manufacturers aren't going to outsource manufacturing processes."

Users are sticking to a handful of tasks such as human resource, administration and payroll, procurement, data center management, procurement, and order entry. And this is reflected in the major players' strategies for the market.

For example, PeopleSoft so far is sticking to human resource administration because that is its strong point, but it is expected to expand its offering. The Pleasanton, California-based firm announced earlier this year that it was setting up regional service centers in major cities to initially provide implementation services to customers but eventually act as outsourcing centers. Toward that end, PeopleSoft last week hooked up with USInternetworking (Usi) in Annapolis, Maryland, in a deal in which Usi will run PeopleSoft applications and manage them and customers can access the software across the Internet.

Oracle is likely to go after the data centers because it owns the database market and can easily take on such projects. Oracle announced earlier this week it plans to build a vast networking system which would allow it to run applications and databases from its sites and let customers access them over the Internet.

And SAP crosses the spectrum, announcing earlier this year it plans to take on all four areas. But for the most part, SAP is minimizing the risk to itself by turning to other companies for its outsourcing offerings. The German software titan's plan is to provide the software to other firms, who will then run the service. Its target industries include human resources and payroll, financial services, purchasing, and order entry. SAP has already teamed with AT&T Solutions Customer Care for a human resource management outsourcing program.

But none of these programs are expected to generate huge profits. Tse said until mind sets change, it will mostly be a wait-and-see game.