SAP, EDS rent business apps

Software giant SAP is partnering with outsourcing heavyweight Electronic Data Systems to target smaller clients' business applications.

Kim Girard
Kim Girard has written about business and technology for more than a decade, as an editor at CNET News.com, senior writer at Business 2.0 magazine and online writer at Red Herring. As a freelancer, she's written for publications including Fast Company, CIO and Berkeley's Haas School of Business. She also assisted Business Week's Peter Burrows with his 2003 book Backfire, which covered the travails of controversial Hewlett-Packard CEO Carly Fiorina. An avid cook, she's blogged about the joy of cheap wine and thinks about food most days in ways some find obsessive.
Kim Girard
3 min read
Software giant SAP is partnering with outsourcing heavyweight Electronic Data Systems to target smaller clients' business applications.

Through today's joint deal, services and consulting firm EDS and German software maker SAP are hoping to lure new midtier customers with an offer to manage SAP's core R/3 applications that connect financials, sales and distribution, manufacturing, and logistics operations across a company.

Missing from the initial applications outsourcing offering are supply chain, human resources, and business warehousing applications. The companies will offer those applications at a later date.

The services are available now through SAP's midmarket retail channel partners and are targeted to companies with revenue of $250 million or less, and fewer than 200 users.

Tom Gormley, analyst at Cambridge, Massachusetts-based Forrester Research, said SAP is one of the last big ERP players to announce an outsourcing strategy, though the company has taken the time to pick a good partner.

"The [SAP/EDS] offering is kind of a halfway point to where we think the market is going," Gormley said. "They're not reinventing the world. It's a somewhat careful approach to a very new environment."

On the down side for customers, integration costs are excluded from the flat monthly pricing, Gormley said. Unlike EDS/SAP, upstart applications services provider USinternetworking folds integration costs into its monthly price tag, he said. Usinternetworking, which recently filed to go public, has partnered with PeopleSoft, Cisco Systems and Sun Microsystems

SAP and EDS are among a growing number of vendors teaming up to provide to smaller firms an affordable alternative to expensive ERP installations. Most of the major enterprise resource planning vendors, including PeopleSoft and Oracle, have their own applications outsourcing services or partner with others for the jobs.

These larger vendors are all trying to snag business from smaller vendors, such as Symex, Intentia, and JDA International. Those vendors specialize in selling business applications to midtier customers. This year, about $6 billion of the overall $13.5 billion expected in ERP license revenue is expected to go to smaller ERP players, according to AMR Research.

Yet applications outsourcing might not be the big money saver it's touted to be, said one industry analyst.

"I don't see any of them having a very landmark offering yet," said Dave Caruso, an analyst at AMR Research, particularly when a company can buy an ERP system with more advanced tools for 100 users from a midlevel vendor for between $350,000 to $400,000.

Pricing for the new EDS/SAP services range from $425 to $660 per month, per user, and includes server management, leased line or frame relay connectivity, software upgrades, and help desk support, the companies said. The 36-month contract comes with guarantees on uptime, support requests, and response times when problems occur.

At $540 a seat, it will cost a company with 100 users $540,000 to outsource applications and server management to EDS/SAP.

"Clearly what's missing [through the SAP/EDS outsourcing package] is planning and scheduling, a business information warehouse, and the front office applications," Caruso said.

Caruso said applications outsourcing could be worth the high price tag if it eliminates the cost of server management and operations staff.

Both EDS and SAP have integrated their help desks to support customers. EDS will use its 80 data centers around the world to host the applications. Users signing up for the service will access R/3 applications over a secure connection from the EDS data center.

"We've tried to make this whole process easy," said Tom Melchiore, SAP's director of outsourcing, noting customers get access to R/3 applications within a week of ordering the service instead of taking the time to choose a vendor, pick a database, and integrate a system themselves, which can take years.

However, unlike traditional outsourcing agreements, the SAP/EDS offering excludes the cost of desktop management and support, and local area network management, meaning customers will have to either provide that support or find a separate oursourcer.

"If users have issues with their PCs they have to handle it themselves," said AMR Research analyst Steve Tyrone. "These agreements are really kind of new. It's a different beast. The old agreements used to be: 'We'll take care of soup to nuts--services, desktop, and networks.'"