RationaleBy Gary Bolles
Technology: ERP 2003
Face it: Enterprise apps may no longer provide the strategic advantage they once did. Now what?
It used to be that companies saw enterprise applications as the glue that held together their most critical operations. How could you manage a company of any scale without the software necessary to, say, aggregate complex transactions, or track and manage all of your employees? But that pivotal value has come at a steep price: AMR Research says that companies worldwide poured $76 billion into ERP from 1999 to 2002, and that they're likely to invest another $89 billion from now through 2006. And that doesn't even include the cost of all the business process re-engineering and user training required to synchronize the processes and the software.
There was another reason companies were willing to foot that bill: Once all the parts were in place, companies expected they were also buying a competitive advantage. They assumed that those company-wide applications would give them a leg up on rivals whose operations weren't yet so highly automated. Part of that advantage, it was further assumed, came from choosing the strongest ERP vendor in the area most critical to the company's operations: Oracle Corp. in financials, SAP AG in manufacturing, and PeopleSoft Inc. in human resources.
But time has tarnished some of those assumptions. Today, most large companies have implemented some form of ERP, so simply having an ERP system is unlikely to be a key differentiator. Meanwhile, the functional differences between the various vendors' flavors of enterprise applications are rapidly dwindling, says Forrester Research Inc. senior analyst Jennifer Chew.
Though we're still several years from the day where technology can be purchased like power or water (see "The Simplicity Paradox," April 2003), enterprise software is increasingly commonplace. "We are going to have a commoditized world," predicts Dean Davison, vice president and director at META Group Inc.
What's an IT exec to do? Learn from other businesses, such as telecommunications and wide-area networking, where simply having a particular capability is necessary, but not sufficient, to compete. Begin by taking a hard look at which of your ERP's capabilities are critical to the way you do business, and consider what you can do to reduce the financial impact of everything that isn't at the core. Then do the homework necessary to determine whether it makes sense to keep managing those non-core components yourselfor to look for outside alternatives.
Ask Your Controller:
How much have we spent on ERP in the past four years?
Ask Your It Analysts:
What do we get from our current ERP vendor that we couldn't get from another?
Ask Your Business Constituents:
How much does our ERP software truly differentiate us from competitors?
The decision to outsource your ERP applications comes down to one issue: Cost.
If your company is relatively new to ERP, odds are you're still modifying the software to match your business processes, moving around the furniture to make sure it suits your environment. But if you've had your ERP for some time, it's likely you've already done the lion's share of adaptation, and are now focusing on squeezing out costs, reducing overhead for components such as servers, application upgrades and integration with other systems. And that's a good time to consider if a service provider might be able to cut expenses in ways you can't.
The first step is to focus on what you need your enterprise application to do, then determine whether a service provider can provide the same thing. "Figure out the functionality first, then the delivery method," advises Katherine Jones, managing director of enterprise business applications at researcher Aberdeen Group Inc. That's seconded by Mitch Dickerman, CIO of Boston-based ad agency Hill, Holliday, which recently outsourced its financial applications. "The hardest part of these kinds of implementations is not the technology; it's analyzing the business processes" you want the outsourcer to support, says Dickerman.
By doing your homework, you may uncover big expenses that a service provider can whittle down for you. Take ERP upgrades, for example. Researcher AMR says 61 percent of companies responding to a survey say they upgradetypically at a substantial costto get access to new functions. But an outsourcer already running that version will have amortized those new costs across multiple customers, generating savings you probably can't match. Jay Topper, CIO of Applied Graphics Technologies Inc., a creative services and printing company in New York, says he eliminated the need for up to five full-time staff positions when he outsourced his PeopleSoft system to an ASP, Surebridge Inc., shaving his monthly expenditures by nearly 40 percentand avoiding having to pay directly for the next PeopleSoft upgrade.
Ask Your It Analysts:
How much are we spending each year to modify our ERP applications?
Ask Your ERP Vendors:
How much are we likely to have to spend on our next ERP upgrade?
Ask Potential ERP Outsourcers:
What ERP-related expertise do you bring to the table that I don't currently have?
Navigating the choices can be daunting.
Years ago, your ERP options were straightforward: Either you brought in a large-scale service provider to manage your entire shop, or you did it yourself. But today's range of offerings can be as confusing as a long restaurant menu written in a language you don't understand. You'll find it easier to analyze an outsourcer's offerings by matching them up to the characteristics of your ERP infrastructure, as measured along five axes:
Legacy or newer models? How deep are your ties to your existing ERP systems? Are you still running custom enterprise applications built years ago from the ground up, such as process control manufacturing software or drug research management? Have you switched to client-server? Or are you running so-called "Web-native" applications that are fully Web-based in the server and on the desktop? Complex legacy systems are more difficult to offload to a service provider, while Web-native systems increase a service provider's ability to provide enterprise functions to your users.
Single operating unit or cross-enterprise? If your ERP system must meet the needs of a lot of different business units, then you'll likely need complex customization that may stretch an outsourcer's abilities. For example, if you have several divisions using half a dozen different systems, turning to a service provider could be an expensive proposition. The more consistent you can make your ERP applications across the organization, the greater the likelihood a service provider can support your implementation.
Are your ERP-supported business processes highly differentiated, or do they provide no major advantage? If you can use an off-the-shelf application with little customization, investigating an outsourced offering becomes more logical: Service providers are likely to be able to maintain a plain-vanilla ERP system for less money than you can. If you've customized an off-the-shelf enterprise application to any great extent, you may feel locked into it. But it still may be worth talking to a service provider to see how difficult it would be for the provider to duplicate what you haveespecially if you're reaching the point where you're no longer modifying the software to any great extent.
Managed at your site, or at a hosted site? If someone comes in to manage your existing system, you'll be transferring staff and costs onto the service provider's shoulders, which may result in substantial savingsunless you're already running a really lean operation. But if your applications can be decoupled from your infrastructure, it's more likely to transfer easily to an entirely different location, leveraging the service provider's economies of scale in providing all its customers with the same system.
Maintain ERP expertise or farm it out? If you're convinced that maintaining your ERP systems in-house is critical, you won't want to use an outsourcer's staff. But you may be able to save by leveraging a service provider's programming staff if you don't mind leaving that work to others.
Ask Your CTO:
Where do we sit on each of these five axes?
Ask Your ERP Specialists:
What would you carve out from our ERP management portfolio to offload if you could?
Tell Potential Outsourcers:
Look at our ERP systems, and tell me what model you'd use to get me the biggest savings.
Once you decide what you want, choosing a service provider comes down to cultureboth yours and the provider's.
Of the many potential hurdles to outsourcing ERP, the greatest is companies' lingering skittishness about adopting the model. Aside from the megadeals that traditional outsourcers have offered for years, and notwithstanding powerhouse outsourcing relationships like J.P. Morgan Chase & Co.'s decision to offload huge pieces of its IT infrastructure to IBM Corp., many companies just feel uncomfortable handing off chunks of their IT infrastructure to someone on the outside. The critical nature of ERP software makes it seem even more riskyespecially through service providers. "All of those ASP types have top Fortune 100 companies" as customers, says Delphi Group chief analyst Nathaniel Palmer, "but in none of those cases are they an enterprise play."
Yet interest in outsourcing is on the rise, in part because service provider offerings have become more sophisticated, and in part because users have a clearer sense of their requirements. Service-level agreements have become far more sophisticated, too, detailing exactly the business value to be provided and the penalties if they're not met. "Customers are definitely getting smarter about SLAs," says Forrester's Chew, "because the SLA drives the vendor's behavior."
Is outsourcing a panacea for the continuing costs of enterprise applications? Not by a long shot. It can't magically make legacy systems disappear, and potential culture clashes pose a major hurdle. Resistance lingers from the historical "not invented here" mentality, both in IT and on the business side: If we don't own it, the reasoning goes, we won't be able to control it. Yet the unrelenting focus on cost-cutting in many companies, as well as the increased flexibility of service providers, are encouraging many IT shops to at least kick outsourcers' tires to see where major gains might be found. Just make sure your potential outsourcer has the same maniacal focus on the customer that you dobecause in this case, the customer is you.
Tell Your It Staff:
Count how many total seats we would need an outsourcer to supportand find several for your short list who've already supported that many.
Ask Your Legal Staff:
How well prepared are we to write iron-clad service level agreements?
Tell Potential Service Providers:
Give me examples where you've gone the distancein both service and cost-cuttingfor your customers.