Traveling [at the Speed of] Light
By Anne-Christine Strugnell
Fast Track to E-Business Success: Outsourcing Business-Critical Applications.
If you haven't begun to use internet technologies to streamline your company's internal business processes, you probably will soon. The arguments are too compelling to ignore: With global competitive pressures, labor shortages, and the increasing need to decrease costs to maintain profit margins, streamlining business processes is key to a company's ability to operate nimbly and efficiently in the fast-paced, connected business world.
But what about streamlining the computing power behind those business processes—streamlining it to the point where nobody in your company thinks twice about your business applications on a day-to-day basis? Instead, imagine your lean, mean staff focusing where it should—on your business expertise, your customers, your strategic direction, and how to beat your competition. How? Off-load those processes that aren't core to your business to professionals whose job it is to run those processes at peak efficiency.
Think about it: Who at your company empties the wastepaper baskets? Who provides security? Who does the catering? Most companies outsource at least one of these services, paying a specialized organization to perform the service better and more cost-effectively than in-house staff could. Why not? These services are important, but they aren't core to the business or a source of competitive differentiation.
Some leading-edge companies are now looking inside, deciding whether all of their critical business processes really are core to the business or whether—like cleaning—they would be more efficiently and cost-effectively managed and maintained by organizations specializing in such services.
Pioneering companies are beginning to outsource vital enterprise-resource-planning (ERP) applications, including those for financials, order entry, human resources, and shop-floor management—contractually handing off responsibility for the deployment, management, and enhancement of packaged or customized software applications to an external application service provider (ASP). And companies are beginning to see evidence that the standard benefits of outsourcing—reduced capital outlay, greater efficiency, increased ability to focus on the core business—apply just as well to applications as to building maintenance.
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Application service providers (ASPs) typically provide services for packaged software applications from a centrally managed facility. Clients access the applications remotely, over the internet or leased lines. Unlike IT outsourcers or companies that do application maintenance, ASPs rarely deal with customized applications. Instead, they partner with major software vendors to support standard applications with minimal or no customization. ASP services range from simple application hosting to actively managing the application environment, which may include consulting, customization, and extension of the applications as well as ongoing technical support. The types of applications an ASP supports range from standalone applications that address a tightly defined business function to environmental ones that address an entire business process or processes—for example, an ERP or e-commerce application that handles the entire sales business process instead of just the transactional component. Oracle Business OnLine, Oracle's recently launched application-hosting service, is Oracle's answer to the call for premium ASPs. Launched a little more than one year ago, Business OnLine has already garnered an impressive list of customers, some of which are running mission-critical business applications with no more infrastructure than a phone line and a Web browser. |
Traveling Express
Companies that have chosen to outsource all give the same primary reason: the imperative to focus on core competencies. An IT infrastructure, although important, is generally not core to what the business does best. For example, Robert Mondavi has 28 IT personnel on staff, but the company's focus is on remaining one of the world's preeminent producers of fine wines. Consequently, when the California company had to upgrade its human-resources system to become Y2K-compliant in the shortest time possible, it chose to outsource those applications to Oracle Business OnLine, Oracle's recently launched application-hosting service.
Robert Mondavi, which manages operations in the United States, Chile, Italy, and France, needed the sophistication of a tier-1 human-resources system but "didn't want to invest undue time and effort in systems not specific to winemaking," according to Steven Soderberg, senior vice president of information systems at Robert Mondavi.
A similar evaluation process led TeraLogic, Inc.—the world's leading privately held provider of solutions for broadband digital television—to draw the same conclusion. Growing demand for TeraLogic's digital TV chips, development platform, and software created a need for an ERP system that would support the company's extended global supply chain, which ranges from outsourced wafer manufacturing in Asia to semiconductor design in Silicon Valley. But the company was reluctant to invest time and money in implementing an ERP system in-house.
"We prefer to focus our investments on bringing cutting-edge digital TV products to market ahead of competitors' products, not on developing an IT infrastructure," says Alex Sinar, TeraLogic's vice president of operations.
According to Sinar, TeraLogic's core competencies are to define products by looking at market potential; design chips logically, physically, and from a software perspective; and design reference platforms. The company outsources everything else: all fabrication and wafer manufacturing, testing, assembly, and shipping. Sinar sees the decision to implement and host the company's new ERP and shop-floor-management applications through Business OnLine as a logical extension to the company's approach of outsourcing vital but noncore activities.
The Faster-Cheaper-Better Route
The wish to focus on core competencies may be what motivates a business to consider outsourcing its applications, but the decisive factors in clinching the deal are most often the cost savings for hardware, software, and head count; shorter time to implementation; and easy scalability. It was these factors alone—not the issue of core competence—that brought Business OnLine one of its first customers. Ironically, the core competence of Core Technology Group, a nationally known systems integrator and provider of e-commerce solutions, is implementing ERP applications. In fact, Core Technology, now part of FutureNext Consulting, implemented more than 40 percent of all Oracle Applications sold in Northern California in 1998. However, growth rates of 20 percent during the past 13 quarters hadn't left the company any time or resources to look after its own IT needs.
"We were reluctant to tie up our IT experts—who are, after all, our revenue-earning staff—with an internal project," says Don Gootee, Core's cofounder and CFO. "Plus, we knew that a sophisticated software solution would require an incremental increase in administration costs and staffing." But by late 1998, the company could no longer postpone an upgrade, and Gootee and his team decided to implement an Oracle Applications ERP solution and hire and allocate internal IT staff to support ongoing operations. Just before committing resources to the project, however, Gootee learned about Oracle's Business OnLine solution.
"It was an irresistible value proposition," says Gootee. "Business OnLine made implementing a better system much easier and less expensive than I expected. We can run the tier-1 systems we need to support our growing business without investing in database administration, system administration, or hardware. Plus, we were able to implement the solution very quickly, minimizing the use of our own consultants so that they could spend more time addressing client needs and bringing in revenue. If Business OnLine had been available earlier, I think we would have moved to Oracle Financials years ago." Gootee estimates that having Business OnLine handle all database and system administration has saved the ongoing expense of employing at least one database administrator and one systems administrator. "We're saving $15,000 to $20,000 a month just on staffing," he points out. "Plus, we haven't had to buy hardware, which would have cost us $25,000 to $50,000."
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www.robertmondavi.com Robert Mondavi is one of the world's preeminent producers of fine wines, selling more than 125 types of wine. Today, the Napa Valley-based company manages operations in the United States, Chile, Italy, and France and exports wine to more than 80 countries. To support its global operations and to achieve Y2K compliance, Mondavi needed to upgrade its human-resources and benefits systems but was reluctant to invest significant time and effort in systems not specific to winemaking. By choosing Business OnLine, Robert Mondavi benefits from the economies of scale typically enjoyed by larger companies. The company now has a tier-1 human-resources solution but hasn't had to hire additional IT staff or divert scarce IT funds from other projects. Software & Services
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Counting Heads
For some companies, the head-count issue is one of the most compelling reasons to outsource. Faced with the choice of buying new software or performing Y2K remediation work in-house, Robert Mondavi chose an another route: Through Business OnLine, the company gained immediate access to a human-resources solution backed by technical support and educational services, eliminating the need to hire additional IT staff. Oracle Consulting also helped interface the new Oracle Applications with the existing payroll and time-management systems. "With Business OnLine, I don't have to worry about having the right people in the right place," says Soderberg. "I've off-loaded all operations, administration, and applications staffing worries onto Oracle."
And even if companies were willing to allocate head count to run the applications, finding qualified people is a challenge in an information economy that's catapulted IT professionals into starring roles at companies around the world. For Marketing Out-of-the-Box—a provider of professional fulfillment services, such as order processing and pick, pack, and ship functions for companies selling products over the internet—the lack of a large local talent pool was a major factor in the decision to outsource. "I think we could have found the top-level staff we needed—eventually," says Allison Haftl, cofounder and vice president of operations at MOTB. "But it would have taken too long for our time frame."
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www.teralogic-inc.com TeraLogic, Inc. is a privately held provider of solutions for broadband digital TV, with more than 80 employees and with sales in the U.S., Japanese, and European markets. Based in Mountain View, California, TeraLogic provides comprehensive solutions for broadband TV—products including integrated circuits, platforms, and software—to leading consumer OEMs of advanced TVs, set-top boxes, and PC-TV convergence products. TeraLogic is familiar with the economies of outsourcing: The company outsources all of its vital but noncore activities. After analyzing its options for ERP-type functions, the company concluded that the most cost-effective approach was to have Business OnLine host an Oracle ERP system and Oracle's Shop Floor Management solution. In addition to saving on the cost of software and hardware, TeraLogic calculates it will save on expenses for IT system administration, since the management of the IT network and future application upgrades will be handled electronically by Business OnLine. The company believes the savings, including labor costs, are approximately 30 percent of the cost of a more traditional implementation. Software & Services
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First-Class System at Coach Rates
Few executives can turn away from the prospect of increasing profit margins by lowering costs. For Triton Network Systems, Inc., a frontline provider of wireless broadband products, it was important to save up-front technology costs. Triton Networks' innovative network technology makes it a fast-growing company with the potential to be a $500 million business.
"Triton Networks is putting everything together from an infrastructure standpoint to be a very large company, but in the beginning, cash is king, so we didn't want undue expenses to slow our ability to gain market share," notes Carryl Smith, CIO at Triton Network Systems. "However, when we went out and compared tier-1 ERP systems and one vendor told us it could install one for about $500,000, I realized we were really looking at $1 million. We also needed about five more qualified people to support the system, with salaries big enough to keep them once they were here. That would be tough to achieve in Orlando. Business OnLine helped us limit our up-front costs. For $360,000 plus monthly user fees, we have highly qualified people to run the systems and tier-1 ERP applications that we won't outgrow."
Likewise, TeraLogic's Sinar found the cost of installing an ERP application in-house prohibitive. The company views the decision to outsource as a way to gain access to tier-1 ERP applications without paying high ERP prices, in time and money. "It's analogous to what's happening in our industry and in every industry," says Sinar. "Capital investment in vertical integration is too intense. It just doesn't make sense anymore."
TeraLogic ran extensive spreadsheets comparing the cost, over a six-year period, of five options: using Business OnLine; implementing a tier-2 system; implementing a tier-3 system; relying on the existing system of spreadsheets until 2001 and then going with Business OnLine; and relying on the spreadsheet system until 2002 and then buying an Oracle ERP solution. "After all, we're all engineers here," jokes Sinar.
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www.futurenext.com FutureNext Consulting is dedicated exclusively to combining e-business and supply-chain solutions for its clients. Focused on the mid-market and divisions of Fortune 500 companies, FutureNext delivers end-to-end solutions to the manufacturing and distribution industries. In 1999, FutureNext acquired Core Technology Group, a systems integrator focusing on implementing legacy, Oracle, and e-commerce applications. Core implemented more than 40 percent of all Oracle Applications software sold in Northern California in 1998. Core Technology chose Oracle Business OnLine to host and help implement an Oracle Financials application. As a result, the company now has more-detailed and -accurate financial information, and its consultants can update data while working at client sites. FutureNext estimates that it saves $15,000 to $20,000 per month in staffing costs alone, added to a one-time hardware saving of $25,000 to $50,000. Outsourcing also allows the company to leverage and maximize the revenue-producing activities of its staff. Software & Services
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To the company's surprise, the most-expensive option was to wait until 2002 to buy an Oracle solution. The least-expensive option was to start Business OnLine immediately. In addition to saving on the cost of software and hardware, TeraLogic calculates that it will save on expenses for IT system administration, since Business OnLine will handle the network management and application upgrades electronically. "From a pure monetary outlay, it's probably a 10 to 15 percent savings, but that doesn't include the labor required," says Mike Dooley, director of IS at TeraLogic. "If you add that in, that could be up to 30 percent. We completely sidestep all those issues."
Funds are scarce and IT staff are too valuable to allocate to noncritical activities at internet start-up PointClick.com, which has a unique business model that tracks Web-site traffic and offers cash incentives to Web surfers who purchase products via the PointClick Network. "Business OnLine was just half the cost we had estimated for an in-house implementation of Oracle Financials," notes PointClick's Chief Technology Officer Craig Brown. "By going with Business OnLine, we have a cost-effective way to access Oracle's 100 percent Web-enabled Financials package, which we believe is the only solution on the market capable of processing the millions of transactions we anticipate handling on a daily basis."
More Than Economy Travel
Getting a system up and running quickly and having unlimited, rapid scalability are both key to succeeding in a business environment that breeds competitors overnight and spawns products at the speed of light. And both are benefits of outsourcing ERP systems.
Like many e-commerce companies, MOTB was under pressure to complete implementation before the holiday season to meet the requirements of its increasing number of business-to-consumer clients. The company expects a tenfold increase in business during the holiday season, and it simply had to have its new, more powerful ERP system in place. "It just didn't make sense to try to create an IT department in that time frame," says Haftl.
For PointClick too, time was critical. The management team had just six weeks to launch the company itself—and it needed to have the selected ERP solution implemented and operational just a few weeks before PointClick's public launch in September 1999. With the assistance of Oracle Consulting, the company completed its implementation in less than three weeks, using Oracle's FastForward methodology (a fixed-price, fixed-time implementation solution that includes consulting, education, and support) to complete the basic implementation in seven working days. "Oracle Consulting was phenomenal, meeting our demanding implementation schedule on time and under budget," says CTO Craig Brown.
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www.motb.com Marketing Out-of-the-Box provides professional fulfillment services such as back-office order processing and pick, pack, and ship functions to companies selling products over the internet. The Niles, Illinois-based company was founded in a garage in 1991 to handle the business-to-business direct-marketing operations of large publishers. Today the company serves Fortune 500 clients and e-commerce start-ups out of its 100,000-square-foot production warehouse. MOTB chose Business OnLine to host its Oracle Applications to avoid the time and expense of hiring an extensive IT staff to manage the software and database. The company selected Oracle Applications because its leading-edge e-commerce clients also use Oracle products, and MOTB wanted to be as compatible with them as possible. MOTB also wanted software that was 100 percent Web-enabled and preferred applications built on an open architecture so that it could use the inventory and order-entry modules in a nonmanufacturing environment. Software & Services
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Scaling Rapidly
Most early ASP clients are small- and medium-sized companies facing rapid growth. Quick growth, with its enormous scalability requirements, poses a risk for companies, and choosing to outsource applications can be a way of covering that risk.
For MOTB, starting small wasn't an issue: The challenge was dealing with exponential growth. An established business, the company has been growing steadily from its 1991 beginnings in a garage to a 100,000-square-foot production warehouse and a Fortune 500 client list. The company has coped well with its growth and now has the capacity to handle approximately 1.25 million orders a month. However, as it acquires new e-commerce clients, and as those clients achieve runaway success, MOTB is facing growth on an unprecedented scale. "We're betting on Business OnLine to help us handle that," says Haftl.
Exponential—or even explosive—growth is projected for PointClick too. With a network of more than 350 companies and 1 million projected users over the next few months, PointClick needed a financial package capable of handling a staggering 20 to 40 million transactions each day. Business OnLine will leverage the scalability of Oracle Applications to manage transactions and will enable PointClick to sign up thousands of new subscribers each day. Growth on that scale would overwhelm even an expensive, heavily staffed, and well-financed IT department—which PointClick can't afford. Outsourcing to a service such as Business OnLine was the only practical solution.
"Business OnLine is like having an entire IT infrastructure and technical team sitting in the next room," adds Triton Network Systems' Smith. "There's no doubt that this solution offered us a huge up-front cash cost savings and, in the long term, is very cost-competitive with what we could do internally. The bottom line, though, is that we're outfitted for the future with a mission-critical tier-1 ERP solution that can grow without strain as we grow."
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Triton Network Systems, Inc., headquartered in Orlando, Florida, is a leader in providing fixed-wireless, high-broadband network products for telephone and internet services. Its Invisible Fiber wireless-network products allow carriers to implement or expand their network coverage, combining the benefits of wireless with the high bandwidth of fiber. Triton Networks chose Oracle ERP applications to replace its PC business software. But rather than deploy the ERP system in-house, with all the attendant labor and expense, the company turned to Oracle Business OnLine. With Business OnLine, the company was able to implement Oracle Financials and Oracle Manufacturing in just a few weeks and saved thousands of dollars in up-front costs. Software & Services |
Calming the Travel Jitters
Despite the obvious benefits, for most businesses, even the thought of having critical applications and data hosted off-site brings anxieties. Is it really secure? Will we lose control of critical information? What about hardware failures? According to some experts, ASPs are often more concerned than their clients about security, since their business is taking care of clients' data (see "Engineering Success"). Some businesses, however, feel more comfortable taking that concern one step further when they sign up with an ASP.
Having sensitive financial information hosted off-site was a concern for FutureNext Consulting. Using a virtual-private-network (VPN) connection that encrypts information in transit addressed this concern and enables the company to take advantage of the internet's flexibility without sacrificing security. And accessing applications via the VPN has boosted productivity. "People can update information even when they're not in the office," says FutureNext's Gootee. "That's important, because our consultants spend most of their time at client sites."
With the VPN in place, having FutureNext's new system located off-site didn't worry Gootee. "In fact, the more I learned about Business OnLine, the more I realized that there were benefits in having the servers and applications off-site," he says. "We didn't have to make room in our offices for the hardware. Plus, Business OnLine supplies a lot of important onsite services that would be very expensive for us to provide here, such as full security and complete disaster recovery."
TeraLogic wasn't worried about jumping on the train. With its extensive experience outsourcing most of its critical business functions, the company viewed applications hosting as just another way to be more productive without adding employees. "Of course the ERP system is critical, so we are involved in all the significant decisions about it," Sinar says. "We're outsourcing the execution, not the strategy. Although Business OnLine is hosting the data, we're the ones who understand it and its significance."
Some companies' customers actually appreciate the fact that the applications they depend on for conducting business with a company are being managed by professionals around the clock. For MOTB, hosting the applications with Business OnLine gives customers a greater level of comfort, says Haftl. "They think that, if anything goes wrong with an application, it's being managed by the people who initially designed it. They feel that's their best guarantee that any problems will be corrected quickly."
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www.pointclick.com Launched in August 1999, PointClick.com is a start-up pioneering a new business model called reciprocal marketing—a concept similar to affiliate marketing, except that the company tracks Web-site traffic and offers cash incentives to surfers who purchase products via the PointClick Network. Businesses in the network also win, because they pay only for potential buyers who visit their Web sites. The company is based in American Fork, Utah. With a network of 350 companies and 1 million projected users, PointClick needed a financial package capable of handling an incredible 20 to 40 million transactions per day—but it lacked the time and resources to create an industrial-strenth IT infrastructure. The company needed to implement its ERP solution within a few weeks, and it could not allocate scarce funds toward an expensive in-house implementation. Nor could it shift valuable IT staff away from its launch and ramp-up activities. By going with Business OnLine, PointClick was able to implement Oracle's 100 percent Web-enabled Financials in less than three weeks, for just half the cost it had estimated for an in-house implementation. By using Oracle Consulting staff, the company was able to minimize distractions for its own development team. PointClick believes that the scalability of Business OnLine offers the only realistic solution for the explosive growth it expects. Software & Services
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Personalized Travel
Another common concern is flexibility. Whereas in-house systems are typically customized, hosted ERP applications are almost always out-of-the-box implementations, configured but not customized to suit the client. The decision to outsource involves calculations about the potential costs or advantages of using standardized applications. For MOTB, this is problematic. "Our whole business is based on offering complete customization and flexibility to our customers," explains Haftl. "Outsourcing our systems to Business OnLine makes a lot of sense for several reasons, including the flexibility of the applications and the one-stop-shopping ease of having so many interactive modules we can just put together. Although this solution gives us a lot of flexibility, going forward, I'm anxious to see what happens if one of our customers makes a request we haven't anticipated—one that we can't support with a standard application."
But other businesses see a definite advantage in using a standardized form of Oracle Applications. "We have Business OnLine run Oracle ERP and Oracle Shop Floor Management with zero customization," says TeraLogic's Sinar. "Of course, this will yield cost savings on maintenance and upgrades, but there are other, more important advantages. Those ERP apps have been refined over the years by feedback from many different customers and industries—and we're leveraging that experience."
TeraLogic is also the first Business OnLine customer for Oracle Shop Floor Management, a specialized solution for the semiconductor industry developed during three years of working with one of the leading fabless semiconductor companies, which outsource most of their wafer fabrication. "The same principle applies with OSFM," says Sinar. "Just as with the ERP applications, we feel that Oracle is committed to being the leader in this market and that we get state-of-the-art functionality and state-of-the art business processes in going with the standard apps."
All Aboard
In today's business landscape, too many businesses in all sectors are in danger of being caught off guard by rocketing growth or plummeting profitability or of being sideswiped by a new competitor or technology that emerged seemingly from nowhere. Organizations can no longer afford to tie up resources in the "how" of achieving goals, because they may lose sight of the "what" or "why" of the business mission. Handing over noncore tasks to specialists is one way for companies to free themselves to focus on the changing horizon and the opportunities it holds.
Anne-Christine Strugnell ([email protected]