1 netsourcing business applications mary c. lacity professor of is
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NetsourcingBusiness
Applications
Mary C. Lacity Professor of IS
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Readings
• Kern, T., Willcocks, L., and Lacity, M., "Application Service Provision: Risk Assessment and Risk Mitigation," MIS Quarterly Executive, Vol. 1, 2, 2002, pp.113-126.
• Harney, J., "The New World of ASPs," Cutter Consortium, Vol. 5, 9, 2005.
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ASP Market: 1997 to 2005
Phase 1:Hype & Fear
Phase 2:Early AdoptersBest & Worst Practices EmergeFocus on Costs
Phase 3: Market MaturesRicher Practices EmergeFocus on Quality
Phase 4:InstitutionalizedFocus on Value-added
Siz
e of
Mar
ket
Cus
tom
er L
earn
ing
Time
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One-to-many Application Service Provision
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Application Service Provision
ASP is the practice of renting or "paying as you use" access to centrally managed business applications, made available to multiple users from a shared facility over the Internet or other networks via browser-enabled devices.
ASP allows customers to receive business applications as a service.
ASP is a delivery channel
ASP is a pricing model
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Promised Customer Value:
30% to 50% reduction in Total Cost of OwnershipMinimal upfront IT infrastructure costsLess in-house IT support staff
Superior cash flow
Access to best-of-breed innovations
Flexible, scalable solutions
Rapid implementation
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Why ASP does not initially appeal to large companies?
Forrester Research found that 71% of large companies (28 casestudies of more than 1,000 employees) do not outsource anyapplications for the following reasons:
75% software already in-house50% not cost effective45% expertise in house30% want to keep control20% applications are business specific
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Intermediaries
Application Specialists & Portfolio Assemblers
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Supplier
Supplier
Supplier
Supplier
Supplier
Supplier
Supplier
Supplier
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ApplicationPartners
InfrastructurePartners
Implementation/Set Up Partners
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
PortfolioAssembler:
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ApplicationPartners
Implementation/Set Up Partners
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
XXX X
XX
X
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InfrastructurePartners
Implementation/Set Up Partners
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
X
XX
X
X
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ApplicationPartners
InfrastructurePartners
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
Customer
“To support our partners and deliver the most reliable and cost effective solutions leveraging Corio technology, Corio offers enhanced training and support to select systems integrators through the Certified Corio Applications on Demand Partner program.”
X XX
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ApplicationPartners
InfrastructurePartners
Implementation/Set Up Partners
CustomersInclude:
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1998 1999 2000 2001 2002 2003Revenues: $1,292,000 $5,782,000 $44,946,000 $51,571,000 $56,144,000 $68,738,000
Net Losses: $3,201,000 $44,522,000 $103,164,000 $66,971,000 $36,088,000 $12,869.000
Assets: $10,006,000 $61,596,000 $197,130,000 $113,290,000 $80,292,000 $72,143,000
2004Revenues: $53,094,000 (only 3 quarters January to Sept 2004)Net Losses: $10,366,000 (only 3 quarters January to Sept 2004)Assets: $69,001,000
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Stock PerformanceOver 5 Years
As assessed on Oct 1, 2004:
52-Week High:$4.50 on Monday, April 05, 2004
52-Week Low:$1.12 on Tuesday, August 17, 2004
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IBM Buys CorioIBM bought Corio for $182 million in cash in First Quarter 2005
IBM paid 38% above stock price
All 400 Corio employees offered jobs at IBM, included CEO George Kadifa
All Corio customers will get same high level of service
IBM to expand business to Asia & Europe in 2006
Move business to IBM’s 44 megacenters
IBM wanted Corio’s mature rapid application deployment methodology for SMEs
“Existing Corio clients will continue to receive the same high level of service.” IBM press release
“As enterprise applications become more complex and costly to manage, we see growing demand for application services. IBM, with the new capabilities from Corio, is uniquely positioned to help clients navigate these challenges.” – Jim Corgel, General Manager, Small and Mid-Sized Businesses, IBM Global Services
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CIO & CEO level customer survey of netsourcing experiences & plans:
28 countries, data gathered 2001, n = 274 useable surveys
10 Supplier-Customer Pair Case Studies
RESEARCH METHOD
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Current ASP Customer Satisfaction is Good Overall
(mean response = 7.06)
0
5
10
15
20
25
30
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1 2 3 4 5 6 7 8 9 10
Poor Satisfactory Good Excellent
Pe
rce
nta
ge
of
Re
sp
on
de
nts
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Current ASP Customer Outcomes:
Reduction in Total Cost of Ownership 72% experienced significant cost savings
Superior cash flow 74% have variable pricing mechanisms
Access to best-of-breed innovations 70% claim degree of innovation is significant/extensive
Flexible, scalable solutions76% of customers experienced significant business flexibility
Rapid implementation67% perceived improvement in application rollout speed
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Other Findings:
But we also found that the ASP space, as initially defined, is vastly more fragmented, complex, and risky than many customers realized.
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Defining the Space
Netsourcing
ASP
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Wacky World of Alphabet …
Netsourcing
SSP
BSP
CSP VSP
FSP
MSP
ASP
xSP
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The Netsourcing Service Stack
Business Process Delivery
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
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The Netsourcing Service Stack
Business Process Delivery
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
Internet ServiceProviders & telecom companies offer an array of connectivity options matched to customers bandwidth and data throughput rates
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The Netsourcing Service Stack
Business Process Delivery
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
Network monitoring services; Example, Intellinet handles network monitoring for Marconi Medical Systems’ 71 routers, 200 servers, 1800 mobile users
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The Netsourcing Service Stack
Business Process Delivery
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
Exodus (bought by Cable & Wireless) provides data center facilities, leases servers, and manages server performance
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The Netsourcing Service Stack
Business Process Delivery
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
Middleware Layer for accessing applications from remote sites; Charon Systems transforms customer legacy systems to be network ready using Citrix MetaFrame & MS Terminal Server
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The Netsourcing Service Stack
Business Process Delivery
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
Supplier may resell ISV software; or have net-native applications they created themselves; or may rebrand ISV software
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The Netsourcing Service Stack
Business Process Delivery
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
Supplier may host the customer’s home-grown software
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The Netsourcing Service Stack
Business Process Delivery
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
Exult processesHR forBP Amoco in$600 million5 year deal.
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Abz Insurance
InsuranceCompanies
Body RepairShops
Spare PartsCompanies
Siennax
KPNDutch Telecom
Insurance Shoppers,
Customers, and Claimants
Mapping a Case Scenario to the Service Stack…
ISVs
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Abz Insurance
InsuranceCompanies
Body RepairShops
Spare PartsCompanies
Siennax
KPNDutch Telecom
Insurance Shoppers,
Customers, and Claimants
ISVs
Abz provides end-to-end business processes from searching forauto insurance to claims resolution…
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Abz Insurance
InsuranceCompanies
Body RepairShops
Spare PartsCompanies
Siennax
KPNDutch Telecom
Insurance Shoppers,
Customers, and Claimants
ISVs
Siennax supports Abz’s legacy systemsAnd new customized insurance applications
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Abz Insurance
InsuranceCompanies
Body RepairShops
Spare PartsCompanies
Siennax
KPNDutch Telecom
Insurance Shoppers,
Customers, and Claimants
ISVs
Siennax rents their proprietary IntranetSuite SX to and through Abz
Siennax resells ISV software(Microsoft, Lotus) to and through Abz
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Abz Insurance
InsuranceCompanies
Body RepairShops
Spare PartsCompanies
Siennax
KPNDutch Telecom
Insurance Shoppers,
Customers, and Claimants
ISVs
Siennax connects Abz to Abz Customers(Through middleware like MS Terminal,Open Source, Lotus Domino)
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Abz Insurance
InsuranceCompanies
Body RepairShops
Spare PartsCompanies
Siennax
KPNDutch Telecom
Insurance Shoppers,
Customers, and Claimants
ISVs
Siennax operates servers(Sun Solaris, Compaq NT, Linux, Oracle)
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Abz Insurance
InsuranceCompanies
Body RepairShops
Spare PartsCompanies
Siennax
KPNDutch Telecom
Insurance Shoppers,
Customers, and Claimants
ISVs
Siennax servers in KPN data center…KPN provides network monitoring &network infrastructure
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Wrong activities Wrong supplier Wrong governance
Higher costsLower service
Loss of competitivenessLoss of revenues
Loss of customers
Risks:Risk
Consequences:
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Netsourcing Risk Mitigation
Right activities Right supplier Right governance
Higher CostsLower Service
Loss of competitivenessLoss of revenues
Loss of customers
Promised Value Realized
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Netsourcing Risk Mitigation
Right activities Right supplier Right governance
Higher CostsLower Service
Loss of competitivenessLoss of revenues
Loss of customers
Promised Value Realized
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Outsourcing risks are high when the customer cannot readily switch
suppliers because the assets, capabilities, and services are highly
idiosyncratic to a particular customer.
A Better Way to Identify Risky Activities:
Right activities?
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Products Netsourced by Current Customers:(percentage* of respondents currently netsourcing)
38%* Email & Communication23% Personal Productivity21% Finance & Accounting21% CRM17% HRM17% B2B11% B2C 9% ERP13% Other
Mostly non-idiosyncratic
activities
Right activities?
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Customers Netsource Shopping For:(percentage* of respondents seeking to netsource)
45%* Email & Communication35% B2B33% Personal Productivity31% CRM25% Finance & Accounting22% HRM23% B2C19% ERP 9% Other
Mostly non-idiosyncratic
activities
Right activities?
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But technically immature market…
Current customers claim the following big problems:
41% slow response time25% application unavailable
Right activities?
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Security has not been a problem…
Current customers report:
0% instances of hackers3% instances of data security problems
Right activities
But shopping customers rate security their number 1important criterion…
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Netsourcing Risk Mitigation
Right activities Right supplier Right governance
Higher CostsLower Service
Loss of competitivenessLoss of revenues
Loss of customers
Promised Value Realized
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Initial ASP providers suffered
60% predicted by Gartner Group to Close Doors
Agillion, BlueStar, Hotoffice, iTango, eBaseOne, JDe.sourcing, Red Gorilla, Pandesic, Utility.com, VitaGo, and XS-Media.
Stock prices plummeted
ASP model had to merge to more value added services, net-native applications.
According to Harney, still 3,500 ASPs worldwide but be careful! (ASPstreet cross lists & lists companies in entire service stack)
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Be big, do it all: A look at EDS
Focus is on delivering IT & business services to all
Types and Sizes of customers world-wide:SMEsGlobal 2000
One-to-Many ------ Personalization ---- Customization
Hosted Managed --------------------------- Outsourced Managed
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EDS ASP assets already in place:
•1 million square feet of excess data center capacity (infrastructure)• Global network• 30,000 application specialists available for ASP • Relationships with 25 ISVs (SAP, Peoplesoft, Microsoft, etc)• Varied Sales and Marketing Channels• Relationships with current customers for cross/up sell
By the first quarter 2001, EDS already had $200 million worth of pure-play ASP contracts signed with nearly 50 customers, making them the largest ASP player in the market.
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How EDS Positions Itself
Competitors simply can't match our flexible suite of Applications Services: •We're the market leader. In fact, 40% of all companies that choose an applications service provider choose EDS. •We support more than 1 million applications and 2.5 billion lines of code. •We deliver methodologies and practices developed and refined over 40 years, and standardized worldwide. •We support applications in 60 countries and more than 50 languages, delivering our services from about 75 solution centers worldwide. •35,000 dedicated application professionals means we have expert resources to develop and manage applications on any platform, and to integrate multiple
platforms.
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• Exchange® 2000• InterMail®• LearningSpace
4.0®• QuickPlace™• Sametime™• Notes/Domino®• NexPrise
• Exchange® 2000• InterMail®• LearningSpace
4.0®• QuickPlace™• Sametime™• Notes/Domino®• NexPrise
• mySAP.com™• Oracle® • Ariba• eMerchant pro™
• mySAP.com™• Oracle® • Ariba• eMerchant pro™
• eSales (OverQuota®)
• Siebel • PeopleSoft®• JD Edwards™
• eSales (OverQuota®)
• Siebel • PeopleSoft®• JD Edwards™
• mySAP.com™• Oracle®• PeopleSoft® • JD Edwards™• TimeTrak!• ExpenseTrak!™• IdealHire®
• mySAP.com™• Oracle®• PeopleSoft® • JD Edwards™• TimeTrak!• ExpenseTrak!™• IdealHire®
Be big, do it all: A look at EDS
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As of Oct 11, 2005:52-Week High:23.95 on Thursday, August 04, 2005 52-Week Low:18.59 on Thursday, May 12, 2005
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1998 1999 2000 2001 2002Revenues: $16,892,000,000 $18,401,000,000 $18,329,000,000 $20,292,000,000 $20,486,000,000Net Profit: $743,000,000 $421,000,000 $1,143,000,000 $1,363,000,000 $1,116,000,000Assets: $11,526,000,000 $12,522,000,000 $12,692,000,000 $16,353,000,000 $18,880,000,000
2003 2004
Revenues: $20,570,000,000 $ 20,669,000,000 Net Profit: (1,698,000,000) $158,000,000Assets: $18,616,000,000 $17,744,000,000
As of December 31, 2003, EDS had 137,000 employees in 60 countries. As of December 31, 2004, EDS had 117,000 employees in 60 countries
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Risk Mitigation Strategies:
Right supplier?
Select suppliers with proven track records Demand customer references of turnaround cases Select supplier with sound finances Understand if and how the supplier earns a profit
√?
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Trust Enhancing Factors:Current Netsourcing Customers Ranking:
Right supplier?
1. Supplier is widely-recognized in industry 2. Supplier has alliances with established ISVs, Tcom & hardware partners 3. Security audits by well-known auditing firms4. Supplier branding
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Primary Worry About SuppliersCurrent Netsourcing Customers Ranking:
Right supplier?
1. Supplier’s longevity and existence2. Supplier’s service and business stability
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Netsourcing Risk Mitigation
Right activities Right supplier Right governance
Higher CostsLower Service
Loss of competitivenessLoss of revenues
Loss of customers
Promised Value Realized
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Proven Governance Strategies:
Right governance?
Short-term Contracts Detailed Contracts Performance measured & monitored Joint Problem Resolution Teams Supplier must earn a profit on account Full disclosure & customer approval of all subcontractors Customer provides user-supplier liaison roles
√
√?
?
?
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ASP Contract Length:Current Customers
57% less than 1 year contract 35% between 1 and 3 years 8% greater than 3 years
Right governance?
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Application Availability
95% availability = 504 minutes down per week (8.4 hours!)99% availability = 101 minutes down per week (1.68 hours)99.7% availability = 30 minutes down per week 99.9% availability = 10 minutes down per week99.99% availability = 1 minute down per week
“Many service level agreements limit themselves to guaranteeing availability, Which is a measure of when the application is accessible at predefined points in the Network. However many applications are only useful when they consistentlyAchieve certain performance levels, so most service level agreementsShould also guarantee performance levels.” – Phil Wainewright, ASPnews.com
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ASP Contract Details:Current Customers
67% no performance penalty clauses 60% no response time clauses50% no confidentiality clauses40% no data security clauses37% no application availability clauses
Right governance?
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Final Risk Mitigation Practice:
Incremental Sourcing√
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Likely Future of Netsourcing
But Maturity needs to occur in:• Technology • Integration • Customization • Service Support • Pricing Models• Contracts• Suppliers & Customers
Netsourcing value to the customer is too compellingnot to be adopted…
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All outsourcing requires significant
in-house management