1 netsourcing business applications mary c. lacity professor of is

1

NetsourcingBusiness

Applications

Mary C. Lacity Professor of IS

2

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.

3

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

4

One-to-many Application Service Provision

5

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

6

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

7

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

8

Intermediaries

Application Specialists & Portfolio Assemblers

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

Supplier

9

ApplicationPartners

InfrastructurePartners

Implementation/Set Up Partners

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

PortfolioAssembler:

10

ApplicationPartners

Implementation/Set Up Partners

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

XXX X

XX

X

11

InfrastructurePartners

Implementation/Set Up Partners

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

Customer

X

XX

X

X

12

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

13

ApplicationPartners

InfrastructurePartners

Implementation/Set Up Partners

CustomersInclude:

14

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

15

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

16

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

17

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

18

Current ASP Customer Satisfaction is Good Overall

(mean response = 7.06)

0

5

10

15

20

25

30

35

1 2 3 4 5 6 7 8 9 10

Poor Satisfactory Good Excellent

Pe

rce

nta

ge

of

Re

sp

on

de

nts

19

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

20

Other Findings:

But we also found that the ASP space, as initially defined, is vastly more fragmented, complex, and risky than many customers realized.

21

Defining the Space

Netsourcing

ASP

22

Wacky World of Alphabet …

Netsourcing

SSP

BSP

CSP VSP

FSP

MSP

ASP

xSP

23

The Netsourcing Service Stack

Business Process Delivery

Customized Applications

Standard Applications

Application Operating Infrastructure

Hosting Infrastructure

Network Services

Network Connectivity

24

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

25

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

26

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

27

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

28

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

29

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

30

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.

31

Abz Insurance

InsuranceCompanies

Body RepairShops

Spare PartsCompanies

Siennax

KPNDutch Telecom

Insurance Shoppers,

Customers, and Claimants

Mapping a Case Scenario to the Service Stack…

ISVs

32

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…

33

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

34

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

35

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)

36

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)

37

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

38

39

Wrong activities Wrong supplier Wrong governance

Higher costsLower service

Loss of competitivenessLoss of revenues

Loss of customers

Risks:Risk

Consequences:

40

Netsourcing Risk Mitigation

Right activities Right supplier Right governance

Higher CostsLower Service

Loss of competitivenessLoss of revenues

Loss of customers

Promised Value Realized

41

Netsourcing Risk Mitigation

Right activities Right supplier Right governance

Higher CostsLower Service

Loss of competitivenessLoss of revenues

Loss of customers

Promised Value Realized

42

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?

43

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?

44

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?

45

But technically immature market…

Current customers claim the following big problems:

41% slow response time25% application unavailable

Right activities?

46

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…

47

Netsourcing Risk Mitigation

Right activities Right supplier Right governance

Higher CostsLower Service

Loss of competitivenessLoss of revenues

Loss of customers

Promised Value Realized

48

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)

49

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

50

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.

51

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.

52

• 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

53

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

54

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

55

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

√?

56

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

57

Primary Worry About SuppliersCurrent Netsourcing Customers Ranking:

Right supplier?

1. Supplier’s longevity and existence2. Supplier’s service and business stability

58

Netsourcing Risk Mitigation

Right activities Right supplier Right governance

Higher CostsLower Service

Loss of competitivenessLoss of revenues

Loss of customers

Promised Value Realized

59

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

√

√?

?

?

60

ASP Contract Length:Current Customers

57% less than 1 year contract 35% between 1 and 3 years 8% greater than 3 years

Right governance?

61

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

62

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?

63

Final Risk Mitigation Practice:

Incremental Sourcing√

64

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…

65

All outsourcing requires significant

in-house management