ASP – An Alternative buying ERP

Alternative: The Application Service Provider model

• Attempt to increase the market – Extending to smaller players– Speeding up implementation– Limiting draw on scare expertise

• "An ASP manages and delivers application capabilities to multiple entities from a data centre across a wide area network.”

• different types of ASP:– horizontal: enterprise or regional ASP– vertical model: task-specific or industry-specific ASP

• solution offered through a Best-of-breed or One-stop-shopping model

Some players in the ASP market include:

Bull allied with Baan worldwide British Telecom with SAP in the UK Catalyst Solution with JD Edwards in the UK Oracle by themselves in the States and the UK Compaq with SAP in the States and the UK Prologue Software by themselves in France Corio with Peoplesoft and Siebel in the States and the UK IBM with Oracle in Denmark IBM with SAP in Brasil IBM with JD Edwards in North America Symix by themselves worlwide with their Syteweb product which enables

integration with customers and suppliers over the web. Groupe Galeries Lafayette with IBM in France (using their own in-house

developed software not available otherwise!) under the name LASER Interpath and Sun for SAP Oracle and HP for SAP

Bold indicates primary consortium partner.

ERP and ASP

• As with all ecom systems, service has two parts:– interface (web) or client– back end functionality on a server

• opportunity to differentiate service for ASP + offer additional software in the package

• opportunity for customer to pay far less and to implement far quicker (c.f. SMEs)

• Also, traditional ERP market is contracting• expertise is in short supply

Mechanics of ERP / ASP Services

• 24 to 36 months contracts • 500 euros per workstation per month + subscription

fee at start• service includes: technical setup / implementation +

software licences + on-going support + upgrade• some ASPs offer differentiated services for different

industries• others develop interfaces that allow some degree of

customisation without touching the software• SAP claim the same margins can be obtained as with

traditional projects

Critical Success Factors in ASP model

• Security of the data and application• performance and reliability of application

– at least 98% uptime• flexibility of the service offered

– eg: fee• Proper adaptation of the software to ASP• relationship between supplier and customer /

user

Potential partners

• Pure play ASPs - 100% new

• ISP and Telecom companies - own the infrastructure

• Software vendors - own the licences

• Hardware vendors - own the platform

• Distributors - own the customers

• No one has all the required competence

Future trends

• Risk element is great for all partners involves - especially customers

• Application Service Provider Industry Consortium created end of 1999

• Code of good practice written in January 2000• creation of a certification that guarantees service

and gives protection to customer (CGEY and Deloite & Touche)

Evaluating IS Investments

Managing IT investments

• Allocation of resources to selected projects• Application portfolio contains list of potential

systems• Limited resources mean that systems must be

evaluated in terms of their business potential– justifying investment– allocating priorities– determine how the expected benefits will impact the

business overall (+review of these)

Evaluating IS investment

• Little consensus on how to do it

• Total consensus that it is not done properly– 70% of organisations have no formal process

– only 30% of projects’ outcome are reviewed • Variety of types of benefits suggests that

multiplicity of methods id required• Old fashion financial oriented methods less and

less appropriate80% of IT directors admit that cost/benefits analyses are

“a fiction” in relation to IT projects

Characteristics of IT investments

• Technology investment does not really have a return on investment (unless it strictly replaces another older system)

• Many investments in infrastructure cannot be linked to a specific application and their potential is not exhausted by one project

• But technology is not always scaleable (purchased in increments)

• Additional development costs incurred within functional areas are rarely taken into account

• Identifying and quantifying benefits is also difficult• Consider the following three types of applications:

– Substitutive to improve efficiency– Complementary to improve effectiveness– Innovative to obtain and preserve competitive advantage

• These different types of applications may require different evaluation methods

Characteristics of IT investments

Generic Methods• Traditional cost/benefit analysis - good at measuring

improvements in efficiency• Value Linking - good to estimate improvements in overall

business performance• Value acceleration - to model the positive (non £)

consequences of saving time in business processes• Value restructuring - to plan for the productivity resulting

from a combination of better systems and other fundamental change

• Innovation evaluation - to take into account the additional revenues that can be obtained from extension of business to new activities

Examples of targets for these Methods

• Traditional cost/benefit analysis

• Value Linking

• Value acceleration

• Value restructuring

• Innovation evaluation

Savings resulting fromautomation

More accurate billing means less time spent in correcting mistakes

Acceleration of order processing internally means more time for negotiating with suppliers for the buyers

Support given by systemsin implementing change

IT based plan to developtotally new activities

Translating into Benefits• Revenue generating

• Eg. New markets, channels, customers

• Cost saving

• Eg. Reduces head count

• Efficiency gain

• Eg. shorter order fulfillment cycle

• Support implementation of radical change

• BTO model

• Better management information

• Eg. better visibility of costs

• More real-time information

• Eg. point of sale responsiveness

• Rationalisation of IT costs?

• Centralise on single supplier

Summary• Different categories of benefits have been put

forward • Overall value of project is combination• Costs and benefits should be appraised in

both IT and business domains• Shape of learning curve must be taken into

account• Not possible to convert all intangibles to

financial figures (spurious)• However crucial to establish how intangibles

will be measured and monitored• Portfolio Analysis can be used as guide

Portfolio Analysis

High

Low

Potentialcontribution

of IS/IT applicationto achieving future

business goals

Degree of dependenceof the business on IS/IT application

in achieving overall business objectives

High Low

Support - Safe

Strategic -Attack

Key Operational - Explore

High Potential -Beware

Application Portfolio

Strategic

High Potential

Key operational

Support

Applications critical to sustaining future business strategy

Applications which may be important in achieving future success

Applications on which the organisation currently depends for success

Applications which are valuable but not critical to success

Application Portfolio Example for a manufacturing

companyStrategic

High Potential

Key operational

Support

• Sales order management• Links to suppliers• Sales Forecast & market analysis• Product Profitability analysis• …

• E commerce• Manpower planning• Decision Support (capacity plan)• Expert fault diagnosis• Document processing• …

• Bill of Materials• Inventory management• Customer database• Receivables / Payables• Employee database• …

• Time recording• Budgetary control• General accounting• Cost accounting• Payroll• …

Application Portfolio Enterprise wide applications

Strategic

High Potential

Key operational

Support

Support• Given the aim to improve efficiency, financial

evaluation should be used• benefits should be quantified and a financial

argument made• Additional arguments might be relevant (eg: staff

morale) - other methods to be used for those• Potential benefits must be evaluated before any

resource is committed• To compete against other projects, a support

application must show a good return on investment especially when scarce resources are involved

Key operational

• Some important arguments cannot be converted into financial arguments

• Not suitable to estimate all benefits prior to any resource allocation or cost determination

• most economic solution may not be the most effective• Critical failure effect if systems do not do enough• Some freedom must be given to each business unit to

initiate such projects even when the economic rationale is not obvious to an outsider

• But design and implementation must be undertaken by central IS/IT

Strategic Applications

• Very important applications - critical in achieving future business objectives

• Cost / benefits should be evaluated in terms of their order of magnitude

• Reasons to go ahead will remain intangible (linked to CSFs)

• Attention of top management is required to ensure that objectives are met and resources are available

• Centralised processes is best with a task force approach

High potential Applications

• Benefits are unknown! Only potential benefits can be anticipated

• Projects should be treated as R&D projects (on a separate budget)

• Project champion arbitrates between spending too little and spending too much (Hayes’ model)

• Iterative process of developing a bit and evaluating the results then re allocating some resources etc...

Lessons from the Portfolio approach

• Quantitative justification easier in key operational and support quadrant

• Reliance on single method will result in only one type of application to be developed

• The way IS is regarded and managed in the organisation will be reflected in the way IT investments are justified

Hidden costs

• A large multi-national budgets $100m for an ERP implementation

• Total cost of the project $300m

• What was omitted:

• High cost of software modification (labour)

• Implementation assistance (labour)

• Refresh training

Calculating costs (labour)

• Take basic salary (eg. € 20k)

• Double it to get employer cost (eg. € 40k)

• Divide by no. of working days in year (260)

• Daily cost 40k/260 = € 154 per day

• Take basic contractor rate (eg. €40 / hour)• Convert to daily rate (eg. €40 x 8 = €320) • Consultant rates may range € 500 – 2,000 /

day

Total Cost of Ownership (TCO)

• Gartner $11,900 per PC per year (June 1997)

• Capital 21%

• Tech Support 21%

• End-user support 46%

• Admin 13%

•Formal learning•Informal learning•Data management•Apps development•Supplies•Peer support

TCO tools