Sometimes it's better to let the "experts" do a job. This is true even for running mission-critical applications, such as enterprise resource planning (ERP). In fact, global competition almost demands it. "It's precisely because ERP is so critical that you should find the best, most professional way of doing it," argues Eugene Lukac, principal at the Application Value Management Practice of CSC (Lexington, MA). "Your company's core competence is probably not in information technology (IT). And yet, you might need extremely reliable, world-class IT functions to compete with your competitors. If IT is not your core competence, then why strap yourself?"
Why indeed? Outsource it. ERP outsourcing "frees the IT staff to concentrate on the application of technology, not the technology of applications," says Tom Melchiore, director of Outsourcing for SAP America, Inc. (Newton Square, PA).
ERP outsourcing also solves a demographic issue, subject to the harsh economic realities of supply and demand, according to James Patrick, vice president of Worldwide Channel and Internet Services for interBusiness Supply Chain Group, formerly the MK Group of Computer Associates International (Irving, TX). The software environment is so sophisticated and requires such specialized expertise that it essentially screams for specialized people to manage it—people who are increasingly in demand, and in short supply.
Hence the tremendous popularity today to outsource ERP.
Something Old and New
The Outsourcing Institute (Jericho, NY) defines outsourcing as a management strategy that contracts "major, non-core functions to specialized, efficient service providers." To that, adds CSC's Lukac, outsourcing has two key dimensions. First, outsourcing involves taking responsibility. This dimension distinguishes outsourcing from a rent-a-body effort, contracting, or simply hiring consultants. Second, outsourcing involves an ongoing relationship between two companies, as opposed to a one-time transaction or one-time turnkey contract.
Outsourcing is not new. Many Fortune 500 companies have a third-party provider run their entire data center. Likewise, many companies rent a service to independently handle a specific business process, such as financials, payroll, data entry, sales, or human resources. "The primary deliverable is a process service, as opposed to access to the software," explains Marc Duame, North America Sales & Marketing manager, ERP Outsourcing, for J.D. Edwards World Solutions Company (Denver, CO).
Then there's application outsourcing. ERP outsourcing, explains Patrick, is a little bit of everything:
In ERP outsourcing, the client company uses some or all the modules in an ERP system over a secure network link to an off-site computer center, though Internet access is just now becoming available. This approach, says Duame, "is a bundling of everything that a customer would need to access an enterprise solution." The bundle includes renting hardware and software, implementation, help-desk support for applications and systems, complementary product integrations, customizations, and the expertise to operate, maintain, and support the hardware and software environment.
However, the outsource provider's responsibility typically "stops at the router at the manufacturer's site," says David Caruso, vice president of Enterprise Application Strategies for AMR Research (Boston, MA). "From there on in, that client company has to take care of a whole host of things: desktop maintenance, local area network (LAN) maintenance, integration to such conventional computerized applications as computer-aided design, barcode data collection, and the related support."
Is Outsourcing Worth It?
An SAP market study last fall showed that 80% of automotive suppliers surveyed, from Tier 1 on down, were quite favorable to the idea of outsourcing ERP. "It's a compelling economic argument," claims Melchiore. "The cost of entry has been reduced significantly." There is no upfront capital outlay; no license or hardware to buy. The client company need not continually invest in hiring and training people. Nor must the client company invest in maintaining and upgrading hardware and software. Best of all, the ongoing costs in software and outsourcing services are predictable and guaranteed on a per-user per-month basis.
Still, there are some concerns. "These models are flawed for mid-market manufacturers," says Caruso, who admits to being "the industry's biggest skeptic that ERP outsourcing is going to take off in the mid-range ERP world."
Here's how Caruso sees it. ERP outsourcing ranges from $375 to more than $1,000 per seat per month. The average is somewhere between $600 and $900. For a mid-market manufacturer with 100 users paying $400 per seat per month, ERP outsourcing costs $40,000 month. Pricey. And that does not include all costs.
Consider this. Many ERP vendors think the magic to their outsource offerings is to provide the technical skills necessary to maintain the applications. There's truth to that, admits Caruso; outsourcing ERP does eliminate the need for an in-house database administrator. And moving toward NT-centric applications eliminates a Unix systems administrator. That's two job functions, which mid-market manufacturers probably don't have anyway.
The manufacturer still needs a small staff to manage the LAN and to maintain desktop applications. Second, few manufacturing companies completely shut down their legacy systems and fully replace their legacy data. Someone still has to maintain those. Third, manufacturers will now have to pay for communications between the corporate site and the outsourced data center. And that is probably a whole new cost.
"What are you taking off the plate? Where's the financial benefit to mid-market manufacturers? I just don't see outsourcing being practical in their world today," says Caruso. Granted, he does see ERP outsourcing holding some promise as the Internet unfolds. But that's in the future.
Money Is Not Everything
So, should your enterprise outsource its ERP? Lukac offers a short quiz to find out:
If some of your answers are "no," think about outsourcing.
Many vendors and outsource providers say ERP outsourcing is not just about saving money. "It's about competitiveness. It's about business success. It's about speed in business results. And it's about business performance," says Lukac.
It's like getting a Corvette, says Duame. You still won't be able to beat Mario Andretti because he has the skills and the expertise to win with that car. The same holds true with ERP outsourcing. So why not hire a Mario Andretti to drive—read "manage and run"—your ERP environment to ensure that your enterprise has the critical information it needs to transact business, add value, and meet its strategic goals? "That's the real value proposition for outsourcing ERP applications," concludes Duame.
Out of Sight, But Not Out of Mind
Simpson Industries, Inc. owns an ERP system and a computer to run it on. But neither hardware nor software is in Simpson's headquarters in Plymouth, MI. In fact, Simpson isn't even running the system. IBM Global Services is—a few hundred miles away in Rochester, NY.
Simpson designs and manufactures suspension, chassis and powertrain components for automotive and diesel engine customers. It's a global company with about 2,350 employees and about $500 million in sales.
In 1996, Simpson replaced a hodgepodge of homegrown and packaged manufacturing and financial software with J.D. Edwards WorldSoftware ERP system. Simpson also upgraded its in-house computer system, an IBM AS/400. And, as long as it was doing all that, the company decided to look for someone who might run the whole kit and kaboodle. "Why would a company like Simpson want to maintain a core competency in computer operations?" asks Dick Lefebvre, Simpson's vice president of Information Technology. "It's like payroll; it's important, but it's not value added. Why not go to somebody who can do it better and cheaper?"
Simpson turned to IBM Global Services, which helped Simpson install the ERP system. Then, following the notion of rentable applications, IBM managed both the ERP system and the associated hardware from its Rochester data center. Simpson, because it has the expertise in-house, customized the ERP software—about 5% of the WorldSoftware code—because of unique business requirements.
Lefebvre views IBM Global Services as an extension of his staff, for which Simpson pays about 8% more than if it ran the data center in-house. "I can more than justify that 8% in value-added work. It's the kind of work that nobody says `thank you' for if it's done right. But as soon as it isn't, they'll come and rip your head off."
For instance, Simpson's AS/400 in Rochester went down in 1997. The IBM system engineers investigated the problem, changed the failed components, reloaded the ERP system, and Simpson was up and running in four hours. If that happened at Simpson, Lefebvre estimates he might have been down for 24 hours—at least. Plus, "if I were renting contractors, they would be sitting here occupying my space, and I would be responsible for giving those guys daily direction."
Simpson's executives and 250 concurrent ERP users expect the ERP system to be running seven days a week, 24 hours a day. The latest quarterly operations report from IBM reinforces that expectation. Simpson's 12-month rolling average for CPU availability was 99.87%. "That's excellent," beams Lefebvre. "And the absence of complaints from my customers tells me that outsourcing is working quite well."
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