E-Business Commentary

Dec. 21, 2004
Outsourcing redux.

The last time outsourcing was the topic in this space, I came down on the side of keeping control of information technology. I wrote that if technology is integral to your business, you should keep it in-house. If it was a support function- la payroll or benefits -- you might consider sending it outside. That was a year and a half ago --a century or so in technology time -- and we were talking about the entire IT function: network and desktop computing, IT staffing, and software purchasing and upgrading. Now one of the hottest new trends is applications outsourcing. The idea here is that an application service provider (ASP) such as IBM, USinternetworking Inc., Oracle Corp., or Corio Inc. will basically rent you the business software you need and run it on their computers. All the processing can be done remotely, with the user company connecting to the ASP's host system via the Internet. There are all kinds of software applications that companies can use over the Internet, all without having to hire a single database administrator or network systems manager. Planning, document management, e-mail, and information sharing are just a few. It's no wonder some companies are attracted to outsourced soft-ware applications. First, costs are predictable. Often the initial investment is minimal when compared with the big-ticket price tags -- often $500,000 or more -- for many of the major enterprise-resource-planning (ERP) software packages. When the business grows, the ASP must bear the responsibility of expanding systems to support the larger enterprise. What's more, the technology-skills headache -- the troubles involved in finding capable people who know SAP or e-commerce or databases -- goes away. Finally, the company gets to focus on its core business, instead of buying, maintaining, and upgrading layers of enterprise software. The idea of downloading applications off a network -- or using the network as the engine to process and manage information -- also is catching on among consumers using desktop applications. Hundreds of thousands of taxpayers filled out their 1040s this year using Intuit Inc.'s Web site instead of going out and buying the company's TurboTax software at OfficeMax or Office Depot. Businesses can use terminals, Apple Macintosh computers, or old PCs to access desktop programs such as Microsoft Office running on Internet servers. Even Microsoft has a pilot effort underway to license its server-based Windows NT software to service companies that would offer users subscriptions to tap into the software. Intel Corp. also is getting into the act, establishing computing facilities to operate Web-based services for companies. For smaller companies, and even some medium-size ones, outsourced software applications may make sense. Certainly if your business views IT the same way you'd look at a service such as telecommunications, then offloading it may not be a bad idea. On the other hand, for larger businesses that require stronger integration between business processes and the technology that supports them, this arrangement may not be so advantageous. In a June report on ERP outsourcing for midmarket companies, AMR Research Inc. analyst David Caruso points out that "IT managers must deal daily with a full range of issues beyond core ERP-application operations" that are outsourced. These include connections with other strategic systems such as advanced planning and scheduling, customer-relationship management, electronic commerce, and logistics management. "But ERP outsourcers generally lack integration to such strategic applications," Caruso warns. In many cases, outsourced applications don't go beyond the basic ERP functions. In other words, no connectivity is provided to the plant-floor systems. Bar-code data collection, shop-floor controls, and other key information networks must be connected by someone in the company. It's like the water company -- they'll bring the pipe to your lot, but you're responsible for making the connection and maintaining the plumbing fixtures in your home. There's no doubt the day is coming soon when the network will be the computer. For consumers, much of the processing of information will be done remotely, the same way the phone company does all the complex switching at a central location. But something as strategic as the flow of information supporting a company's business processes is better handled in-house by the people whose livelihood depends on it.

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