Pay-per-view ERP

Managers at Thermos Inc. faced a painful choice. Stick with the old, outdated enterprise resource planning program and risk losing highly prized customers, or switch to a new, 21st-century ERP system and risk alienating the company's only in-house source of tech support.

If you think there's a back story here, you're right. In 2001, managers at the Rolling Meadows, Illinois-based thermos maker were facing the same pressure as executives at other manufacturers of consumer goods. Simply put, big-box retailers wanted suppliers to deliver products faster and with fewer screwups. While management at Thermos obviously wanted to satisfy the requests of business partners, doing so would involve ripping out the company's existing ERP system. And tearing out an old ERP system, as many CFOs will attest, is a bit like having your eyebrows plucked out by a farsighted cosmetologist: it's a hit-or-miss affair punctuated by long periods of anxiety, dread, and cranial distress.

Despite the fear factor, Thermos management eventually decided it had little choice but to step into the modern world. Then it ran into an unexpected snag. The IT workers who specialized in the old ERP system were dead set against the new ERP system, and they weren't shy about expressing their feelings. According to COO Alex Huang, tech staffers dug in their heels: "Our MIS manager basically told me that if some of his people went, the company would come to a halt."

Facing the prospect of a crucial, complicated technology project in the face of a defiant and hostile tech staff, management appeared boxed in. But in an inspired bit of thinking, the company came up with a simple, elegant solution. In 2002, Thermos signed on with Oracle's On Demand solution, which delivers enterprise applications over the Internet. In essence, Thermos outsourced its ERP headaches. "[The lack of IT cooperation] was the motivation to go to on-demand," explains Huang. "I needed outside help from the get-go."

The move paid off. With the new system, Thermos saw almost immediate improvements in its warehouse and inventory operations, as well as in finance. What's more, the hosted approach freed Thermos from making sizable investments in hardware and facilities. It also lowered the company's IT management costs, enabling the company to shed some of its disenchanted tech staff. Says Huang: "Now, the MIS staff is building more value — stuff I can observe — as opposed to just keeping the system up."

Therein lies the main appeal of hosted ERP products: they get companies out of the software caretaker business. Not surprisingly, this freeing up often leads to decreases in overhead costs and increases in productivity. In fact, consulting firm Shack & Tulloch estimates that the on-demand ERP project at Thermos will generate more than $6 million in benefits and an ROI of 222 percent over the life of the software.

Tabular Rasa
That's a healthy return for any tech investment. Of course, the value proposition for hosted software is hardly unknown in the business community. Unlike conventional licensed software, which usually resides on company-owned and -operated servers, on-demand programs are housed on computers maintained by a software vendor or a third-party operator. In most cases, the customer pays a monthly fee that covers both hosting services and software licensing, although sometimes a program is simply rented (called apps on tap; for more on the different delivery methods of software, see "Program Guide" at the end of this article).

Over the past few years, a number of software publishers have popularized on-demand delivery of business programs. Most notably, Salesforce.com Inc. and NetSuite Inc. have developed a loyal — some would say messianic — following by offering hosted customer-relationship management (CRM) software along with other enterprise applications. Salesforce.com's rise to industry stardom has been nothing short of meteoric. Four years ago, the company had 25,000 registered subscribers. Today, that number is closer to 350,000.

Even with the wild success of Salesforce.com, ERP vendors have been slow to embrace hosted products. Many have questioned whether a market exists for Web-based resource planning software, which typically pulls data from a company's transactional and supply-chain systems. Frank B. Modruson, chief information officer at Accenture, a business advisory firm, thinks that on-demand ERP is a nonstarter for most global corporations. "They already have ERP systems that are very entrenched and integrated into their ongoing business operations," he says. "They're not about to dump everything and start over with something new."

That's not necessarily the case for small to midsize companies. Experts point out that many SMBs have yet to turn to resource planning technology to help with tabulations, transactions, or turnaround time. Absent expensive legacy systems, smaller companies are often ideal customers for on-demand ERP software. Says Albert Pang, director of enterprise applications research at tech consultancy IDC: "ERP is pretty much a clean slate for these businesses."

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