The Perfect Web Hosting

A new breed of outsourcer asks: Why buy an ERP system when you can lease one--over the Internet?
Jeffrey ZygmontMay 1, 1999

For Triton Network Systems Inc., an ambitious, growing start-up in Orlando, installing a big-name enterprise resource planning (ERP) system is turning out to be a lot like having one’s cake and, yes, eating it too.

Chartered in 1997 to make wireless data equipment for digital telecommunications, Triton Network gets a full ERP suite from Oracle Corp. It gets all of it operational in a mere six months–an eye-blink to battered veterans of ERP installation wars. Best of all, Triton Network is investing next to nothing in the system.

That’s the piece of cake the company keeps: up-front cash, freed for sinking into product development.

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“We decided very early that we had to go with a tier-one ERP solution,” recalls Ken Vines, CFO of Triton Network. “This is the cheapest, quickest way to get one.”

Vines is talking about an emerging software delivery service called Internet application hosting, or Web hosting for short. A fresh take on computer-services outsourcing, Web hosting is a pay-as-you-go arrangement. A company pays a flat monthly rate to a service provider–in Triton Network’s case, Oracle’s newly minted Business OnLine division–which sets up, operates, and maintains an information system for the duration of the agreement, usually three years.

Web hosting started making waves about a year ago, and then “seemed to explode on the landscape” in October 1998, says Marty Gruhn, vice president of Summit Strategies Inc., market analysts in Boston. In one approach, the user leases the application, which remains the property of the service provider. In another, the company buys the application. It may even buy the hardware to run it. In both approaches, the customer cedes control of the software to the provider hired to run it–at the provider’s facility, which could be clear across the country. The customer uses its everyday PCs, equipped with Web browsers, to access the distant application via the Internet.

The Internet communications distinguish Web hosting from earlier outsourcing arrangements. Before, to hire an outside specialist to handle any significant data-processing duty, a company also needed costly, high-capacity communication gear to pipe the data back and forth. That often amounted to expensive T-1 lines leased from a telephone company. But the combination of the Internet and Web-enabled applications eliminates the customer’s need for such facilities.

Along with the Internet, advances in data processing have relieved a lot of the performance and response problems associated with old-time outsourcing. It used to be that a mainframe doing time-sharing duty could get bogged down if too many of its clients made demands at the same time. Today’s servers are much better at handling multiple, simultaneous tasks.

Besides, in some Web-hosting arrangements, a customer may not even have to share computer time. In the service just announced by SAP America Inc., a separate server will be dedicated to each separate customer, operating the version of SAP’s R/3 ERP system tailored for that company’s use.

Whatever the physical arrangements, Web hosting swaps contract management for computer application management. The contract, after all, defines the performance a customer gets out of the application. It can include assurances for round-the-clock support, 99 percent uptime, and predefined service levels. “Now the customer can point to a contract and see all the features covered in the service,” says Tom Melchiore, director of outsourcing for SAP America.

When signing up to outsource a PeopleSoft system with USinternetworking Inc. (USi), an Internet application provider based in Annapolis, Maryland, Sunburst Hospitality Corp. spent about two months in negotiations. But finalizing the contract was largely a formality, says Charles Warczak, vice president of finance and systems for Sunburst, a Silver Spring, Maryland-based hotel operator. “The business points were agreed to up front, because [USi] had presented a very detailed proposal,” he explains. “We made the proposal an exhibit to the legal document, so dealing with them on the legal side was almost a nonissue.”

Too Good to Pass Up

All told, Web hosting promises considerable benefits:

* Getting started with a new application can be much quicker and cheaper.
* The overhead required to operate applications is replaced by set monthly costs.
* The persistent problem of hiring and retaining IT staffers to run applications vanishes.
* Higher service levels and expert knowledge of the applications may be available from Web-hosting specialists.
But the arrangements can present some liabilities as well. Two of the biggest concerns are data security and system response across the Internet. The Web-hosting industry is taking pains to allay those fears. (More on this below, in “Overcoming Doubts.”)

For Triton Network, Web hosting was too good to pass up. The big win is delivery of a tier-one ERP application to a company with limited IT resources. Triton Network started life in 1997 as a 3-man team; currently it has about 100 employees. Nevertheless, it was determined to acquire a top-level ERP system. “We think we have a very good opportunity to become a large company in a short period of time,” says CFO Vines, and the company wanted a system that could keep up with anticipated growth.

The price for Oracle Applications comes to $895 per month for each of the company’s 10 users, or about $107,000 annually at the current usage level. Triton Network also paid an initial fee to cover the software’s setup and configuration. It won’t say how much that fee was, but CIO Carryl Smith ticks off all the other start-up costs Triton Network avoided: no software costs, no data-center hardware costs, no consultants to configure the system, and, especially, no employee salaries for a Unix administrator, application developers, and other new IT staffers Triton Network would have needed.

“There’s a huge amount of up-front expense that we’re now able to put into our production development, rather than our computer infrastructure,” sums up Smith.

Triton Network realized other benefits, too, like rapid installation. It’s using Oracle’s FastForward tool, a preconfigured model of the application, which limits a company’s setup options, to make the procedure faster. “As a young company, we can adopt the business processes that are already built into the tool,” notes Vines. Even so, the pace is brisk. Triton Network signed with Oracle at the end of December. In the first week of February, the company went live with financial functions of the ERP package, covering general ledger, accounts payable, purchasing, and inventory. “That would not have been possible without this outsourcing environment,” says Smith. He expects to be running the balance of the Oracle modules by June, including bill-of-materials management and engineering, order management, and field service, plus converting an existing manufacturing system.

The Web hosting arrangement also let Triton Network escape the employment crunch in information technology. “We were very concerned that we would bring in systems people, have them learn the Oracle tools, and then have to try to retain them against some of the larger companies in the Orlando area,” says Vines. “We concluded we would pay for somebody else to have that risk.”

PeopleSoft Minimalism

For hotel operator Sunburst, web hosting’s biggest selling point is the low overhead required.

“Our business model calls for keeping corporate overhead as limited and lean as possible,” comments finance vice president Warczak. Sunburst operates 87 hotels across the United States, including Comfort Inns, Quality Inns, and Clarion Hotels. It was formed in October 1997, when Choice Hotels International, a hotel franchiser, spun off its company-owned properties. Sunburst employs about 5,000 people, with annual revenue of more than $200 million.

And it does it all with a four-person IT staff, including Warczak, an IT director, one person to support the hotels, and another specializing in Sunburst’s outsourced PeopleSoft application. USi handles the rest, charging a flat monthly lease rate to operate three modules of PeopleSoft Financials: general ledger, accounts payable, and fixed assets.

Warczak won’t reveal the lease rate. (Generally, USi charges anywhere from $50,000 to $200,000 a month for all 12 of the PeopleSoft ERP modules it offers. But he does detail the overhead that Web hosting eliminates. Installing the system in-house would have cost about $1.5 million, including hardware costs for servers. Ongoing maintenance of both hardware and software would have come to another $75,000 per year. On top of that, salaries would have increased by $300,000 to $400,000 annually, covering new hires such as an Oracle database administrator and other staffers to tend the PeopleSoft application.

“We’ve been able to configure this whole setup without adding any additional people, and we have no intention of adding any,” Warczak says. Sunburst’s role in the implementation “has been very minimal,” he adds. Managers for A/P and fixed assets sat down to explain their functions’ business rules and practices; USi configured the system accordingly.

That is seldom a trivial task, and Warczak is pleased to sidestep the stickier issues his company’s particular setup entails. Data has to be disentangled and picked out of the Formix database of Sunburst’s former parent, Choice International. It must then be formatted for an Oracle database, to work with the latest version (7.5) of PeopleSoft, an upgrade from the Choice system Sunburst inherited. The process started early in January and was running on schedule to cut the lingering business-system lifelines to Choice on April 1. Had the whole job been done in-house, data conversion alone would have consumed at least six months and probably nine, says Warczak.

Along with a fast implementation, Sunburst is acquiring better knowledge of the PeopleSoft application, Warczak thinks. Back at Choice, there had been some bumps during installation, “but we decided [at Sunburst] to stay with PeopleSoft because we were already experienced with it,” says Warczak. “Working with USi, we found that PeopleSoft is a lot more powerful than we had thought.”

Overcoming Doubts

The standard pitch from Internet application providers highlights such expertise. They sell themselves as specialists in the applications they support, operating large-scale facilities that provide economies of scale. “I can offer clients more uptime, better performance, richer application functionality, faster disaster recovery, says Chris Russell, president of Oracle’s Business OnLine. “I’m giving them better performance at lower cost.”

For Warczak, any doubts about data security were dispelled when he visited USi’s hosting center in Annapolis. “They have things we could never accomplish here,” he says. Safety features include redundant systems for backup if the main system sputters. Security measures include palm-print entry authorization and guards on the data-center floor. “We probably have less risk with our system over there, because these people focus on security,” declares Warczak.

To beat the other big worry surrounding Web hosting–system response over the Internet–Triton Network uses a secure virtual private network to shuttle its data between Orlando and Oracle Business OnLine’s data center in California. The configuration gets replies to the application viewers on Triton Network’s PCs in less than a second. “You can’t tell whether it’s coming out of a computer room right here or if it’s coming out of California,” says Smith, the CIO.

What about those perpetual bugaboos of software implementation, process redesign and training? Web hosts claim to provide help. For instance, FutureLink Distribution Corp., an applications service provider based in Calgary and Irvine, California, has a clutch of MBAs on staff to help customers with process redesign and workflow needs, according to CEO Cameron Chell. Also, FutureLink will work with Great Plains VARs to configure Great Plains and provide training, says Chell.

Sweet Spots

Web hosting is so new that there’s still little ground for speculation about its likely impact. Gruhn of Summit Strategies estimates that the number of Web-hosted applications actually up and running is well below 100. “The count is going up exponentially, but then, it’s coming off of a nonexistent base,” she notes wryly. A lot of observers expect the concept to sell best to companies that lack established IT resources.

“The real sweet spot is going to be medium- to smaller-sized companies that are operating applications on a desktop computer or small server,” says Gruhn. “They’ll be attracted to renting the large applications that even large companies have trouble implementing.”

On the other hand, certain applications offered on a Web-hosting plan may attract companies of all sizes. Such thinking stands behind the creation of SiebelNet, a service announced in February by Siebel Systems Inc., based in San Mateo, California. Siebel sells software for sales, marketing, and customer-service management. The dispersed salespeople who use the software typically must call in to a centrally operated computer site; it could as easily be an outsourced site as one operated by the company.

“We have so many globally distributed users that the timing for this is just right,” says Eric Hjerpe, SiebelNet general manager. Large companies especially, he says, “are faced with deploying [a sales-support] infrastructure worldwide that they would rather not do.”

Big companies might also use Web hosting to outsource certain concentrated activities. Oracle Business OnLine expects only about half of its business to come from companies with less than $500 million in annual sales. “The other half will come from large, global players that want us to take responsibility for things like branch and field financial management, and time and expense tracking for their professional staff,” predicts Russell.

Of course, it may happen that such expectations turn out to be wishful thinking. But with start-up investment so low, it could prove tough for companies to pass up the Web-hosting opportunity without at least a test drive. “There are some real products on the table now that companies can actually rent and test and play with,” says Gruhn.

“The pioneers are emerging from this without any arrows in their backs,” she adds, “which is a good thing. I think this is going to be as revolutionary for corporations as the PC was in the 1980s. It just makes good business sense.”

Jeffrey Zygmont writes on business and technology from Salem, New Hampshire.

The Providers
Generally, Web hosts fall into two camps. One consists of the application vendors themselves, like SAP and Oracle Corp., which offer managed, remote versions of their ERP systems at flat monthly fees.The other includesInternet application providers (IAPs), a still-new category already distinguished by other competing acronyms: IMAP (Internet managed application provider) and ASP (application service provider). Whatever they call themselves, companies like Interliant Inc. and USinternetworking Systems Inc. (USi) resell popular applications, setting up and operating the software for their customers.

Each provider, however, puts a particular spin on its service. For example, Oracle Business OnLine is putting together a subscription service that will operate like an application lease. Details remain sketchy, because the Business OnLine service isn’t available yet–Oracle aims to announce its formal launch by July. (Triton Network, profiled in the main story, is a pilot customer.) According to Chris Russell, president of Business OnLine, the division will deliver Oracle Applications for monthly rates of $895 per full user and $395 per occasional user. Those rates include the hardware, which Oracle owns and manages. Business OnLine customers will pay an additional implementation fee. And as with all other Web-hosting arrangements, users have to cover the telecommunications costs for Internet connections.

By contrast, SAP requires customers of its new hosting service, launched in February, to purchase outright the license to its R/3 software. Users buy the hardware, too. That means the servers running a company’s version of R/3 work for that company alone. “This is not timesharing,” emphasizes Tom Melchiore, director of outsourcing for SAP America. Still, you won’t be able to watch your hardware ply R/3. It does that at a data center operated by SAP’s Web hosting partner, Electronic Data Systems Corp. (EDS). SAP expects to add more hosting partners this year, says Melchiore.

SAP’s arrangement is a hybrid of vendor-provided and IAP-provided Web hosting. EDS, through its newly formed KeySource Service Line division, is the Internet application provider, operating and supporting R/3 and the hardware that runs it. But SAP holds the contracts with the companies enrolled in the program. That makes it the official provider of the outsourcing service. Melchiore points out that SAP’s partnership with EDS provides added advantages to its customers. For example, users get double the on-call support. “We have integrated our support and help desks, so customers can call either one of us,” he says.

With SAP’s new Finance Option, companies can bundle together hardware costs, software license fees, and implementation charges, spreading payments over 36 months. While implementation costs will vary, total software and hardware cost is pegged at anywhere from $425 to $625 per user, depending on the number of users.

Internet application providers like Houston-based Interliant and Annapolis, Maryland-based USi don’t write any packaged applications themselves, but they’ll set up and run many popular offerings. Interliant emphasizes its experience hosting IBM’s Lotus Notes and Domino, basically operating companies’ E-mail and messaging networks. USi delivers the financial management and human resources applications of ERP vendor PeopleSoft. It also supports customer relationship-management software from Siebel Systems, E-commerce support software from Microsoft and BroadVision, and data warehousing from Sagent Technology.

Bundled Costs

USi typically bundles together hardware, software, and consulting costs, plus the price of running a virtual private network to assure fast and secure communications across the public telecom grid. It asks for a 10 percent up-front deposit, then stretches payments over 36 months. Naturally, prices vary. The take for some configuration of the 12 PeopleSoft ERP modules it offers may range from $50,000 to $200,000 per month, says Mike Harper, vice president and general manager, product development. Siebel’s customer-management wares may go for $25,000 monthly for a 50-person sales force, he adds.

USi, which at press time had just seven customers, runs applications out of data centers in Annapolis; Milpitas, California; Amsterdam; and Tokyo. It assures rapid implementation. Harper says it takes 45 days to get a Siebel application fully customized and operating at full production levels, and 90 to 120 days for a PeopleSoft system.

But it’s not just tier-one ERP systems that are being outsourced. For smaller companies, FutureLink Distribution Corp., an ASP based in Irvine, California, offers Web hosting for Great Plains’s Dynamics financial suite (as well as for Onyx Software’s relationship-management software). Monthly rates for Dynamics vary between $250 and $350 a seat.

USi, which was launched in January 1998, is the closest thing so far to a pure Internet application provider. But its approach is already undergoing some modifications. In February, Siebel Systems announced that its SiebelNet division is taking over sales of Web-hosted versions of its software. USi will still run the systems for customers that opt to outsource the applications.

“The contract and the relationship are all owned by Siebel,” explains Eric Hjerpe, SiebelNet general manager. “We own the customer paper, and we turn around and assign part of the services to USi.” As Hjerpe explains it, some Siebel prospects were clamoring for a Web-hosted option, but they didn’t want to deal with a third party to get it. “A lot of these companies want a one-vendor solution,” he says. “They want to go to Siebel and hold it accountable.”

If Web hosting is such a great concept, where are the big system integrators and service providers? “You’re going to see more of the traditional giants coming into the business,” answers Marty Gruhn of Summit Strategies. EDS, for one, is already in the game. “IBM is going to hit the market by the end of the year with a pretty aggressive formalized offering,” notes Gruhn. “When that happens, the rules of competition will change.” — J.Z.

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Lassoing Costs
Much early resistance to Web hosting comes from corporate IT managers, who naturally feel threatened by any form of computer-services outsourcing. “You get the usual push-back from IS: ‘We can do it better, cheaper, blah, blah, blah,’” says Marty Gruhn of Summit Strategies, who is admittedly bullish on the concept. “The fact is, this is a better, cheaper way to end-run IS.”

Indeed, Oracle positions Web hosting as rope to lasso the runaway cost of ownership of corporate computer networks (see “Commanding the Desktop,” January). When running large-scale client/server applications in-house, a lot of administrative costs accrue from keeping so many scattered PCs in compliance with the applications’ operating requirements. Then there’s the burden of distributing the innumerable application upgrades, patches, and fixes to all the desktops that use the software.

With Web hosting, client computers need only an adequate browser. The problems of PC compliance and software distribution virtually vanish. “You have very little software out there to manage,” says Don Haig, vice president, Oracle Business OnLine.

Still, many companies will find it tough to cut the cord on business-critical applications and the data housed therein, predicts Tristan Hoag, vice president of the ERP Solutions Group at Complete Business Solutions Inc., a Farmington Hills, Michigan-based systems integrator. “A lot of companies barely trust their own IT staffs to run that stuff, let alone turning it over to someone else,” he says.

But Hoag contends that unless a company remains vigilant, organizational efficiency can suffer with on-site data processing. “Companies like to keep their finance and accounting systems in-house, but does anybody ever sit down and figure out, ‘What’s my cost per journal entry?’” he asks. “You may never sit down and define clear performance metrics and costs with an internal IT organization, because you figure you can always run downstairs and beat them up.” But in practice, few executives ever make the trip, observes Hoag.

By contrast, application outsourcing puts the cost and performance issues clearly on the table, in the form of a contract. “You have a clear service/cost relationship that you can manage,” says Hoag. — J.Z.