Corporates are examining whether they can successfully rent software applications instead of using the proven methods of buying or building systems.
Traditionally, corporates found that building an application was expensive and slow, but the resulting product fulfiled the company's specific needs.
Buying a packaged product saved time but the software would typically fulfil only 80 per cent of user needs. Initial purchase costs were high and the organisation would be required to develop the internal knowledge necessary to maintain the software.
Sanjiv Gossain, vice president and chief technology officer of Cambridge Technology Partners, said: 'Renting applications is becoming a viable option.'
He added that application outsourcing, or rental, shares some of the characteristics of buying a packaged system because it is only an 80 per cent fit, but it saves on implementation time.
Software rental differs in that it has a low start-up cost and maintenance can also be outsourced. On the negative side, the outsourced application often integrates badly with a company's other systems.
Chandra Patel, president and chief executive officer of Isys Solutions, an enterprise resource planning (ERP) and internet consulting firm said: 'There's been a lot of hype in this area.' He added that many ERP vendors, such as SAP and Baan, see application outsourcing as a magic bullet allowing them to reach small and medium businesses and achieve recurring revenue streams.
According to research from IDC, the most popular area for outsourcing is payroll administration. About 25 per cent of businesses would prefer to outsource that particular application.
E-commerce comes a distant second, with 10 per cent of businesses intent on outsourcing it.
Jonathan Vaughan, vice president of research and development at Prudential Insurance of North America, said the company has, in different instances, decided to build, buy or rent certain applications.
He added that outsourcing does make sense in certain circumstances. For instance, when an enterprise wants to expand into an area - such as e-commerce - but does not want to invest in the necessary infrastructure immediately.
'The quality of the relationship with the service provider and the degree of commitment between partners is going to be crucial to the success of the model,' said Vaughan. But he warned of the risk of vendor lock-in.
Application outsourcing is far from being a mature market and few of the providers have much experience in this type of service. Companies rushing into this space include ERP vendors such Oracle and Siebel, ISPs and established services companies such as EDS.
Vaughan said service providers were offering a variety of pricing models.
'Buyers should definitely go to a number of different suppliers and look at their price models,' he advised.
Patel had the same advice, adding: 'Application service providers are desperate for customers at the moment and the rules are not yet set. You can get some pretty good deals.'
Gossain argued that the pricing models employed by outsourcing service providers have typically been short term. 'I have seen no long-term pricing projections, because frankly, no one knows,' he added.
Gossain compared the current software outsourcing situation with the rise of the client-server model: 'Remember, client-server was supposed to be cheaper than the mainframe. But we all know how that turned out.'
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