Netsourcing
Business
Applications
Mary C. Lacity
Professor of IS
1
Readings
• Kern, T., Willcocks, L., and Lacity, M.,
"Application Service Provision: Risk
Assessment and Risk Mitigation," MIS
Quarterly Executive, Vol. 1, 2, 2002,
pp.113-126.
• Harney, J., "The New World of ASPs,"
Cutter Consortium, Vol. 5, 9, 2005.
2
Size of Market
Customer Learning
ASP Market: 1997 to 2005
Phase 1:
Hype & Fear
Phase 4:
Institutionalized
Focus on Value-added
Phase 3:
Market Matures
Richer Practices Emerge
Focus on Quality
Phase 2:
Early Adopters
Best & Worst Practices Emerge
Focus on Costs
Time
3
One-to-many
Application Service Provision
4
Application Service Provision
ASP is the practice of renting or "paying as you use" access to
centrally managed business applications, made available to
multiple users from a shared facility over the Internet or other
networks via browser-enabled devices.
ASP allows customers to receive business applications as a
service.
ASP is a delivery channel
ASP is a pricing model
5
Promised Customer Value:
 30% to 50% reduction in Total Cost of Ownership
Minimal upfront IT infrastructure costs
Less in-house IT support staff
 Superior cash flow
 Access to best-of-breed innovations
 Flexible, scalable solutions
 Rapid implementation
6
Why ASP does not initially
appeal to large companies?
Forrester Research found that 71% of large companies (28 case
studies of more than 1,000 employees) do not outsource any
applications for the following reasons:
75% software already in-house
50% not cost effective
45% expertise in house
30% want to keep control
20% applications are business specific
7
Intermediaries
Supplier
Supplier
Customer
Application Specialists &
Portfolio Assemblers
Customer
Supplier
Customer
Supplier
Customer
Supplier
Supplier
Customer
Customer
Supplier
Customer
Supplier
Customer
8
Portfolio
Assembler:
Customer
Customer
Infrastructure
Partners
Customer
Customer
Application
Partners
Customer
Implementation/
Set Up Partners
Customer
Customer
Customer
Customer
Customer
9
X
X X
Customer
X
X
Customer
X
X
Customer
Customer
Application
Partners
Customer
Implementation/
Set Up Partners
Customer
Customer
Customer
Customer
Customer
10
Customer
Infrastructure
Partners
X
X
X
X
X
Customer
Customer
Customer
Customer
Customer
Implementation/
Set Up Partners
Customer
Customer
Customer
Customer
11
“To support our partners and deliver the most reliable and cost effective solutions
leveraging Corio technology, Corio offers enhanced training and support to select
systems integrators through the Certified Corio Applications on Demand Partner
program.”
Customer
Customer
Infrastructure
Partners
Customer
Customer
Application
Partners
Customer
Customer
Customer
XX
X
Customer
Customer
Customer
12
Customers
Include:
Infrastructure
Partners
Application
Partners
Implementation/
Set Up Partners
13
Revenues:
1998
1999
$1,292,000 $5,782,000
2000
$44,946,000
Net Losses:
$3,201,000 $44,522,000
$103,164,000 $66,971,000
Assets:
$10,006,000 $61,596,000
Revenues:
Net Losses:
Assets:
2001
$51,571,000
2002
$56,144,000
2003
$68,738,000
$36,088,000 $12,869.000
$197,130,000 $113,290,000 $80,292,000 $72,143,000
2004
$53,094,000 (only 3 quarters January to Sept 2004)
$10,366,000 (only 3 quarters January to Sept 2004)
$69,001,000
14
As assessed on Oct 1, 2004:
Stock Performance
52-Week High:$4.50 on Monday,Over 5 Years
April 05, 2004
52-Week Low:$1.12 on Tuesday,
August 17, 2004
15
IBM Buys Corio
IBM bought Corio for $182 million in cash in First Quarter 2005
IBM paid 38% above stock price
All 400 Corio employees offered jobs at IBM, included CEO George Kadifa
All Corio customers will get same high level of service
IBM to expand business to Asia & Europe in 2006
Move business to IBM’s 44 megacenters
IBM wanted Corio’s mature rapid application deployment methodology for
SMEs
“Existing Corio clients will continue to receive the same high level of service.” IBM
press release
“As enterprise applications become more complex and costly to manage, we see
growing demand for application services. IBM, with the new capabilities from Corio,
is uniquely positioned to help clients navigate these challenges.” – Jim Corgel, General
16
Manager, Small and Mid-Sized Businesses, IBM Global Services
RESEARCH METHOD
CIO & CEO level customer survey of netsourcing
experiences & plans:
28 countries, data gathered 2001, n = 274 useable surveys
10 Supplier-Customer Pair Case Studies
17
Current ASP Customer
Satisfaction is Good Overall
(mean response = 7.06)
P e rc e n t a g e o f R e s p o n d e n ts
35
30
25
20
15
10
5
0
1
2
Poor
3
4
5
S a tis fa c to r y
6
7
Good
8
9
E x c e lle n t
10
18
Current ASP Customer
Outcomes:
Reduction in Total Cost of Ownership
72% experienced significant cost savings
Superior cash flow
74% have variable pricing mechanisms
 Access to best-of-breed innovations
70% claim degree of innovation is significant/extensive
 Flexible, scalable solutions
76% of customers experienced significant business flexibility
 Rapid implementation
19
67% perceived improvement in application rollout speed
Other Findings:
But we also found that the ASP space, as
initially defined, is vastly more fragmented,
complex, and risky than many customers
realized.
20
Defining the Space
ASP
Netsourcing
21
Wacky World of Alphabet …
BSP
SSP
FSP
ASP
Netsourcing
MSP
VSP
CSP
xSP
22
The Netsourcing Service Stack
Business Process Delivery
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
23
The Netsourcing Service Stack
Business Process Delivery
Customized Applications
Internet
ServiceProviders
& telecom
companies offer
an array of
connectivity
options matched
to customers
bandwidth and
data throughput
rates
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
24
The Netsourcing Service Stack
Network
monitoring
services;
Example,
Intellinet
handles network
monitoring for
Marconi
Medical
Systems’ 71
routers, 200
servers, 1800
mobile users
Business Process Delivery
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
25
The Netsourcing Service Stack
Business Process Delivery
Exodus (bought
by Cable &
Wireless)
provides data
center facilities,
leases servers,
and manages
server
performance
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
26
The Netsourcing Service Stack
Middleware
Layer for
accessing
applications
from remote
sites; Charon
Systems
transforms
customer
legacy
systems to be
network
ready using
Citrix
MetaFrame
& MS
Terminal
Server
Business Process Delivery
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
27
The Netsourcing Service Stack
Business Process Delivery
Supplier may
resell ISV
software; or have
net-native
applications they
created
themselves; or
may rebrand ISV
software
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
28
The Netsourcing Service Stack
Business Process Delivery
Supplier may host
the customer’s
home-grown
software
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
29
The Netsourcing Service Stack
Exult processes
HR for
BP Amoco in
$600 million
5 year deal.
Business Process Delivery
Customized Applications
Standard Applications
Application Operating Infrastructure
Hosting Infrastructure
Network Services
Network Connectivity
30
Mapping a Case Scenario to the Service Stack…
ISVs
KPN
Dutch Telecom
Insurance
Companies
Body Repair
Shops
Siennax
Abz Insurance
Spare Parts
Companies
Insurance
Shoppers,
Customers, and
Claimants
31
Abz provides end-to-end
business processes from searching for
auto insurance to claims resolution…
ISVs
KPN
Dutch Telecom
Insurance
Companies
Body Repair
Shops
Siennax
Abz Insurance
Spare Parts
Companies
Insurance
Shoppers,
Customers, and
Claimants
32
Siennax supports Abz’s legacy systems
And new customized insurance applications
ISVs
KPN
Dutch Telecom
Insurance
Companies
Body Repair
Shops
Siennax
Abz Insurance
Spare Parts
Companies
Insurance
Shoppers,
Customers, and
Claimants
33
Siennax rents their proprietary Intranet
Suite SX to and through Abz
Siennax resells ISV software
(Microsoft, Lotus) to
and through Abz
ISVs
KPN
Dutch Telecom
Insurance
Companies
Body Repair
Shops
Siennax
Abz Insurance
Spare Parts
Companies
Insurance
Shoppers,
Customers, and
Claimants
34
Siennax connects Abz to Abz Customers
(Through middleware like MS Terminal,
Open Source, Lotus Domino)
ISVs
KPN
Dutch Telecom
Insurance
Companies
Body Repair
Shops
Siennax
Abz Insurance
Spare Parts
Companies
Insurance
Shoppers,
Customers, and
Claimants
35
Siennax operates servers
(Sun Solaris, Compaq NT, Linux, Oracle)
ISVs
KPN
Dutch Telecom
Insurance
Companies
Body Repair
Shops
Siennax
Abz Insurance
Spare Parts
Companies
Insurance
Shoppers,
Customers, and
Claimants
36
Siennax servers in KPN data center…
KPN provides network monitoring &
network infrastructure
ISVs
KPN
Dutch Telecom
Insurance
Companies
Body Repair
Shops
Siennax
Abz Insurance
Spare Parts
Companies
Insurance
Shoppers,
Customers, and
Claimants
37
38
Risks:
 Wrong activities
 Wrong supplier
 Wrong governance
Risk
Consequences:
Higher costs
Lower service
Loss of competitiveness
Loss of revenues
Loss of customers
39
Netsourcing Risk Mitigation
 Right activities
 Right supplier
 Right governance
Higher Costs
Lower Service
Loss of competitiveness
Loss of revenues
Loss of customers
Promised Value Realized
40
Netsourcing Risk Mitigation
 Right activities
 Right supplier
 Right governance
Higher Costs
Lower Service
Loss of competitiveness
Loss of revenues
Loss of customers
Promised Value Realized
41
 Right activities?
A Better Way to Identify Risky Activities:
Outsourcing risks are high when the
customer cannot readily switch
suppliers because the assets,
capabilities, and services are highly
idiosyncratic to a
particular customer.
42
 Right activities?
Products Netsourced by Current Customers:
(percentage* of respondents currently netsourcing)
38%*
23%
21%
21%
17%
17%
11%
9%
13%
Email & Communication
Personal Productivity
Finance & Accounting
CRM
HRM
Mostly nonB2B
idiosyncratic
B2C
activities
ERP
Other
43
 Right activities?
Customers Netsource Shopping For:
(percentage* of respondents seeking to netsource)
45%* Email & Communication
35% B2B
33% Personal Productivity
31% CRM
25% Finance & Accounting
22% HRM
Mostly non23% B2C
idiosyncratic
19% ERP
activities
9% Other
44
 Right activities?
But technically immature market…
Current customers claim the following big problems:
41% slow response time
25% application unavailable
45
 Right activities
Security has not been a problem…
Current customers report:
0%
3%
instances of hackers
instances of data security problems
But shopping customers rate security their number 1
important criterion…
46
Netsourcing Risk Mitigation
 Right activities
 Right supplier
 Right governance
Higher Costs
Lower Service
Loss of competitiveness
Loss of revenues
Loss of customers
Promised Value Realized
47
Initial ASP providers suffered
60% predicted by Gartner Group to Close Doors
Agillion, BlueStar, Hotoffice, iTango, eBaseOne, JDe.sourcing,
Red Gorilla, Pandesic, Utility.com, VitaGo, and XS-Media.
Stock prices plummeted
ASP model had to merge to more value added services, netnative applications.
According to Harney, still 3,500 ASPs worldwide but be careful!
(ASPstreet cross lists & lists companies in entire service stack)48
Be big, do it all:
A look at EDS
Focus is on delivering IT & business services to all
Types and Sizes of customers world-wide:
SMEs
Global 2000
One-to-Many ------ Personalization ---- Customization
Hosted Managed --------------------------- Outsourced Managed
49
EDS ASP assets
already in place:
•1 million square feet of excess data center capacity
(infrastructure)
• Global network
• 30,000 application specialists available for ASP
• Relationships with 25 ISVs (SAP, Peoplesoft, Microsoft, etc)
• Varied Sales and Marketing Channels
• Relationships with current customers for cross/up sell
By the first quarter 2001, EDS already had $200 million worth of
pure-play ASP contracts signed with nearly 50 customers, making
them the largest ASP player in the market.
50
How EDS Positions Itself
Competitors simply can't match our flexible suite of Applications Services:
•We're the market leader. In fact, 40% of all companies that choose an
applications service provider choose EDS.
•We support more than 1 million applications and 2.5 billion lines of code.
•We deliver methodologies and practices developed and refined over 40 years,
and standardized worldwide.
•We support applications in 60 countries and more than 50 languages,
delivering our services from about 75 solution centers worldwide.
•35,000 dedicated application professionals means we have expert resources to
develop and manage applications on any platform, and to integrate multiple
platforms.
51
Be big, do it all: A look at EDS
• Exchange® 2000
• InterMail®
• LearningSpace
4.0®
• QuickPlace™
• Sametime™
• Notes/Domino®
• NexPrise
• mySAP.com™
• Oracle®
• Ariba
• eMerchant pro™
• eSales
(OverQuota®)
• Siebel
• PeopleSoft®
• JD Edwards™
• mySAP.com™
• Oracle®
• PeopleSoft®
• JD Edwards™
• TimeTrak!
• ExpenseTrak!™
• IdealHire®
52
As of Oct 11, 2005:
52-Week High:23.95 on Thursday,
August 04, 2005
52-Week Low:18.59 on Thursday,
May 12, 2005
53
1998
Revenues: $16,892,000,000
Net Profit:
$743,000,000
Assets:
$11,526,000,000
1999
$18,401,000,000
$421,000,000
$12,522,000,000
2003
Revenues:
Net Profit:
Assets:
$20,570,000,000
(1,698,000,000)
$18,616,000,000
2000
2001
2002
$18,329,000,000 $20,292,000,000 $20,486,000,000
$1,143,000,000
$1,363,000,000 $1,116,000,000
$12,692,000,000 $16,353,000,000 $18,880,000,000
2004
$ 20,669,000,000
$158,000,000
$17,744,000,000
As of December 31, 2003, EDS had 137,000 employees in 60 countries.
As of December 31, 2004, EDS had 117,000 employees in 60 countries
54
 Right supplier?
Risk Mitigation Strategies:
 Select suppliers with proven track records
√

? Demand customer references of turnaround cases
 Select supplier with sound finances
 Understand if and how the supplier earns a profit
55
 Right supplier?
Trust Enhancing Factors:
Current Netsourcing Customers Ranking:
1. Supplier is widely-recognized in industry
2. Supplier has alliances with established ISVs,
Tcom & hardware partners
3. Security audits by well-known auditing firms
4. Supplier branding
56
 Right supplier?
Primary Worry About Suppliers
Current Netsourcing Customers Ranking:
1. Supplier’s longevity and existence
2. Supplier’s service and business stability
57
Netsourcing Risk Mitigation
 Right activities
 Right supplier
 Right governance
Higher Costs
Lower Service
Loss of competitiveness
Loss of revenues
Loss of customers
Promised Value Realized
58
 Right governance?
Proven Governance Strategies:
√



√
?


?


?
Short-term Contracts
Detailed Contracts
Performance measured & monitored
Joint Problem Resolution Teams
Supplier must earn a profit on account
Full disclosure & customer approval of
all subcontractors
Customer provides user-supplier liaison roles
59
 Right governance?
ASP Contract Length:
Current Customers
57% less than 1 year contract
35% between 1 and 3 years
8% greater than 3 years
60
Application Availability
95% availability
99% availability
99.7% availability
99.9% availability
99.99% availability
=
=
=
=
=
504 minutes down per week (8.4 hours!)
101 minutes down per week (1.68 hours)
30 minutes down per week
10 minutes down per week
1 minute down per week
“Many service level agreements limit themselves to guaranteeing availability,
Which is a measure of when the application is accessible at predefined points in
the Network. However many applications are only useful when they consistently
Achieve certain performance levels, so most service level agreements
Should also guarantee performance levels.” – Phil Wainewright, ASPnews.com
61
 Right governance?
ASP Contract Details:
Current Customers
67% no performance penalty clauses
60% no response time clauses
50% no confidentiality clauses
40% no data security clauses
37% no application availability clauses
62
Final Risk Mitigation Practice:

√ Incremental Sourcing
63
Likely Future of Netsourcing
Netsourcing value to the customer is too compelling
not to be adopted…
But Maturity needs to occur
in:
• Technology
• Integration
• Customization
• Service Support
• Pricing Models
• Contracts
• Suppliers & Customers
64
All outsourcing requires
significant
in-house management
65
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Information Technology Sourcing: A Decade of Learning