Handing Off Your HRMS: What You Need to Know - evaluating application service providers

Workforce, Feb, 2001 by Samuel Greengard

Application service providers can help a company defer big capital costs, compared to traditional in-house systems. But there's more to think about than just cost when it comes to choosing a provider.

For years, it has been the Holy Grail of enterprise computing to maintain core HR systems in-house. While companies have turned to outsourcing to boost productivity and cut costs for various specialized functions -- including payroll, recruiting, and benefits--the mere thought of allowing an outside company to manage core HR resources has always seemed more than a bit unsettling.

However, in the Age of the Internet, the workscape is changing faster than anyone could have ever imagined. Where there was once fear and distrust, there's now growing acceptance of the idea that outside companies can manage hardware, software, and telecommunications remotely. And, make no mistake, these so-called application service providers (ASPs) are forever changing the way companies view technology and how they use it to gain a competitive advantage.

"In certain instances there are substantial advantages to outsourcing enterprise applications, including ERP software," notes Dave Boulanger, service director for AMR Research, Boston. There's growing evidence to back him up. According to a survey by Inter@ctive Week magazine, the number of companies using application service providers has increased from near zero in early 1999 to 7.3 percent in early 2000. Market research firm IDC predicts that the ASP market will grow to $7.8 billion in 2004, compared to $296 million in 1999.

But behind the glitzy facade of progress lies an important truth: developing a strategy and determining how, where, and when to use the ASP model is no simple matter. Virtually all the major HR systems vendors, including SAP, PeopleSoft, Oracle, J.D. Edwards, Lawson Software, TALX, and Infinium Software, have begun to rent their applications. So too have a seemingly endless wave of second- and third-tier vendors offering add-on products. Meanwhile, independent ASPs like USinternetworking, Corio, Breakaway Solutions, Qwest Cyber.Solutions, and AristaSoft have begun to offer an assortment of enterprise applications.

While traditional software can take months to install, rented software typically requires only a few weeks, and sometimes days. Vicki Griffith, director of netsourcing at Lawson Software, says that ASPs offer a more predictable cost model and eliminate the constant headache of upgrades, patches, and fixes. As new features become available, the ASP updates the software on its end. That can create a more stable computing environment, while helping an organization predict costs more accurately.

Laurie McCabe, vice president of consulting firm Summit Strategies Inc., Boston, says that many firms are beginning to recognize that the ASP model provides a powerful way to defer capital costs. "You don't have to go out and buy hardware, software, and networking gear, which can add up to hundreds of thousands of dollars up front." Of course, deferring costs doesn't eliminate them. The monthly rental fee for major ERP packages, for example, has settled into the $400 to $1,000 range, after setup. Other HR applications range anywhere from $10 to $100 per month per user.

Yet cost isn't always the primary factor -- or sometimes even a significant factor--in the migration toward ASPs, Time to market, the need to focus on core competencies, and the desire to reduce the risk of dead-end technology all play a role. There's also the fact that ASPs allow an enterprise to quickly and easily scale up the number of users. "What organizations buy when they adopt an ASP business model is not just an application and hosting, but access to IT expertise," explains Daniel Sholler, senior program director for Meta Group, a Stamford, Connecticut, IT consulting firm.

And it's clear that the level of IT expertise is growing. The first generation of ASP offerings consisted mostly of conventional client-server programs ported over to an Internet environment, whereas many programs are now designed to function efficiently in a multi-user environment. Some vendors are also beginning to offer greater customization-albeit at a higher price. They will modify an application's interface and help integrate the software with other back-end systems. In many instances, they can also provide templates designed for specific vertical industries, from financial services to chemical manufacturing.

The bottom line on the front lines of technology? ASPs are appealing to different companies with entirely different needs. For dot-com start-ups with no IT staff and virtually no technology infrastructure in place, it's a quick way to acquire needed applications--particularly core ERP and HRMS packages. In the past, many small firms did not have the wherewithal to afford such systems, says Sholler.

Meanwhile, large corporations that already have an IT staff in place and have previously installed ERP systems are now eyeing ASPs as a fast and seamless way to add functionality in areas that are not mission critical. Instead of taking months to install software, it's possible to add an application and have full functionality available in days or weeks.