Challenges to Oracle and SAP
Oracle Corporation has long prospered in the application service provider (ASP) and hosting space with its vision to deliver "software as a service" through the Oracle On Demand offerings (in former incarnations called Oracle.com and Oracle Business Online). At the applications level, Oracle has over 200 customers within the Oracle E-Business Suite On Demand program. Here pricing is based per module and is similar to standard licensing, whereby the license is either perpetual or for a certain period. Product support is about 22 percent or so of the license price per year. Implementation, which is based on the on-line life cycle, is of a fixed scope and fixed fee.
Part Two of the Enterprise Application Players Keep Refining Their Value Propositions series.
Moreover, this offering also has an MSP option involving application management, database management, systems management, and optional hardware management. If the hardware is located at Oracle's data centers (the so-called @Oracle option), Oracle will host users' servers and manage the infrastructure. Alternatively, companies can leverage their existing hardware investment and Oracle will remotely manage the software residing at the location of their choice. With this @Customer option, users can manage their hardware internally or have it hosted and managed by a third party vendor or ASP.
Despite challenges, both SAP and Oracle will be formidable forces in the hosting space because of their intimate knowledge of their application, in respect of other ASPs; their infrastructure and organizational stability; and their vast capital, which is still a problem for many ASPs. Both giants, however, face the challenge of not easily integrating with other software products.
By leveraging its partners to develop solutions for vertical industries, SAP might have a notable advantage over Oracle. Oracle has a lower tolerance for customizations and may face a channel conflict with other Oracle ASPs, and system integrators (SIS). Also, while there is a price parity of $120 $150 (USD) per user, per month between the two offerings, SAP has the much broader, vertically-oriented functional scope of the mySAP ERP suite, whereas as many as 80 percent of Oracle hosting instances are still limited to Oracle Financials. SAP also touts a dedicated one-to-one, single-tenant relationship with every hosting client and provides an assigned hosting account executive. This works well for clients who, despite the cost and scalability advantages that multi-tenant hosting options can provide, tend to be wary of one-to-many hosting models where their mission-critical data is managed in an open environment.
Still, SAP needs to be careful not to take too long to roll out its forthcoming industry solutions. Given that SAP supports a few dozen industries, at its current rollout pace, it will take SAP at least two years to align SAP Hosting with its numerous on-premises industry solutions so it complement its offerings. This will give SAP's competitors significant time to deliver similar offerings for at least a few industries. However, SAP Hosting may be more promising for small and medium businesses, but only if SAP maintains its partner sales arrangements and continues to commit, motivate, and compensate its partners for the development of vertically-oriented extensions.
This is Part Two of a two-part note.
Part One covered the event and the market impact.
As issues of Internet security, privacy, and multi-vendor product interfaces are addressed, the number of vendors adopting the software-as-a-service business model will undoubtedly grow. Using hosted arrangements will also make sense, not only as a cost reduction exercise, but as a solution for manufacturers in high-tech and electronics and for similar complex manufacturing segments that are outsourcing portions of their manufacturing operations or are dispersed geographically with their own manufacturing and distribution centers.
As with any decision of strategic importance, whether to use a hosted applications service or not requires due diligence. This is pertinent to both vendors and potential customers. Although the promise of reduced implementation risk and time, lower upfront costs, and so forth justify the hosting/ASP model, there is an entirely new set of issues for mid-market organizations to consider. Some of the issues include the technical capability of the ASP to administer the program; the ASPs' industry focus; the application's customizability; the ability of the ASP to guarantee connectivity; the pricing model chosen; and how to negotiate a service level agreement (SLA). These need to be addressed in conjunction with evaluating the capabilities of the software package, and understanding whether the ASP offering differs from the traditional licensed offering. Clients should diligently and comprehensively evaluate the benefits, as well as the potential business constraints of the hosted option, and they should make assessments based on referenced clients.
More comprehensive guidelines for determining if you should consider the ASP model along with thoughts on selecting an ASP can be found in The ASP Decision and Are ASP Applications Right for You?.
Despite the bad impressions left by the largely ill-fated first generation of hosted providers, and owing to the positive outsourcing news from vendors like Oracle, Salesforce.com, ACCPAC or NetSuite, mid-market enterprises might benefit from objectively evaluating the next-generation ASPs. Generally , the following types of enterprises should consider using hosting/ASP services:
- Those with limited investment capital and those without an IT department.
- Those that do not anticipate a high rate of change in the way they do business.
- Those investing in an application to streamline costs rather than to enhance revenue.
- Those that can jettison most of the organization's aged legacy infrastructure.
- Those that lack resources for the rapid implementation of a distinct project that possibly does not require complex integration with existing applications, such as HR/payroll administration, e-mail, etc.
Look for the following characteristics amongst the hosting vendor/ASP candidate providers:
- Amenability to reasonable customization and interfacing to legacy systems
- Service-oriented architectures (SOA), Internet-based architecture, and standards-based interfaces
- Support for specific vertical industries or business processes
- Hybrid services that can coexist with on-site systems
- Sound policies for privacy and security
- A sound track record of SLA maintenance at originally quoted price levels and a quick payback
- Sound financial viability and geographic coverage
- The ability to track and provide key metrics for application and network availability.
For users, success-based pricing models offer a "pay-as-you-grow" alternative to up-front license fees. Though often touted as cheap and convenient, these models can bring unexpected IT costs down the road. As with any long-term contract, prospective clients should carefully review the fine print to understand the implications that transactional revenues will have on future expenses. A transaction may appear cheap at $10 or so, but detailed growth projections that factor in per transaction increases, milestone increases, as well as other contract attributes may reveal additional costs. Also, without a fixed upfront price, planning of yearly IT budgets will become much more difficult.
Interested customers should certainly consider SAP Hosting mySAP All-in-One offerings and carefully determine their needs and implementation framework, keeping in mind typical problems that come with new product releases. Organizations seeking a Web-based solution and out-of-box functionality with little or no customization may benefit from evaluating the offering. Support, connectivity, ease of use, security, acceptance, and scalability are only a few considerations. Current users of older SAP traditional client/server product may benefit by exploring the ramifications of switching to the hosting/ASP mode. However, decision-makers should be aware of SAP's extended rollout periods while it aligns industry editions of SAP Hosting with all of its on-premises industry solutions and defines how they will mesh or complement the on-premises industry offerings.
If SAP Hosting is the final choice, future clients should consider the following:
- Negotiate the license fee per component if the entire mySAP ERP breadth is not needed (after a thorough consideration).
- Provide for future incorporation of mySAP ERP or mySAP Business Suite components by bundling them into your contract now at negotiated license fees.
- Stay away from consulting partners who do not follow SAP's stringent implementation methodology; the best scenario would be to use an SAP Certified partner.
- Conduct preliminary research on the industry expertise and reference accounts of a regional SAP Certified service partner. Also, familiarize yourselves with the solution's strengths and weaknesses within certain vertical industries.