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October 8, 2002

Outsourcing Deja Vu

IT outsourcing is staging a comeback, but must first learn from ASP's mistakes

by Joshua Greenbaum

Continued from Page 1

But the rest of the reasons why outsourcing is a good idea remain: In most cases, and outsourcer can perform nonstrategic IT functions better and cheaper than an in-house IT staff. For the part of your IT environment that's nonstrategic — and it varies from business to business — the economics of outsourcing have never looked better.

The best evidence of outsourcing's comeback potential is Oracle, which alone among the software vendor community has continued to push the concept despite the bad times and press. Oracle now runs the enterprise software environment — Oracle 11i, of course — for about 300 customers, 100 of which signed on in the last quarter alone.

The economics for the customers is nothing short of fabulous: An independent review of Oracle's outsourcing customers by International Data Corp. showed a 44 to 66 percent decrease in overall IT costs. Oracle claims it can handle service requests 50 percent faster than most internal IT departments, and the company has been able to use outsourcing as a way to lower implementation costs and times and, especially important for Oracle, provide lower upgrade costs to its customers as well.

What Went Right

Why is Oracle succeeding when the ASPs failed? First and foremost, Oracle knows its software better than anyone else and can leverage tuning and performance tips that come from its consulting and R&D efforts in its outsourcing business. Second, Oracle is only supporting Oracle applications and databases, which gives it a much more scalable knowledge and personnel pool than the ASPs that tried to support a number of enterprise applications. Third, Oracle is putting its money where its mouth is: Customers know that no buck-passing is possible when something goes wrong. And finally, it's Oracle, hardly a fly-by-night operation that might not be around when the contract comes up for renewal.

Oracle's not alone in playing the outsourcing — let's forever bury the term ASP — card. SAP and PeopleSoft still have outsourcing services and partnerships with third-party outsourcers, although neither company is pursuing the market with the same vision that Oracle has. And there are always the granddaddies of outsourcing — Electronic Data Systems Corp., Computer Sciences Corp., and IBM Global Services — although these companies lack the single application focus that makes a company like Oracle so attractive.

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The growth in customers and the savings that Oracle provides shows that outsourcing — under the right conditions — can't be beat. But it's not for everyone: Many companies are increasingly linking their strategic growth to a highly tuned and customized IT environment. Although you can outsource anything, an in-house team should run your truly unique or strategic IT systems. But the mundane or nonstrategic — the stuff that's more like your payroll system than your secret sauce — can probably be better run by someone else.

It's nice to know that a few ideas did emerge from the '90s that have some staying power. We may never see the revival of the Internet market or the NASDAQ in 2000, but we're going to see more and more of the outsourcing market. This idea is back and here to stay.

Joshua Greenbaum [josh@eaconsult.com] is a principal at Enterprise Applications Consulting. He researches enterprise apps and e-business.