The multimillion-dollar price tag of a new or substantially upgraded ERP system can understandably give CFOs pause. For several years, the idea of "software as a service" has loomed as an alternative, touted by third-party application service providers (ASPs) as well as software vendors themselves.
While licensing terms have continually metamorphosed as companies struggle to find a sustainable business model, no less a luminary than Oracle Corp. CEO Larry Ellison, who has fared extraordinarily well in selling software the old-fashioned way, has declared that he has seen the future of ERP, and in it hosting is the rule, not the exception.
To date, the reverse has been true. In 2001, the 10 largest software-as-a-service firms realized a collective $595 million in revenue, according to IDC Corp. That's less than Oracle collects in a month. Further, momentum is not on their side. Amy Mizoras, program manager for applications sourcing at IDC, says that in general the hosting market will grow more quickly than the overall software market, but that market is expected to grow only in the low single digits this year.
She sees ERP as a potential bright spot, however, arguing that Oracle and other companies have learned by trial and error how best to price and manage ERP services.
While the ASP model was originally seen as ideal for smaller companies or for larger companies looking to kick the tires on new types of software, in fact it has proved most popular with large companies that have already outsourced some facet(s) of IT and see value in passing the complexity of ERP and related applications (such as financials) to third parties. Most companies are motivated to move to a hosted model by a "trigger" event, such as a major upgrade, which can be particularly wrenching in the ERP arena.
Oracle and others see a chance to offset the slower growth in new-license revenue with the recurring fees that hosting clients would provide. Whether 2003 sees this far-from-new idea take hold remains to be seen.