Oracle's Outsourced Apps Push

Oracle Corp. has been completely transformed and it is all due to an IPO that never happened, according to Timothy Chou, president of Oracle's E-Business Suite Outsourcing. Three years ago the company started Oracle Business Online group with a plan to spin it off as separate business that would go public. The unit's goal was to license Oracle's software to customers as normal, but the twist was that Oracle would host and maintain the software, as well as provide the hardware for it to run on. This would all be done for about 3 percent to 5 percent of the cost of the software per month thus saving companies nearly half of the cost of paying their own database administrators or hiring consultants to maintain the applications, according to Chou. And while the plan to form a separate business fizzled, the goals of the unit have basically stayed the same, albeit some minor tweaking, and were eventually incorporated into Oracle's overall business plan. According to a 2001 report by Gartner Group, the worldwide Application Service Provider market has been projected to grow to an estimated $25 billion market by year-end 2005. Chou is also expecting big things. "The new kids on the block are all doing it -- like Salesforce.com -- and at some point every software company will be doing this. This is the software model of the future," Chou says. "It has transformed our entire business," he says, noting that several thousand people who were once in Oracle's support organization now have the primary responsibility for delivering these software support services. According to figures disclosed earlier this year, more than 200 of the company's 12,000 e-business application users are using Oracle to host one or more of components included in its software suite. This includes users of Oracle's CRM, ERP and supply chain management applications. Oracle expects that by 2006 more than a quarter of its e-business users will want to get its applications this way. That would translate to nearly $1 billion in additional services revenue for Oracle. Last month the company also began selling its database and application servers as hosted services. But the shift in business models has been a little slow to take hold because until last quarter (Oracle's fourth quarter of fiscal 2002, which ended June 30) the company's sales force of more than 5,000 was not being compensated for selling the service. Chou says that changed recently with intensive training and now the sales force is offering every customer the chance to have hosted services. "It is just a standard part of doing business now," he says. Still, in the past, businesses have been reluctant to turn over hosting to another company. Businesses fear configuration, customization, and responsiveness to users will suffer. Joanne Correia, an analyst with the Gartner Group says that while users are guaranteed specific levels of service, data and network security, the trade off is loss of in-house control over applications. However, Chou claims that Oracle reaction time to troubles is 50 percent faster than the traditional model and that 75 percent of the time Oracle is able to be proactive and resolve issues before they become problems. Chou also says the cost benefits to users are not easily overlooked. He claims that it is 44 percent to 66 percent cheaper to outsource hosting of applications. Recently released research from IDC, a market researcher in Framingham, Mass., shows that 20 percent of the organizations that responded to the study showed a 51 to 100 percent return on investment, and 33 percent enjoyed a 101 to 500 percent ROI on deployed and used ASP-delivered applications services.