Finding the "e" in Procurement

Regardless of what procurement system they settle on, the company was ready to go the application service provider route. Why? They were certain they could save money.

Executives at Digital Insight are technically and financially savvy enough to help banks and other institutions deliver financial solutions and products to their customers. But when it came to its own procurement systems, the Calabasas, Calif.-based company had not kept up with the times. "Until recently we had no 'e' and no 'procurement'," jokes Howard Seligman, MIS director of Digital Insight. "We were operating in a 100 percent paper driven environment, with procurement staff walking around for signatures for purchase approvals."

Seligman and his colleagues weren't happy with the situation, but it took the acquisition of an Atlanta company to spur serious plans to implement a procurement system. A number of decisions had to be made, not the least of which was deciding which system to adopt. However, on one matter they were settled: whatever system they decided to use, it would be via the ASP (application service provider) route.

Eventually the company chose CoreHarbor, an ASP based in Norcross, Ga., that had recently partnered with Ariba. "Ariba is a proven product," explains Seligman. "And CoreHarbor's package of alliances are very good. We knew it would be easy for our existing suppliers to work with them."

Best of all, he says, after some conservative calculations it was determined that payback on the investment would be no longer than 18 months. But even without the math Seligman knew the ROI would be relatively fast. Being application service providers themselves, the folks at Digital Insight are well aware of the cost saving benefits of the ASP model.

Infotech's Latest Trend
Application service provision is the latest infotech craze, popular because it allows users to access certain applications online with minimum fuss and cost. Specifically, application service provision, or web application hosting, as it is sometimes called, allows a user to Œrent¹ a particular application instead of purchasing and licensing it. Installation and integration become minor issues instead of the headaches they usually are in a traditional deployment.

"ASPs allow companies to have access to leading-edge technology that doesn't have to be upgraded every six months," says Andrew Frost, senior research analyst and head of the ASP Stream for the Butler Group, an IT research and consulting house in the United Kingdom, with offices throughout Europe. "We're advising all of our clients to look at ASPs very seriously."

The applications themselves range from the complex - e-procurement, customer relationship management, ERPs, supply chain management, warehouse management; to the relatively mundane - Microsoft Office or e-mail for example. The level of sophistication among the suppliers tend to vary as well. Some may offer the bare minimum of software and hardware provision, while others provide a certain level of infotech management and a wide range of software packages.

The biggest attraction of ASPs is the relatively low cost. For example, a company could easily pay $300,000 to install a system from Clarus. Accessing that same system from USi, a popular ASP supplier, could be around $200 a month, according to an announcement made by Clarus and USi earlier this year. Another example is American Software, which reports that a typical mid-size company with 100 users can access its e-procurement software for about $50 per user per month using an ASP platform. In fact, many are calling ASP technology the door that opens opportunity for the small- and mid-market participants.

The Usual Caveats
For many who have only a passing acquaintance with the ASP model, these figures may seem to fall in the category of too good to be true. Oftentimes, unfortunately, they are. While companies can generally assume there will be lower costs and less bother with installation, too many new users fail to properly calculate the total cost of ownership of these applications and then get burned by unexpected expenses, says Adrian Gonzalez, senior analyst with the Dedham, Mass.-based infotech consultancy ARC Advisory Group. Some ASPs don't guarantee connectivity, which means companies have to have separate agreements with their telecom providers,² says Gonzalez. Pricing models also vary, making it hard to compare one ASP with another. For instance one supplier may offer an application for $100 a month but not include in that price hardware, telecom fees or configuration costs, Gonzalez says. Another might include some of these items with a higher monthly fee. Another issue is catalog content: some suppliers make the user manage that while others include it in the service.

"A buyer should be aware of the costs that come after the initial licensing fees... consulting, training, etc,² agrees Andy Russo, director of enterprise solutions for PurchasingNet, an e-procurement provider that recently selected NaviSite to host its system. "Sometimes the cost of implementation services can quickly eclipse licensing and subscription fees." He also warns that in some cases installation may take longer than expected. "An application that takes a great amount of effort to implement in the traditional manner won't be much different in an ASP environment."

Happily, such instances do appear to be more the exception than the rule. Certainly the people at Digital Insight are pleased with the process. "We had a very rapid deployment and with minimal effort from the tech side," reports Joe Gomez, e-procurement project manager.

Yet the ASP model has really only been a viable one for the last year and a half or so (a lifetime and a half in Internet years). So until recently, users tended to be smaller-sized companies that had "no choice" as Gonzalez puts it. "Early adopters were the dot com companies that didn't have the time or money to go the traditional route." The larger companies, he says, "wanted to get some history behind these early adopters and took a wait-and-see approach." It turned out that many liked what they saw.

Gaining Acceptance
With annual sales of more than $6.5 billion and 150 manufacturing and research sites scattered in 25 countries, Rohm and Haas is one of the world's largest specialty chemical companies. As part of a new overall strategic sourcing initiative, Rohm and Haas weighed the costs and benefits of various e-procurement systems. "In all cases the hosting model turned out to be a better deal for Rohm and Haas," says Tom Chapman, purchasing manager. Eventually, the company chose the Ariba B2B Commerce platform, provided by USi.

Jeff Heller, Rohm and Haas' procurement process manager, expects the system to pay for itself within a year or so and in fact avoids citing specific numbers "because they sound too good." And that¹s not counting the indirect benefits, he says. "We will have around half of our 20,000 people using Ariba directly, saving them many hours a year buying goods and services. We also expect higher compliance with our contracts and discounts from our suppliers for electronic ordering."

At the same time, Chapman says, the company insisted on including certain provisions in the service level agreement (SLA) with USi. As it turns out, the 'wait-and-see' attitude has paid off in more than one respect.

SLAs are the contracts users and ASPs sign, usually lasting between one to three years. Until recently Gonzalez says, the language in SLAs did not receive much attention, something that is starting to change as ASPs become more popular and certain problems seem to reoccur from client to client. In a way the increased focus is too bad, he says. "I had one company rep tell me the goal should be to try to keep the lawyers out of it, that the two sides should operate more as a partnership."

"But SLAs are a necessary evil," he says. Basically, says Frost "you want the SLA to define who is responsible for what, and when, and at what cost, in every possible circumstance."

Create Powerful Provisions
A large order for a company of any size. Rohm and Haas, for example, included provisions for guaranteed online availability and a set number of consulting hours available to the company. There are other points that a company might want to consider as well:

  • Spell out the necessary procedures for implementation including time frames, necessary down time and even how to roll back in the event of a failure.
  • Establish acceptable levels of service, such as a certain percentage of permissible down time every month. Be careful with definitions. Many service providers promise a network uptime of 99 percent or better, according to an ARC strategies report, "Web Application Hosting; Strategies for Success."

"This doesn't necessarily guarantee that the application will be available. In other words, if the software crashes, but the network is operational, the ASP has still met its guarantee," the report states. Include application availability in the agreement.

  • Ask about the policy on upgrades. Most ASP contracts last at least a year, usually three and sometimes as long as five. At the same time, software suppliers usually release an upgrade every year and a half or so. "An agreement signed for three years will result in obsolete software being used, unless the ASP agreement caters for upgrades as they are released," cautions a Butler Group report, "Outsourcing the Enterprise."
  • Consider privacy implications, both of your data and your customers'. "Ask who has access to the data and how is it secured," Gonzalez says. "Is the data encrypted and what protections are there against security breaches, both online and physically?"
  • Give yourself an escape clause. "If you want to switch providers or bring the application in-house, make sure you actually own the data so you can easily move the data structure," says Gonzalez.