Many companies today outsource some of their operations to an outside service provider, sometimes called a third party. In the next section, we will look at how outsourcing can simplify the management of ERP systems.

Application Service Providers

An application service provider (ASP) is a company that provides management of applications for a company over a network. Usually that network is the Internet. Companies can outsource their email software, accounting programs, or other programs to an ASP.

The ASP, not the company using the ASP’s services, owns the hardware and the rights to the software; it also employs the workers who run the outsourced applications. The users of the system, of course, are the company’s employees. Suppose an ASP were to run an ERP package such as SAP ERP for Fitter Snacker. The ASP would own the rights to use the SAP software, as well as the server on which the SAP software runs. The ASP could also provide consulting services for configuring the ERP system, so that Fitter Snacker would not have to find its own ERP specialists. The ERP program would be delivered to FS workers over a charge a peruse fee for the system, based on the number of users at FS. Thus, an ASP can provide ERP software with a much lower start-up cost, making it possible for smaller companies to use ERP systems when they cannot afford the costs of installing and maintaining their own system. 

Advantages of Using an ASP

Many companies find it advantageous to use an ASP for ERP and other information system applications. Some of the benefits include:

  • Affordability: Companies that cannot afford their own ERP system can now “lease” one on a monthly basis, avoiding the high cost of obtaining the hardware and software and hiring and training support personnel. ASP services can be received through the Internet, using either a Web browser or the ERP system’s graphical user interface (GUI) software.
  • Shorter implementation time: The time needed for ERP implementation is shorter for those who implement ERP through an ASP. An ASP should have experience with implementing and maintaining ERP software. (If it does not, the company should find another ASP.) ASPs have servers, telecommunications, and highly trained personnel already in place.
  • Expertise: ASPs are experts in delivering IS applications. They do all the maintenance, including execution of backups, training, and customizing of the system. Customers of ASPs do not need to hire additional IT personnel. ASPs can also run information systems more efficiently because they do it on a large scale. ASPs can spread fixed costs over many users, thus achieving economies of scale that might translate into a lower total cost of ownership. The Fitter Snacker in-house ERP Fitter Snacker ASP ERP availability of IT talent is tight in the current market; an ASP might have a better chance of attracting and retaining a talented workforce than a small manufacturing company like Fitter Snacker.
Disadvantages of Using an ASP

There are some potential problems with using an ASP:

  • Security: Companies using ASPs are turning their information systems over to a third party. They must be confident that the ASP has a high level of security. How hardware will be shared is also a security concern. The ASP will have multiple users on a single piece of hardware. Each customer’s data must be shielded from other customers. While these are valid concerns. ASPs often have better security than a small company can have on its own.
  • Bandwidth/response time: The telecommunications channel from the ASP to its customers must be fast enough to handle multiple users. An ASP’s servers must be sufficient in terms of processing capabilities.
  • Flexibility: An ASP should be flexible in working with its users and satisfying their requests for processing modifications.
  • No frills. An ASP can usually provide basic ERP systems well, but asking for unusual configurations may cause problems, and an ASP might not allow for third-party add-ons. Further, the ASP might not want to do custom software development using the SAP ERP programming language, ABAP.
  • Technical, not business focus: An ASP knows the technical aspects of the software, but it will need the customer to define the business processes and make the configuration decisions.
Other Considerations

As with all forms of outsourcing, companies considering an ASP should carefully scrutinize the ASP’s contract to uncover hidden costs and potential problems before signing it.

ERP companies are excited about ASP, ERP software companies relied on a small number of very large sales to make their yearly profit. Now income is steadier because ERP vendors can deliver and support software on a monthly basis to customers of all sizes. For example, an ERP vendor might have high revenues one quarter from securing a few, large sales, but may follow that with lower revenues the next quarter if no large software deals are finalized. Delivering software through an ASP, however, provides a steady monthly income from lease payments.

SAP is offering an ASP version of its ERP product for midsized companies. In September 2007, SAP introduced Business ByDesign, which is delivered to customers over the Web. At that time, pricing was set at $149 per month per user, and the product included applications for financials, human resources, supply chain management, and customer relationship management. Also available in a smaller package, Business ByDesign is available to companies for $54 per month per five users. SAP hopes to increase its customer base with the new product to 100,000 by 2010.