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Analyst: Outsourcing threatens SAP, other large vendors

More executives are using business process outsourcing services, making many ERP vendors find new ways to generate revenue or risk becoming extinct.

SAP and other large software vendors are being pressured to shift sales models off core enterprise resource planning suites as customers begin to outsource many core business processes, according to an analyst with Boston-based Yankee Group.

The ERP model has gone stale and has been going stale for years ... We're seeing many software companies under serious threat.
Philip Fersht,
director of the business applications and commerceYankee Group

The trend in business process outsourcing (BPO) -- the integration of multiple business services under a single provider to an enterprise -- is growing rapidly, said Philip Fersht, director of the business applications and commerce group at the Yankee Group.

"The whole delivery mechanism for ERP is changing," Fersht said. "Suddenly ERP is no longer the core strategy of the enterprise. It's a business process outsource strategy."

SAP began to maneuver itself to adapt to the trend, launching its Enterprise Services Architecture and licensing scheme to partner vendors.

So far 10 partners have signed on to the concept, which will eventually allow SAP to earn revenue from products developed off its architecture. This will give SAP a revenue shift off earnings from its core ERP suite and move toward more revenue generated from analytics and composite applications.

SAP sees the trend as a threat to its business and has begun hiring BPO experts, Fersht said. In April it became the first ERP vendor to jump into the BPO market announcing it will launch its own program through a partnership with several BPO providers.

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"The ERP model has gone stale and has been going stale for years," Fersht said. "We're seeing many software companies under serious threat."

BPO is projected to be a nearly $52 billion business this year, according to the Yankee Group. The trend began with human resources and other HR back-end processes, but it Fersht predicts that it will spread to other processes because benefits can be almost immediate, Fersht said.

The fastest growth will occur in North America between 2005 and 2008, with 43% growth between 2005 and 2006, according to the Yankee Group.

Global BPO providers include IBM, ACS, Accenture, EDS and CSC, which sell HR services to midsized and large enterprises. The market is expected to consolidate and large ERP vendors like SAP could begin to acquire smaller providers to get into the business, Fersht said.

Despite BPO becoming popular, Fersht said enterprises should take a cautious approach and start first by examining their current ERP and infrastructure software licenses and how they could be affected by moving to a BPO vendor.

"BPO has an immediate beneficial impact on an organization," Fersht said.

Some of the benefits are reduced administrative and transactional costs, according to Fersht. Also, management responsibilities are transferred to a third party, reducing headaches.

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