As Published In May/June 2004

Technology On Demand—A New Frontier
By David Baum

Market-leading companies continually strive to construct better information systems, faster communications networks, and more-sophisticated information centers. Although this relentless pursuit of automation frequently delivers a competitive edge the downside is an increasingly complex IT environment. Overwhelmed with constant management headaches, many companies are offloading their IT services to outsourcing companies that specialize in offering software services on demand and keeping information systems online.

IT outsourcing has been garnering plenty of headlines this year, but the practice of offloading IT functions to outside firms has been an important part of the computer industry since the 1960s. According to Timothy Chou, president of Oracle On Demand, first-generation outsourcing, led by EDS, focused on taking over hardware, real estate, and people. The outsourcing vendors concentrated on running operations more efficiently through basic cost control, vendor negotiation, and a focus on the bottom line. Second-generation outsourcers, such as Wipro, Infosys, and Tata, emerged in the early 1990s. Their focus was on supplying low-cost resources by tapping skilled offshore labor pools, with rigid contracts designed to minimize change.

"First- and second-generation outsourcing acted on the premise that companies should emphasize their core competencies and outsource the rest," Chou says. "But focusing on low-cost labor is not enough. The next generation of outsourcing is built on a foundation of better processes and new levels of automation. Availability, security, performance, problem management, and change management processes must be identified, repeated, and ultimately automated if tomorrow's outsourcing ventures are to be successful."

Oracle entered the outsourcing industry in 1998, with its Business OnLine (BOL) program, and has continually updated its offerings ever since. It launched its current business in 1999 to give customers an alternative to in-house management of the Oracle E-Business Suite.

Initially, Oracle hosted the E-Business Suite applications in a data center at Oracle's Redwood Shores headquarters, with a small backup center in Colorado. "Back then, Oracle did not plan to invest in data centers or offer much customization of its outsourced applications," recalls Paige O'Neill, Oracle's senior product director for on-demand services and support. "It was more of a one-size-fits-all model. Over the years, we have evolved more and more flexibility for customers and expanded the available offerings."

Today, hardware facilities can be located at Oracle's data center, the customer's certified data center, or at a certified partner's data center.

"We've also just put new pricing in place that expands the flexibility of the offering, and makes it easier for existing Oracle customers to move to on-demand services, by separating the price of the service from the cost of the license. At US$150 per user per month, customers can get Oracle to manage their software and hardware at a lower cost than the average cell phone bill," O'Neill adds.

Expanded Offerings

As more and more customers have adopted Oracle E-Business Suite On Demand, Oracle has expanded its on-demand services to include the Oracle Database and Oracle Application Server products. This next level of hosted services, called Technology On Demand, gives customers the flexibility to have Oracle manage their database and application server, even if they are not currently running the Oracle Database, Application Server, E-Business Suite, or Collaboration Suite. More recently, Oracle added Collaboration Suite On Demand and Disaster Recovery On Demand to its services lineup. In each case, Oracle On Demand experts provide all system maintenance and support, making it possible for customers to focus on running their business instead of managing their infrastructure.

"Oracle's outsourcing service begins to transform software delivery from the traditional model—based on users licensing, implementing, operating, and upgrading software in discrete steps—to a utility model based on users accessing continually up-to-date software supporting their business processes," says Lance Travis, of AMR Research¹.

This innovative concept is partly what persuaded corporate officers at National Notification Networks (3n) to adopt the Oracle On Demand service. "We were going through all the motions to build our own hosting center, which is quite an expensive prospect," says Patrick Stuver, vice president of technology at 3n. "Once we looked closely at Oracle On Demand, we saw it as a spectacular opportunity. We could save immensely on the capital investment in infrastructure, and we would not have to hire employees or worry about training, maintenance, and upgrades. Besides, where else could we find better Oracle database administrators than at Oracle?"

Having a reliable infrastructure is essential for 3n. The 3n Automated Notification System simplifies the labor-intensive task of contacting numerous people by phone, pager, e-mail, instant messaging, fax, PDA, and wireless laptops. Whether it is an emergency or nonemergency situation, someone can use the 3n notification system to simultaneously deliver voice and text messages to thousands of people by simply making one toll-free call from any phone or by sending a message through the 3n Web site. The system is intended for schools, corporations, and the military. "Our service is all about business continuity, and our Oracle database is at the heart of everything," says Stuver.

3n's contact database—the most valuable component of the notification system—is hosted at the Oracle Technology On Demand facility in Austin, Texas. It is here that Oracle has created the On Demand Grid, an advanced hosting center architected for thousands of servers and hundreds of terabytes of data. When a customer such as 3n initiates its outsourcing service, Oracle provisions a slice of the grid for the company (see "The On Demand Grid" sidebar). As the customer progresses from initialization through implementation and into production, more CPU and storage resources are added as needed. The Oracle Real Application Clusters technology provides the backbone of this inherently scalable environment.

"Our notification system is backed by the security, reliability, and backup services of a billion-dollar facility," says Stuver. "We frequently work with customers who are very security-conscious. When discussing with potential customers whether or not they trust our protection, we tell them the data is maintained at Oracle's Austin data center. After that, we always get the nod."

More Options for Customers

Unlike the typical approach to outsourcing, which provides service-level agreements (SLAs) addressed to each layer of the IT stack, Oracle has structured its approach to outsourcing around delivering value to customer applications in five services areas: availability, security, performance, problem resolution, and change management,² according to Andy Efstathiou, an analyst with the Yankee Group. To improve flexibility, Oracle defined the CEMLI (Configuration/Customization, Extension, Modification, Localization, and Integration) Framework, which translates into 19 classes of extensions that customers can add to their Oracle systems.

"We believe that a next-generation outsourcer should provide a logical and standard framework so customers can tailor the software to their business needs," says Chou. "This not only enhances flexibility but also simplifies the management of the enterprise, improves service levels, and reduces costs."

But how do you know what to outsource and what to keep in-house? Chou encourages IT leaders to distinguish between "context" and "core" activities. Core tasks directly affect the competitive advantage of the company, whereas context tasks refer to routine back-office processes. "The goal for context tasks is to execute them as effectively and efficiently and in as standardized a way as possible," Chou says.

Kip Martin, vice president, META Group Technology Research Services, agrees that routine tasks should be executed as efficiently as possible, making them likely candidates for outsourcing. But he cautions users to avoid political squabbles over what falls into each category. "I've seen a lot of internal debates digress into religious wars about what is strategic and what is not, and what's core and what's not," he says. "It can be very difficult to come up with any kind of concrete list."

According to Martin, companies should start by outsourcing the parts of the IT portfolio that are nonproprietary, are not overly customized, and do not contain inherent trade secrets or best practices. "When people say, 'I want cost savings,' I always ask them, 'At what cost?' What are you willing to forgo? Are you willing to forgo your own people? Are you willing to forgo quality? Are you willing to forgo availability? There's a long list of things you can trade off, but it's rare that you get to have everything. You've got to choose what your priorities are and structure the outsourcing agreement appropriately."

In that vein, the goal of service-level agreements should be not merely to reduce costs, Martin continues, but also to get correct behavior out of your outsourcing partner. "It may not be just about keeping the application running. It may also be about developing new capabilities, driving enhancements, or helping users operate those applications," he says. "It requires a lot of interaction back and forth between the users and the outsourcers."

Oracle accomplishes this interchange with dedicated personnel in the on-demand center for each customer. "We have a service delivery manager who makes sure we have the resources we need," says Eric Maas, cofounder and chief technology officer at Infopia. "I talk with him on almost a daily basis. We were drawn to Oracle Technology [On Demand], because we didn't have enough resources and expertise to manage everything on our own."

Infopia uses the internet to connect consumers to manufacturers and retailers, providing merchants with the e-commerce infrastructure they need in order to automate online business operations and maximize exposure. The company provides services to more than 150 e-commerce companies— from creating Web sites to spearheading marketing initiatives—and also hosts key business processes for inventory, order entry, and customer relationship management activities. "A large percentage of our clients rely on us to host their entire e-business presence," says Maas.

It's a business model that has enabled the company to succeed rapidly in a fast-paced market. However, with only 15 employees and plans for significant growth, Infopia was spending too much time and money maintaining its infrastructure and applications. After evaluating all the options, Infopia selected the Oracle Collaboration Suite delivered through Oracle On Demand. Since then, the company has chosen to outsource its core database and application server assets through Oracle Technology On Demand as well. "Oracle gave us the solutions we were looking for at the right price," Maas says. "Its data center staff is constantly being trained on the newest releases, and we get a quick response if something needs to be fixed or patched."

Thanks to Oracle On Demand's predictable monthly costs, Infopia has cut its technology spending by 30 percent and transitioned its information systems to state-of-the-art hardware. "We needed to focus on our core business, which meant increasing system security and reliability," Maas sums up. "In the past, if something went wrong, I would be in the data center at four in the morning trying to figure out what had gone wrong. Having Oracle handle all that is a huge relief for us."

Making the Numbers

After a decade of hardware, software, and networking equipment purchases, today's IT budgets are dominated by the cost of managing existing software systems. In 2002, Gartner released a detailed study revealing that less than 20 percent of these budgets is spent on innovation and more than 80 percent on maintenance and administration.

In an attempt to improve that ratio, John I. Haas, Inc., enlisted Oracle E-Business Suite On Demand services. The company wanted to avoid increasing its expenditure on IT resources yet build a more efficient and strategically motivated operation. As the world's largest producer of hops and hops products, Haas depends on the time-sensitive agriculture sector, so improvements in operational efficiency have a marked effect on the bottom line.

According to Marc Krens, chief financial officer at John I. Haas, by allowing Oracle to provide its applications online, Haas was able to redeploy 28 percent of its dedicated internal IT employees. The company was also able to avoid purchasing additional servers. These two improvements are netting an annual operating savings of US$180,000 and approximately US$150,000 in increased asset productivity. Overall, running Oracle E-Business Suite applications in the outsourced environment has saved Haas US$425,000 per year, which translates into a 57 percent reduction in overall IT costs.

IT efficiency is particularly relevant when the time comes for a major software upgrade. According to AMR Research, the average time between software upgrades has shrunk from three years in the early 1990s to 18 to 24 months today, and a major ERP upgrade runs about 18 percent of the original installation cost4. Conducting these upgrades efficiently is a challenge—particularly for a company that has never undertaken the task before. An outsourcing vendor can streamline these upgrades through the economies of scale that come from repeating the same process again and again. For example, Oracle's on-demand service has performed more than 300 upgrades of the Oracle E-Business Suite. These upgrades have been done repetitively with specialized teams, following a predefined lifecycle.

"With Oracle On Demand's proactive maintenance, we are more stable than ever," says Infopia's Maas. "Oracle's 24/7 support team is always there if we need assistance. Having access to experts in database, system, network, application, and security management allows us a level of sophistication previously absent from our business."

Oracle's availability management includes a disaster recovery service, so that in the unlikely event of a primary site failure, a backup site can pick up the load in less than two hours, with all data and applications synchronized. "Our state-of-the-art security management drives security patches quickly from R&D into production," says Chou, "and software change management protocols ensure that our customers are always moving forward in software releases and can avoid large upgrade costs."

Backed by the Best

3n's Stuver believes that any enterprise that has concerns about the security, availability, and scalability of its applications should consider Oracle's on-demand services, not only for their proficiency in dealing with Oracle technology but also for all the data center benefits that accompany each implementation. Maas agrees. "Our hardware has definitely improved," he says. "Before, we were leasing two-year-old equipment that was not adequately maintained and whose performance was substandard. With Oracle On Demand, we have higher-end hardware, full-time DBAs, and IT experts devoted to maintaining every single piece of our infrastructure."

Best of all, the service is always evolving. According to Oracle's O'Neill, several service enhancements are currently in the pipeline, such as the On Demand Automation Platform, a vehicle for automating management and provisioning of the grid environment, and a new portal that makes it easy for customers to monitor available capacity, usage statistics, and other aspects of the on-demand service via a dashboard interface. "Our outsourcing customers receive support service and problem resolution that are up to 50 percent faster than what nonoutsourced customers receive," says O'Neill. "This is because we have automated many key processes via the On Demand Automation Platform and can proactively monitor on-demand customer service levels for availability, performance, security, change, and problem resolution. Often, customer support issues are resolved proactively with no impact on users."

Although customers will appreciate these upgrades, Chou insists the true value of what Oracle is providing is not measured by flashy interfaces or executive portals. Rather, it's a function of hard-core discipline. "Next-generation outsourcing is all about standardization, specialization, and repetition of the key availability, security, performance, and problem- and change-management processes," he stresses. "We create a 360-degree feedback loop that influences the entire product lifecycle, from development, implementation, and ongoing performance to proactively resolving problems and automating upgrades. Most important, we bring unique expertise to the task. Only outsourcing vendors such as Oracle that build the software they are servicing can deliver next-generation outsourcing."

The On Demand Grid Oracle's On Demand Grid is an enterprise-scale infrastructure comprising three layers. The Software Grid Layer enables "on-demand" access to Oracle technologies such as Oracle Database, Oracle Application Server, Oracle E-Business Suite, and Oracle Collaboration Suite. This layer provides workload balancing, central provisioning, and management. The Computing Grid Layer comprises the hardware, network, and storage-computing layers. It leverages open standards such as Intel, Linux, SAN, and NAS to provision sophisticated solutions and enable intra- and intercompany collaboration. It also enables incremental growth of complex solutions through fast provisioning of standard slices of computing power. The Services Grid Layer contains the grid control and automated service management technologies necessary to manage the availability, performance, security, problems, and changes of the Oracle Database, Oracle Application Server, Oracle E-Business Suite, and Oracle Collaboration Suite. Flexibility for Changing Business Requirements Over the last four years, Oracle has significantly expanded its hosted services offerings to meet evolving customer demand. The result is an enhanced service offering for Oracle E-Business Suite On Demand customers that includes the following options: Choice of location: Hardware facilities can be located at Oracle's world-class data center (@Oracle), the customer's certified data center (@Customer), or a certified partner's data center (@Partner). Flexible, low-risk contracts: Oracle offers one-year and multiyear contracts with 30-day cancellation. If customers are unhappy for any reason, they can receive a 20-percent rebate on the monthly service charge. Predictable Costs with New User-Based Oracle On Demand Pricing Oracle On Demand provides support management services in an Oracle data center or at a third-party location. Oracle continues to extend its commitment to flexible pricing options with the following user-based purchasing options: On Demand Location—Oracle Data Center Professional Application User—US$150/month Self-Service Application User—US$20/month External Application User—US$50/month On Demand Location—Customer Site Professional Application User—US$90/month Self-Service Application User—US$12/month External Application User—US$30/month The preceding prices are base price per user; additional discounts may apply based on volume. Top 10 Reasons Companies Outsource3 Reduce and control operating costs Improve company focus Gain access to world-class capabilities Free internal resources for other purposes Get resources that are not available internally Accelerate reengineering benefits Deal with functions that are difficult to manage or out of control Make capital funds available Share risks Obtain cash infusion

1 Travis, Lance, "Oracle Outsourcing Moves Towards Utility Software Delivery," AMR Research (April 17, 2003).
2 Efstathiou, Andy, "Oracle Goes Beyond Traditional ISV Outsourcing Services," Yankee Group (April 2003).
3 Outsourcing Institute, "Survey of Current and Potential Outsourcing End-Users."