$US22b firm to outsource SAP operations

In what one analyst called a landmark deal, Tyco International, a $US22 billion manufacturing firm, has hired an application service provider to host and manage SAP applications for its subsidiaries.

While many terms of the deal - including its dollar value and exact scope - haven't been disclosed, analysts said it's unique because of Tyco's size and the fact that the company will outsource mission-critical applications.

"I haven't seen anything this size. It may be an absolute landmark deal for a pure [application service provider]," said Howard Rubin, a research fellow for Meta Group.

Tyco, a Bermuda company, operates in more than 80 countries. Usually, small to midsize companies seek out application service providers, which host and rent applications to businesses, with users accessing the applications over the Internet.

As companies seek to focus on competitive advantage, they're increasingly willing to hand off complex but routine systems to service providers. The US application service provider market is expected to jump from $US150 million this year to $6 billion by 2001, according to Forrester Research.

The worldwide high-end application service provider market - which includes enterprise resource planning applications such as those made by SAP - is projected to reach $2 billion in 2003, according to IDC.

The service provider that landed the Tyco deal is HostLogic. A private company in Florida, HostLogic opened for business just three months ago. It has about 50 employees and has offices in six countries, including Hungary, Germany and Hong Kong.

HostLogic's international presence may have helped it secure the Tyco deal, said Albert Nekimken, an analyst at Input, an information technology research firm.

"Companies like virtual e-business networks, but they nevertheless like their vendors to be in close geographical proximity," said Nekimken.

Tyco senior vice president Brad McGee said the company decided to outsource its SAP applications to off-load some work from its IT staff and to get help integrating different IT systems as the company grows by acquisition. Last month alone, Tyco completed two purchases, including the electromechanical division of Germany's Siemens for $1.1 billion in cash.

HostLogic charges, on average, $US500 per seat per month, and industry observers estimate that the Tyco deal could potentially reach several thousand seats. Outsourcing the hosting and maintenance of high-end enterprise software can cost a firm several million dollars per year, said Nekimken.

Atypical move

Typically, large companies shy away from outsourcing mission-critical applications because such arrangements don't allow for the kind of customisation they need.

HostLogic President Chris Terry, however, said his company's strategy will be to develop standard application service provider business models for vertical industries and thereby deliver software that can address the specific challenges of Tyco's subsidiaries.

Tyco makes products and systems for the health care, electronics, telecommunications and security industries.

Tyco "will need some custom configuration for any degree of success," said Rod Johnson, an analyst at Boston-based AMR Research Inc.

At the same time, Tyco - or any large company that outsources critical applications - needs to ensure that it doesn't ask for functionality or services beyond what the service provider can deliver, said Rubin.

"It's like going to a steak house and asking for a vegetarian meal. You can get a vegetarian side dish, but you can't order a tofu steak," he said.

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