AST spring, the Frank Russell Company, a midsize mutual fund manager in Tacoma, Wash., decided that it was time to get rid of some 10-year-old computers and programs that handled human resources and payroll.
But it did not buy new ones. Instead, Frank Russell turned to the Internet, signing with an applications service provider that transferred the company's data to a new Web site. The move gave Frank Russell's administrative staff access to the latest software whenever they logged on.
By contrast, when BP Amoco
BP executives will be able to check on financial information through an Internet connection, but otherwise the arrangement represented what outsourcing has meant for decades.
Between them, Frank Russell and BP Amoco represent the state of Internet outsourcing, a movement that has neither lived up to the expectations of a year ago nor gone away and died. Services offering Web- based software to handle mundane back-office work and allow companies to concentrate on the products and services that produce revenue are growing. But for the most part, these services are still on the fringe of corporate America.
"By any measure, there is more outsourcing going on now than a
year ago," said Charles Rutstein, a director of Forrester
The barriers that have kept Internet outsourcing from exploding are not likely to disappear overnight.
The global giants who could benefit most from Internet outsourcing are likely to be the slowest to make the transition, mostly because of bureaucracy and the issue of trust, analysts say. Many of the biggest companies have technology divisions that are bigger than many of the outsourcing companies. They have the latest, fastest equipment, and they feel more confident when they are completely in control of vital company functions.
Moreover, analysts say, it is often difficult to get technology executives at corporations to advocate efficiencies that would shrink their staffs and their influence.
So far, more small and midsize companies, with revenues in the millions or hundreds of millions rather than in the billions, have tried Internet outsourcing. But they also worry that confidential information may somehow be nabbed by competitors once it is accessible by computer.
They worry, too, that an Internet contractor may not be as dependable. With plenty of recent failures, they are concerned that new companies with dazzling ideas and programs may not be able to build a customer base fast enough to make the transition from burning money to earning profits.
"We're advising clients who are buying these services to make sure the providers have 18 months of cash before they sign up," said Dean Davison, a specialist on Internet outsourcing at the Meta Group, a technology research company in Stamford, Conn. "I know of providers with good products that have had to close their doors because they ran out of money. That left their customers in a bit of a lurch."
Mr. Davison estimates that there are about 700 fairly new companies whose business is Internet outsourcing.
"We see 60 percent of these people getting acquired or going out of business," he said. "That's not because they don't have the right idea, but simply because supply is ahead of demand."
Most of these application service providers are setting up programs to handle tasks like payroll or health and pension benefits. Or they are running Web sites or e-mail systems.
The outsourcing companies create a site on the Internet, and clients are given access. The Internet operation replaces all or part of a company's technology center.
In contrast to the legions of upstart companies, huge proven
outsourcing companies, like Electronic Data Systems
"If you're trying to do something really new and different, you typically go to a newer outsourcing company," said Todd Eyler, a senior analyst at Forrester Research. "With the bigger, older companies like E.D.S., it's less new ways of doing things and more just being very reliable."
For its part, E.D.S. is trying to demonstrate that it can be as innovative as its dot-com rivals.
After several years of building and running companies' Web sites, E.D.S. began broadening its Internet services in mid-1999. It now takes over all or part of a client's technology operations, providing consulting services, hardware and software in unlimited combinations. The company's Internet customers include a few dot-com start-ups and many midsize and large companies, said Brad Rucker, an E.D.S. senior executive. The Internet business accounted for more than 5 percent of E.D.S.'s nearly $20 billion in revenue last year and is the company's fastest- growing division, said John Clendening, a company spokesman.
OTHER big players are scrambling to grab a part of the business.
Large software makers, like Microsoft
Peoplesoft did the work for Frank Russell as well as the accounting programs for the Juniper Bank, an Internet start-up that went online in November. Though Frank Russell had been in business for decades, it did not have a large technology department devoted to human resources and payroll. So there was little or no internal resistance when it shifted to an Internet system that could easily be expanded as the company grew, said Gene Johanson, an executive at Frank Russell.
Juniper was in the classic position of a start-up company. "We had to concentrate our resources on launching Juniper rather than on our back- end accounting system," said Andy Arnold, a technology executive at Juniper. "By going with Peoplesoft, we didn't have to ramp up all the hardware and infrastructure and hire a staff of professional folks."
Executives at service providers argue that security fears are overblown. And some experts say that outsourcing public Web sites and e- mail services can actually enhance security. "By having virus protection and all the screening occur somewhere else," Mr. Johanson said, "it is easier to protect the company and our local area network."
Some Internet outsourcing is reliable, the analysts say, but still unappealing because it is not tailored to customers' needs. "The problem for the providers," Mr. Davison said, "is taking a piece of software and making it work just the way a law firm with 50 people wants it to work."
Even for companies willing to outsource something as straightforward as payroll, going on to more complicated operations that would be even more financially rewarding is often beyond the pale. There is still too much mystery to the Internet for too many potential customers.
"It's really easy to outsource something like the payroll, which is easily understood and just a pain in the neck and nobody wants to do," said Christine Ferrusi Ross, an analyst at Forrester. "But start talking about an Internet-based connection to a trading partner. Well, you hear, what does that cost? And how should it work? And what kinds of things should I expect? There are a lot of psychological barriers because companies don't understand these things. They are afraid to go out and ask questions for fear of being mistreated. Or that they'll ultimately get something they don't understand. So they just don't do it."