Still Sharing After All These Years
Kenneth Swarth, president of Nathan Road International Inc., learned about the garment industry when everything not written down was stored in the memories of experienced employees. But as annual sales for the Los Angeles-based manufacturer of women's apparel edged toward $4.5 million, Swarth began to think about computerizing.
"Doing everything manually required a lot of man-hours and made us too dependent on too many people whose knowledge wasn't being shared," he says. Rather than leaping directly into owning a computer, however, he decided to ease into the unfamiliar technology by contracting for "on-line" time-sharing.
Nathan Road linked up with a central computer at R&S Financial Services Inc., a data processing service bureau in nearby Woodland Hills, Calif., for a monthly fee (most companies are charged for each transaction) of about 0.5% of its annual gross revenues, plus rental for the keyboards, terminals, and dedicated telephone lines installed in the company offices. Swarth uses the software R&S customized for his company to track inventory levels, orders, shipments, purchases, and production. The arrangement is a very good way to step into the poolat the shallow end," he says.
Time-sharing emerged about 20 years ago when computers were expensive and software distinctly unfriendly. The concept is simple: Instead of installing its own system, a company shares time with other users on a computer owned and maintained by a data processing service bureau. There are two types of service bureaus: "batch" and "on-line," or remote. With batch, a company sends to the bureau the information it wants processed. The bureau puts the data through its computer in a batch, then sends the result back to the client in some form of hard copy, such as printout reports, labels, payroll, or checks.
With an on-line arrangement, a company rents or buys terminals and other equipment, plus one or more data lines to link it with the bureau's central computer. In the past the company would use its own software, drawing on the bureau's computer for extra power and storage capacity. Today most companies rely on software owned by the bureau.
Batch is cheaper by far, since users don't need to obtain equipment or pay for telephone-line usage. But because it involves physically transporting data between bureau and client, it is also much slower and not very useful if a company wants to update information frequently or have quick access to its data. Batch is most frequently used for routine financial tasks, such as preparing payroll. There are, however, some inventive exceptions, such as a one-man service bureau in upstate New York that, using an Apple computer, provides reports on milk production per cow as well as trend analyses for a group of local dairy farmers.
Eventually more service bureaus may follow the example of Automatic Data Processing Inc. of Clifton, N.J., one of the largest suppliers of payroll processing. According to Charles C. Varga, publisher of The Cerberus Report, a journal for users and vendors in the information industry, ADP is considering installing in client companies small dedicated computers preprogrammed to "spew out everything that is needed for 52 weeks of payroll." Not unlike a postage meter, the machine would print out checks and payroll records at the touch of a button. ADP would maintain and update the software and collect a service fee.
With more people buying computers and with telephone-line charges escalating, on-line bureaus are scrambling to hold on to their market by developing and licensing specialized databases and software offerings and by stocking their staffs with industry experts. "The successful firms are going after specific applications and selling themselves on the basis of some specialized expertise," says Walter Ulrich, president of Walter E. Ulrich Consulting Inc., in Houston.
Not all service companies are anxious to accommodate individual preferences, however, since doing so cuts down on their ability to realize economies of scale. "Sometimes," says Sanford "Sandy" Schram, one of the principals of R&S Financial Services, "there is a tug-of-war between a client's unique needs and the service company's need to standardize the product and maximize the profit."
On the other hand, many time-sharing vendors do regard customization as a staple of their menu of value-added services. According to Charles Varga, special requests that would have been difficult to satisfy five years ago pose little or no problem today. Swarth's choice of R&S Financial Services, for example, was based in large part on that company's familiarity with the particular needs of the garment industry, which handles its receivables very differently from most businesses.
While it may be easy to find a time-sharing company to mold a program to your needs you should find out, before the first change whether you'll have to leave the software behind if you decide to move the operation in-house. "One of the strategies of time-sharing companies is to get their customers locked in with custom software, so they can't go somewhere else," says Walter Ulrich. "You may get what sounds like a good deal only to realize that the software is written for a machine you would never buy."
Swarth never intended to use time-sharing as a permanent alternative to owning a computer. "Our initial plan," he says, "was to time-share for a season and find out all the problems of converting from manual systems. We also saw it as a good opportunity for a small, growing company to get into many good software programs on a rental basis and see how they might need to be tailored."
But when Nathan Road switches from time-sharing to ownership, it will buy from R&S its software and a Point 4 minicomputer identical to the one it has been using on a time-sharing basis. One of the data lines linking the two companies will also be left in place, so R&S can continue to provide maintenance support, troubleshooting the Nathan Road system by means of a terminal.
This kind of arrangement is becoming increasingly common, with many service bureaus beginning to function as original equipment manufacturers. They will purchase hardware and package it along with their own software for sale to clients as a complete -- or turnkey -- system.
Swarth did not find time-sharing more cost-effective than ownership; rather he saw the bureau's service as a useful intermediate step. But some companies -- even with their number dwindling as microcomputers become more powerful and affordable -- see time-sharing as the most economical way to get a job done. Most users who find a dollar advantage in time-sharing are, like Kelly Goff, batch customers who have routine tasks to perform that require more memory capacity or data processing expertise than they would care to purchase or manage.
Goff, owner and president of Kelgo International Ltd., a consumer electronics wholesale operation based in Atlanta, turned to a local service bureau after two separate attempts at leasing minicomputers. Neither of the leased machines gave him enough memory to maintain and classify the lists of customers and prospects that form the basis for Kelgo's monthly, 6,000-piece direct mailings. "They just weren't fast enough or efficient enough," says Goff, who now pays the bureau from $1,000 to $1,200 a year for processing, labels, and a detailed breakdown that shows whom he is reaching, by account number, zip code, and purchase history.
"They have software that we couldn't possibly afford, software that allows us to milk our data in a multitude of ways," Goff says. "And besides, with the service company there are no hidden expenses and no headaches. I just wish I could run the rest of my business that way."
Goff does, in fact, run one other part of the Kelgo operation on a batch basis. The bureau also handles the company's monthly 15-person payroll at $21 a run, less than a third of what Goff estimates it would cost him to do it himself.
In weighing time-sharing against purchase, consultant Walter Ulrich warns that it is still a mistake to discount either the price or the headaches of computer ownership, although both have abated considerably. "One of the miscalculations that people make is in thinking that, if they invest $25,000 in a computer, their expenses and their problems will be over. Too frequently it turns out that all they ever get out of the system is frustration, aggravation, and a half-million-dollar headache." Buying a Material Requirements Planning System based on the best techniques available may, for example, be ill-advised, unless your inventory management conforms to the same exacting standards. If it doesn't, you may spend a lot of time and money changing your business procedures to conform to system requirements.
Robert Underwood, controller of the Hoosier State Bank, in Hammond, Ind. says that his institution, an average-size community bank with assets of $130 million, was fleeing another kind of headache in 1976, when it decided to give up its in-house computer system and hand over its processing chores to a batch service bureau. His problem with ownership, he says, was personnel. Not only did the bank's data processing staffers turn over frequently, they were often openly antagonistic in their dealings with other bank employees. "We couldn't find people who knew the banking business," says Underwood, "and the ones we did hire weren't interested in hearing the bank's side when issues arose."
Underwood is now considering another try at ownership. But this time he is putting only some of his operations on his own equipment. He recently purchased a Radio Shack microcomputer and off-the-shelf VisiCalc software, modified to process the records of discrepancies of individual tellers. The price for the entire system, including software modification, was about $7,000, cheaper, in the long run, says Underwood, than any quote he received through a service bureau. But high-volume tasks, such as keeping track of customer checking accounts, savings accounts, and certificates of deposits, would require a more extensive investment and another try at managing a data processing staff. So for these jobs, Hoosier will continue to use its local service bureau.
Mixing time-sharing with in-house systems may, in fact, be the wave of the future. At Prism, a $20 million subscription television service in Philadelphia, payroll, accounts payable, general ledger, and generation of various financial statements are handled on a batch basis by one service bureau. Film inventory management -- a complex process requiring the tracking of myriad details for each film-takes place on terminals that are on-line to another bureau. And the company's vice-president for finance and administration, Donald Heller, has just ordered a microcomputer so he can construct his own financial models. "There are a lot of technologies out there," says Heller, "and you have to look at what each on can do for you."