Looking to be a nimble player in the fast-moving application service (ASP) market, Ernst & Young Technologies Inc. this week renamed itself EYT and spun-off from Cap Gemini Ernst & Young U.S. LCC to offer application services for mid-sized companies.
EYT’s advantage over more established ASPs is the experience and technical skill with corporate accounting and finance systems it has from its Ernst & Young pedigree, according to EYT chief operating officer and president, Jim Hunt. The core application hosting services will be financial and customer relationship management (CRM) applications from Lawson Software and Great Plains Software.
Hunt said he fully expects EYT to sustain large losses during its initial launch, but he admitted that’s the risky proposition of charging into a hot but competition-filled ASP market.
“A lot of the ‘Big Five,’ sense that the model for ASPs is designed for companies smaller than they wish to target for their consulting services,” said Hunt. “I’m not sure intrinsically that they want to own them, but they seem to want to have the arrow in their quiver. It’s pretty hard for an existing company to consider chasing that market with huge investments knowing you’re going to be chasing that red ink.”
Still, the allure of the potential ASP market rewards are too enticing to ignore, said Stephanie Torto, senior analyst of solution integration strategies of Framingham, Mass.-based International Data Corporation.
“We see a lot of the smaller firms doing this, spinning off an area that’s going to be a niche market to be more competitive,” Torto said. “It’s a fast growth market, to be smaller and faster and compete quicker without the bureaucracy of the larger organization, ” can be a distinct advantage, she added.
Backed by a US$50 million investment, EYT has struck separate deals with Ernst & Young LLP and Cap Gemini Ernst & Young US LLC to ensure both companies will continue a guaranteed five-year relationship with EYT to ensure the spin-off’s success, said Hunt. However, only Chantilly, Va.-based Cap Gemini Ernst & Young US LLC will retain equity in the company, earning as much as 10 percent of stock earnings from EYT contingent upon how much ASP business they help generate for EYT, Hunt said.
Per the spin-off deal, EYT will retain “preferred provider status” for its ASP products and services through its agreement with Ernst & Young LLP. Its deal with Ernst & Young calls for EYT to carry “exclusive preferred provider status” for Lawson and Great Plains, the core applications of the new independent company.
Hunt said EYT’s separation from Cap Gemini Ernst & Young US LLC was inevitable as growing conflicts between the consulting entity and tax and audit entity of the company began to surface.
“Anything that could have any more than an arms length relationship could be construed as comprising their (Ernst & Young US LLC) perception on audits, and that’s just not acceptable,” Hunt added.
Investors handing over $50 million to get EYT off the ground include Charterhouse Group International, Inc., Softbank Venture Capital and Interliant, Inc.