What's behind on-demand software's rise

Corporate IT is being drawn to the concept of software delivered as a service and its promise of less maintenance and lower operational costs. Vendors are responding with innovations and commitments to offer the model of hosted application services.

Software-as-a-service is a model of delivering software over the Internet, eliminating the need for companies to buy, build, manage and maintain infrastructure and applications. The concept has its roots in the application service provider (ASP) revolution that fizzled in the late 1990s, but it is now white-hot with its promised IT benefits and is putting pressure on vendors of traditional shrink-wrapped software.

Two recent surveys show that corporations are betting that software-as-a-service is a part of their future.

A survey released in November by AMR Research shows that more than 78 percent of 500 respondents across major vertical industries and company sizes are currently using or considering software-as-a-service. Only 18 percent said they have no plans to consider software-as-a-service.

In an October survey of 118 IT professionals by Cutter Consortium, an IT advisory firm, 65 percent of respondents said they were using or considering software-as-a-service, while 35 percent said they are not considering it. Of the 34 percent who are considering adopting software-as-a-service, 82 percent said they plan to do it in the next six to 12 months.

The most popular applications under consideration are CRM, salesforce automation, ERP, human resources management and supply chain management.

"Users are saying I would be nutty not to at least give [software-as-a-service] strong consideration going forward," says Bill Gannon, vice president of consulting for AMR. "Whether they do it is another item, but upwards of 60 percent of customers are saying to get on my short list, software-as-a-service is one of the key criteria I am looking for. What they are saying is they recognize all the promised benefits of decreased cycle time, faster time to value, lower cost per user, lower [total cost of ownership], not to mention the change in the economic model from a capitalized expenditure to a manageable [monthly] expense."

Users who have made the jump are satisfied not only with the applications but with the concept.

"We don't want to invest in a lot of software. We have in the past and now it is shelfware because it did not work for a variety of reasons," says Ed Barrett, vice president of marketing for CareRehab, a US medical device manufacturer, with some 80 salespeople spread across the US. He says ROI has been faster because the upfront costs are lower. "In our case we only need to improve inventory management by 5 percent and we pay for the application."

Barrett also says CareRehab is not interested in its five-person IT staff being high-tech experts, and he uses himself as an example: "I am the primary administrator of the system and I'm a marketing guy. It is unusual for me to have the capabilities to help manage our sales and inventory and be a marketing guy."

CareRehab uses software from Salesforce.com, an online CRM-centric platform CareRehab has customized to handle its need to track inventory, which is scattered in clinics across the country.

Salesforce.com is the current poster child of corporate software-as-a-service, having grown its customer base by nearly 1,100 percent in the past four years to 351,000 subscribers. The service, with a base price of US$65 per user, per year, counts ADP (5,500 seats), SunTrust Bank (2,500) and Staples (1,500) among its large customers. In Australia, some of the company's customers include 3G provider 3, Pacific Publishing, Esker Software, Dimension Data and Hostworks.

In December, Salesforce.com is adding to its platform with Sandbox, which provides customers a complete replica of their Salesforce deployment for development, testing and training.

"What we are seeing is our customers are deploying Salesforce way beyond our historical heritage, including applications they have built themselves using our tools and applications they have loaded on our platform from third parties," says Phill Robinson, senior vice president of marketing for Salesforce.com. Robinson says software-as-a-service is the next shift in computing, in which the traditional client/server marketplace consolidates and "where vendors are struggling to grow and they are buying one another."

Oracle is an example, having purchased J.D. Edwards, PeopleSoft and more recently Siebel and its Siebel CRM OnDemand. In October, a seven-page memo written by Microsoft CTO Ray Ozzie to company executives outlined the company's challenges and missed opportunities in regard to software-as-a-service. IBM touts itself as the on-demand company and SAP is increasing commitments to hosted services.

Consumer-focused services from companies such as Google, eBay and Amazon show the software-as-a-service model can scale. Those vendors are being followed by a growing list of smaller vendors with corporate- and consumer-focused services (see chart, above). The cost benefits of software-as-a-service also extend to these innovative start-ups.

"It doesn't take US$5 million to start like it did in the ASP business; it takes US$100,000," says Sam Schillace, co-founder of Writely. "Things are cheaper now and you can experiment. One server can handle a couple hundred thousand users."

The money trail leads to venture capitalists who are seeding the market.

"Venture firms across the US are spending less time looking at and funding companies with traditional software models. With that said, they are spending a lot of time looking at companies that are delivering services to enterprises in the form of [software-as-a-service]," says Gus Tai, general partner with Trinity Ventures.

The willingness of corporate users to embrace software-as-a-service is fueling interest as much as venture capital money.

In the Cutter survey, 86 percent of respondents said they expected to use software-as-a-service to generate costs savings. And those respondents cited other benefits, such as greater ROI (27 percent), smaller staff required (24 percent), improved reliability and performance (21 percent), quicker/easier deployments (18 percent), and systematic upgrades and updates (8 percent).

Why is software-as-a-service finding its legs now, after it failed in the ASP days? From a technology standpoint, Asynchronous JavaScript and XML (AJAX) and Asynchronous Flash and XML are making browser-based applications more desktop-like.

"There is no [user interface] being fetched from the server; it is all data," says Ross Dargahi, co-founder and vice president of engineering for Zimbra, which uses AJAX to support the client in its server-based collaboration tools. In the ASP model, users fetched a new page from the server with each click.

Also, the software of today is designed with a multi-tenant architecture, which allows one application to serve multiple companies instead of an ASP hosting one copy of the application for each company. Users also can customize applications today, build entirely new applications on the hosted platform or integrate hosted applications with other applications using Web services APIs.

The near-anywhere access and speed provided by wireless and broadband has dramatically improved access and performance.

Users are not without concerns. In the AMR survey, among those using or considering software-as-a-service, the top three risks were protection of corporate data/information, putting strategic information outside the firewall and integration with on-premises solutions.

But adoption and interest levels show those concerns are fading.

"The traditional enterprise application will transfer online," says Denis Pombriant, managing partner of Beagle Research Group. "What you are viewing is the early stages of a disruptive technology. End users will say, 'Why are we paying so much for this [software] when I can get it for a nickel?'"

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