Posted by kdownie @ 6:12am GMT
The on-demand delivery model for enterprise software -- managed hosting, software as service, whatever you want to call it -- is a big deal right now. Ever since Salesforce.com broke out with its wildly successful IPO last June, investors and industry watchers have been bullish on the promise of hosted applications.
Sure, application service providers (ASPs) have been around for years, but after the dot-com hype faded, it became clear that the "rented software" model only made sense for small businesses that didn't require true enterprise functionality. Not anymore. Flash forward to 2005, and ASPs are once again the darlings of Silicon Valley.
When it comes to extolling the virtues of on-demand software delivery, no one is more evangelical than Greg Gianforte, CEO of RightNow Technologies, one of the leading on-demand providers of contact center and customer service applications. "On-demand software delivery is simply better for the customer," he says. "In 5 to 7 years, it will become the preferred consumption method for enterprise applications. As legacy systems become obsolete, they will gradually be moved to hosted arrangements."
Gianforte is convinced that the market for on-demand software is a young and growing one. Indeed, his arguments as compelling: The software as service model delivers benefits faster, is more reliable, and slices up to 80 percent of ownership costs, eliminating the need for roll-outs and placing the burden of upgrades and maintenance on the vendor, not the customer. What's more, on-demand vendors benefit from economies of scale in hosting situations -- a savings they pass on to their customers.
The market for hosted applications is not confined to CRM and SFA, Gianforte insists. "This is happening in every vertical in the enterprise applications market. In supply chain, there's E2 open. In HR, you have Employease. In ERP and financials, there's NetSuite and Intacct."
It's not just a small and midmarket phenomenon, either, says Gianforte, although he admits to certain factors that have made these companies logical early adopters of software as service. The hosted applications model makes sense for big businesses too, and according to Gianforte, there are many different combinations of vertical markets and customer sizes to be served.
Even though it won't happen all at once, the gradual shift to on-demand applications will certainly be disruptive to some of the biggest names in the business. Gianforte identifies four major challenges that the on-demand revolution poses to the old-guard enterprise vendors that might want to jump on the bandwagon. "First, they have to rewrite their applications from the ground up to accommodate an on-demand delivery model," he says. "This takes time. Second, traditional enterprise vendors have their own universe of systems integrators and consultants that depend on their existence. Severing those relationships would not be easy. Third, the revenue models are completely different. Traditional software vendors get paid all the money up front, whereas on-demand vendors are paid on an incremental basis. Fourth -- and this is a cultural thing -- their incentives are not in the right place. With a pay-as-you-go model, the vendor has an ever-present incentive to provide the best possible service. This is not true of traditional client-server implementations, because once you're millions of dollars into an implementation and knee deep in the details, what choice do you really have?"
Zach Nelson, CEO of NetSuite, a company that has done very well providing a hosted financials suite for SMEs, takes a similar view. "There's one main reason why software as service is a better delivery model," says Nelson. "If the company that writes the software ultimately has to manage that software, they are going to do a better job. If they're just handing it off [to customers and systems integrators], where's the incentive? The majority of the cost of any enterprise software is not in the license -- it's in the ongoing management and maintenance." And there's the rub: Companies are realizing that they don't have to be able to hug their own servers at night, and that paying an ASP whose very existence depends on the security, availability and quality of the application just makes good business sense. "This is a fundamental shift that is occurring right now in the software industry," says Nelson.
ASPs were the "next big thing" six years ago, so why all the buzz surrounding "software as service" today? The answer is that it takes time to build quality applications that function well in a hosted environment, and the first-generation ASPs simply weren't there yet. "The major challenges are, of course, building the software itself, and then figuring out how to economically and reliably deliver it as a service," says Nelson. "It takes time to do this. You can't just port a client-server financials system over to an ASP model and be done with it. In my experience, on-demand applications have to be developed from the ground up."
That's why the first generation of ASPs stumbled, says Nelson. "The first version of NetSuite had less functionality than QuickBooks, just as the first version of Salesforce had less functionality than ACT," he says. "Now, however, the tables have turned. Today, on-demand applications have the advantage, and have become far more robust. This is why companies like NetSuite and Salesforce have an insurmountable lead [in the on-demand market] over companies like Microsoft and SAP. Even if they started tomorrow, no matter how many resources they might decide to throw at it, it would take them six years to build competitive applications."
Unfortunately but understandably, I was not able to catch up with Salesforce.com CEO Marc Benioff, who was busy this week touting Salesforce's upcoming summer release, for his take on the market. But it's worth noting that Salesforce is taking a different tack with its new release, moving beyond CRM and SFA to position itself as a central hub for information management. In a way I'm glad I didn't interview Marc, since he was quoted on InternetWeek.com saying that he "is constantly asked whether Salesforce will offer a general ledger or an ERP offering." Which was exactly what I had planned to ask him.
"We're not doing that, we're building a platform," he said. "We could never build and deploy applications for our customers as easily as they can build and customize them themselves."
