On demand solutions are growing in popularity and are trending to become the standard in areas that are mission critical/non core. Are you ready?
The enterprise software industry is currently experiencing a dramatic shift in how technology is delivered and sold. Customers are effecting this change by demanding fast and ongoing value. They are also reacting against the classic license and maintenance fee model, which has long been favored by enterprise software providers.
This has resulted in a new model — "on demand" — in which applications are priced and delivered in a manner similar to the way that gas, electricity and other utilities are delivered to consumers. The trend toward on demand is proliferating as companies begin to embrace the model and enterprise software vendors scramble to react. Within a few years, on demand will be the standard in many categories where enterprise software previously prevailed.
Customer Demand Has Driven Change
Until recently, customers had no alternative to the classic enterprise software approach and lacked the power to effect meaningful change. Over the last couple of years this situation has changed.
From 1995 to 2000, companies rushed to replace systems with enterprise-wide enterprise resource planning (ERP) applications to ensure they avoided business interruptions due to the year 2000 "bug." In the end, most companies had more software than they knew what to do with. This, combined with a down economy, led to weak demand for enterprise software since 2001.
Due to a brighter economic outlook, businesses are now beginning to consider new software investments, and they are seizing negotiation leverage from the vendor community, demanding a quicker return on their investment in an application. Vendors are being challenged by prospective customers to prove that they can provide a return on investment within a year of beginning a project. Customers are also now examining the total cost of owning an application when estimating the cost of the project, which includes implementation fees, upgrades and support services.
In October of 2003, Scott McNealy, CEO of Sun Microsystems, stated that the high-tech industry is over-charging by a factor of 10. Considering the license fee pricing model and risk/reward aspect of every project, he is correct in his statement. For example, if a company pays $5 million in license fees with annual maintenance fees at 18 percent per year, the total is $7.7 million over the course of three years with 65 percent of the total cost of the solution in license fees. Therefore, companies are being asked to invest millions of dollars in upfront fees, making it next to impossible to achieve a return on investment within a meaningful period of time.
There is also the assumption that customers will see value in their investments. Every project faces the risk of not meeting the expectations of its value due to a variety of unknowns, such as the rate of end-user acceptance or a shift in business priorities. Once risk is introduced to the investment/value equation, paying upfront makes even less sense.
Another trend affecting the enterprise software industry is that companies are increasing their focus on processes that are core to their business. Enterprise software tends to be invasive, and in most cases it takes years to fully install and integrate with other systems. In the process, scarce business and information technology (IT) resources are invested during the implementation, leaving some companies to ask whether or not it is really worth the effort.
Here, we can learn from the past. A decade ago, companies invested in costly software systems to process payroll. They needed complex systems to ensure that employees were paid correctly and in accordance with ever-changing regulations. Today, companies use payroll services and applications provided by such companies as ADP and Paychex. As a result, the companies were able to free up more money and human capital to focus on the areas that were more closely tied to their success as a business, such as manufacturing and customer-facing applications.