Applications, supplied on demand

To hear John Dillon tell it, “the enterprise software model is prehistoric and outdated.” Dillon, the former CEO of Inc., is currently CEO and president of Navis LLC, a supply-chain distribution and logistic software vendor. And, he’s a big supporter of software as a service.

The idea of software as a service is to provide customers with complete solutions using — and the vendors I spoke to will hate me for this — no-name software. It’s a different approach than that of ASPs such as Corio Inc., Siebel CRM OnDemand, and Oracle On Demand, which merely host enterprise software packages on behalf of their clients. According to Dillon, those are still overpriced application solutions; instead, he believes enterprise software should be commoditized.

“Henry Ford did it to autos, and it happened to the cellular industry. Why shouldn’t it happen to enterprise software?” Dillon asks.

Raj Shah, senior manager of business consulting at Sapient Inc., hears what Dillon has to say but insists it won’t happen.

“You can’t give (enterprise users) a cookie-cutter application. You can start with it, but it isn’t going to get adopted, and it won’t meet their business needs,” Shah says.

Truth is, vendors selling software as a service best not try to tell potential enterprise customers they have a better way to do CRM, for example. Most IT departments have spent a lot of time getting various heterogeneous applications to work together to reflect their own unique business processes.

“The business processes have been baked into the application logic,” Shah points out, adding that no enterprise-level company is about to rip and replace.

Having said that, there are areas where software as a service is a logical choice — payroll being the primary example.

Payroll is complex and mission-critical, says Ted Schlein, general partner at Kleiner Perkins Caufield & Byers, but it is not core to the business. The best payroll software in the world will not give a company any competitive advantage. In this situation, software as a service shines.

Think of the difference in time and expenditure between using a payroll service such as ADP (Automatic Data Processing) and creating your own payroll application. Now throw in change management and integration services on top of that.

What’s more, software as a service is delivered in a capacity model. You pay 50 cents to 75 cents for every check ADP writes, but if you owned all the software and hardware yourself, you’d have to buy more than you need to plan for future growth; in essence, you’d be paying for employees you don’t have.

Steve Savignano is chairman and CEO of Ketera Technologies, which offers spend management and procurement software as a service. Savignano believes that in the next three years, IT will exist solely to support a company’s core competencies, whereas everything else will be outsourced.

But Schlein is more realistic, I think. Software as a service is a costly business to fund. You need to invest in both infrastructure and software development, yet unlike vendors that sell software outright, there are no multimillion-dollar up-front deals. “It is almost prohibitive to enter a new category,” Schlein says. “The category has to be big.”

Will software as a service become the trend that swallows the enterprise software industry? Not likely. But it will find its own niche, and my guess is the niche will be small to midsize companies.

Ephraim Schwartz is editor at large at InfoWorld (U.S.).

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