MarketView: Do-or-Die for Software Vendors

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Let’s be honest. Conventional enterprise application vendors are struggling to keep their heads above water, argues Greg Gianforte, Founder and CEO, RightNow Technologies . It’s getting harder and harder for them to foist big-ticket purchases onto customers whose IT resources are already strained to the breaking point and who have no stomach for complex software deployments that carry a big risk of failure.

In stark contrast, software companies that have embraced a web-based hosting model are doing very well. They’re signing up customers, growing their marketshare and making money.

The reasons for this phenomenon are pretty clear. First, there are the simple economics. When you sign up for a conventional application deployment, you’re agreeing to buy a lot more than just software. You need to acquire hardware infrastructure to support that software. You need to hire people to babysit that hardware. You’re adding to the workload of the people who troubleshoot OS problems, the people who secure your IT infrastructure and the people who manage your storage and backup. You may have to purchase a database license. You also commit yourself to all the work associated with owning the software itself: managing upgrades, monitoring performance, planning capacity, patching holes, etc.

In fact, most organisations can’t even calculate the total cost of owning conventional enterprise applications. There are just too many hidden lifecycle costs to count. Their applications are just insatiable money pits.

Hosted applications, on the other hand, are less expensive and offer fixed costs. You don’t need to buy more infrastructure. You don’t need to support more infrastructure. Your vendor takes care of all that for you. Vendors operating under a true multi-tenancy hosting model can achieve tremendous economies of scale that get passed along to you, the buyer. You write a cheque for a known number every month and in return you get software functionality that delivers value to your business. You don’t spend money on a lot of high-maintenance technology that does nothing for you but create headaches.

Then there's risk. Conventional enterprise software projects are very risky. Many companies have spent all the money described above, only to discover after months or years of work that the software didn’t deliver the benefits promised by the vendor. Some have been burned more than once.

Buyers of hosted applications face no such risk. They don’t have to invest hundreds of thousands of dollars and months of effort before they see results. Many hosted applications can be activated in a couple of weeks. If the software doesn’t do what the vendor said it could do, the customer can shut down the project with minimal loss. If it does perform as promised, the benefits start to manifest immediately. Either way, no one has to worry about losing their job.

Then there’s the resource issue. Many corporate IT organisations are simply maxed out. If a business manager wants to deploy a new application, he or she will likely have a difficult time trying to get IT to re-allocate resources to that deployment in a timely manner. If the application is to going to be deployed in the corporate IT environment, the IT department has to carefully evaluate that application to ensure that it doesn’t threaten existing services. In some cases, there may be political conflicts about prioritizing resources and conformance to corporate IT standards. These issues can delay and even derail deployment of new business solutions.

With web-based hosting, IT’s involvement can be kept to a minimum—to the benefit of the department that needs the new application, the IT department itself, and the company as a whole. Because IT doesn’t have to provision or support the new application, business managers can make a buy decision based on their own budgets, resources and objectives. All they need their users to have is a browser on their PCs and an Internet connection. IT’s limited resources and concerns about the integrity of the enterprise environment no longer have to act as roadblocks to the implementation of high-value business solutions.

This doesn’t mean that hosting is a threat to IT. On the contrary, IT organizations are now embracing the hosting model as a way to empower their users without putting additional strain on resources that are already committed to critical technology tasks. Hosting gives them welcome respite from the incessant stream of business demands that threaten to overwhelm them.

There are many other advantages to hosting. Because they serve large numbers of customers, hosting vendors can afford to provision much more redundancy and scalability into application infrastructure than any individual organization can. So their services are much more reliable than conventional enterprise deployments. Hosted, web-based applications can more easily be shared with customers and partners outside the enterprise—without requiring IT to architect and maintain expensive, complex web infrastructure. Also, unlike a conventional “hit-and-run” software sale, the ongoing nature of hosting relationships tends to keep hosting vendors more accountable to their customers.

Today’s hosting vendors, by the way, should not be confused with yesterday’s application service providers (ASPs). ASPs failed because they tried to force client/server applications to fit an Internet delivery model. It didn’t work. The success of today’s hosters is based on the fact that they’ve architected their applications from the ground up for multi-tenancy and delivery to the desktop browser. That’s why they’re able to quickly and cost-effectively provision services for their customers. It’s also why they’re able to provide the customisation necessary for a successful application deployment.

With all these advantages, the only question that faces the software industry is how long vendors of conventional enterprise applications can last. Corporate buyers don’t like to spend more money than they have to. They don’t like risk. And they can’t buy more technology than they can realistically support. That’s why all the growth in the software industry is coming from hosting. And it’s why the days of the conventional vendors are numbered.

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By admin
06th Nov 2003 17:13

Greg Gianforte waxes lyrical about hosting and up to a point he's right, but like every other IT hype, hosting will not take over completely, however much Gianforte wills it.

The first reason is that some clients will be concerned about rising prices within the hosting model. They want to know that they are not going to be ripped off when the hosting supplier starts to bump up the pricing. Maintenance charges for software purchased outright have remained very stable the same cannot be true of the either the ASP or Hosted services. By the way I don't believe Gianforte has explained the difference between ASP models and hosting - Is Salesforce.com an ASP service or is it hosted?

Another side of this is that the hosting model can accommodate purchasing software outright and hosting it elsewhere. Having your cake and eating it is possible in the model, although he patently fails to realise this.

The idea that hosted applications carry no risk is patently untrue, unless the hosted model has subsumed time, in some anti-physical way. You still need to transfer data, you still need to change business proceeses, you still need to train people etc...etc... If it is possible to activate applications quickly they must be inherently more simple, and potentially therefore less functional than traditional applications.

Another wrinkle in the perfect world of hosting lies with the stubborn problem that you may already have paid for your software - are you going to throw it out so that you can pay for it on a per user basis - I hardly think so.

Lastly there are types of applications in enterprise areas that do not lend themselves to the hosted model - highly sensitive financial and personnel applications can have your average FD or HR Director running for the hills when hosting is mentioned.

I believe there is a consensus that hosting to create economies of scale is valid but it will not be at the expense of one software pricing model over another. All of the permutations are valid and can work, I know of a company who recently took their hosted application in-house to bring rising costs and problems with support under control.


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avatar
By admin
06th Nov 2003 17:13

Greg Gianforte waxes lyrical about hosting and up to a point he's right, but like every other IT hype, hosting will not take over completely, however much Gianforte wills it.

The first reason is that some clients will be concerned about rising prices within the hosting model. They want to know that they are not going to be ripped off when the hosting supplier starts to bump up the pricing. Maintenance charges for software purchased outright have remained very stable the same cannot be true of the either the ASP or Hosted services. By the way I don't believe Gianforte has explained the difference between ASP models and hosting - Is Salesforce.com an ASP service or is it hosted?

Another side of this is that the hosting model can accommodate purchasing software outright and hosting it elsewhere. Having your cake and eating it is possible in the model, although he patently fails to realise this.

The idea that hosted applications carry no risk is patently untrue, unless the hosted model has subsumed time, in some anti-physical way. You still need to transfer data, you still need to change business proceeses, you still need to train people etc...etc... If it is possible to activate applications quickly they must be inherently more simple, and potentially therefore less functional than traditional applications.

Another wrinkle in the perfect world of hosting lies with the stubborn problem that you may already have paid for your software - are you going to throw it out so that you can pay for it on a per user basis - I hardly think so.

Lastly there are types of applications in enterprise areas that do not lend themselves to the hosted model - highly sensitive financial and personnel applications can have your average FD or HR Director running for the hills when hosting is mentioned.

I believe there is a consensus that hosting to create economies of scale is valid but it will not be at the expense of one software pricing model over another. All of the permutations are valid and can work, I know of a company who recently took their hosted application in-house to bring rising costs and problems with support under control.


Thanks (0)