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On-demand vs on-premise: You pay your money, you make your choice

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9th Sep 2008
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Software as a service (SaaS) has come a long way since Tom Siebel dismissed it as a "doomed" model. Stuart Lauchlan traces the development of SaaS CRM - from the emergence of the next generation of applications firms such as Salesforce.com and NetSuite, to the hybrid models of Microsoft and SAP - and speaks to some of the most significant figures involved in the sector to find out what the future holds for the battle between on-demand and on-premise CRM.

By Stuart Lauchlan, news and analysis editor

It's only a few years since Tom Siebel - then head of the fastest growing software firm that Silicon Valley had ever seen - declared that the hosted delivery model was “doomed”. They were words that would come back to haunt him.

In the event, it was Siebel Systems that was doomed, destined to be swallowed up by Oracle. IT industry historians might see an uncanny similarity to the demise of database vendor Cullinet, whose CEO John Cullinane resisted the rising tide of the relational data model and firms such as Oracle and Ingres... glug, glug, glug!

"The war of words between SaaS and traditional on-premise software may have led some to believe that it is a case of one or other."

Frank McCracken, founder and executive vice president, Saaspoint

But while Siebel resisted the software as a service (SaaS) revolution, other client server on-premise application software firms have been more welcoming. Oracle CEO Larry Ellison has long championed the internet computing model, before it became a mainstream fashionable stance to take, although Oracle's acquisitive tendencies today mean that it carries a multiplicity of differing interpretations of the on-demand concept in its portfolio. (Only the Siebel CRM OnDemand product meets the multi-tenancy requirements that most SaaS purists insist is compulsary – whether Tom Siebel would appreciate the irony is questionable...)

Most significant has been the emergence of the next generation of applications firms, the presumptive successors to the Siebels of the 1990s, in the form of SaaS pureplays such as Salesforce.com and NetSuite. Both have links back to Oracle's Ellison, who provided some initial funding and support for Salesforce.com and remains the majority shareholder in NetSuite. Other firms such as RightNow Technologies have moved away from a mixed on-premise and on-demand offering to a pure on-demand one.

Meanwhile, more reluctant converts to the cause, in the shape of SAP and Microsoft, have made SaaS commitments, even if product delivery has been slow to date, with both vendors arguing that a hybrid model that supports both delivery platforms is what customers really want.

The hybrid approach

Both companies argue that the hybrid approach allows customers can test the water with an on-demand deployment, then easily move back on-premise if they want to or need to. “If customers choose one deployment option, they can change their mind over time,” notes Brad Wilson, general manager of Microsoft Dynamics CRM for the Microsoft Business Solutions Business Group. “So suppose you decide that you’ve gone hosted for a while and now you want on-premise and just own the system yourself – you can do that. If you are on-premise but choose to actually move it to a hosted environment and let somebody else manage that for you, you can do that as well. So you have that investment protection.”

Photo of Zach Nelson"It's a different delivery model and financial model to get into the on-demand space. Companies like Microsoft and SAP are used to money up front. No traditional vendor has ever made the transition from on-premise to on-demand."

Zach Nelson, CEO, NetSuite

Of course, the problem both firms have that SaaS pureplays do not is that their revenue models are based on on-premise licence sales and moving to an on-demand subscription revenue stream essentially bastardises the bedrock of their cash flow. “It's a different delivery model and financial model to get into this space,” argues Netsuite CEO Zach Nelson. “Companies like Microsoft and SAP are used to money up front. No traditional vendor has ever made the transition from on-premise to on-demand.”

Both SAP and Microsoft have had issues with their SaaS roll-outs. Microsoft's SaaS offering is only available to customers in the US to date, although third party hosting services can be acquired from the Microsoft partner network in the UK and other parts of the world. Meanwhile, SAP has scaled back its Business ByDesign rollout commitments quite significantly, although the firm remains adamant that it's still on track.

"We decided this is the right time to adjust the pace," explains SAP CEO Henning Kagermann said. "We have a brand-new product, we have live customers and the market likes the concept. We have learned we need more time to take additional steps toward optimising the end-to-end process of delivering, selling and running the solution."

But what the arrival of Microsoft and SAP into the market does do is lend support to the validity of the on-demand delivery model. "Larry Ellison once told me that the best thing that happened to Oracle in the early days was IBM’s pre-announcement of a relational database years before it was available,” says Nelson. “It gave credibility to the then-new idea of relational databases and created demand that IBM could not fulfill.”

The revolution is coming

So on-demand or on-premise? Which is most appropriate? The reality is that it varies on a case by case basis. Whatever the pureplay evangelists might dream of in their wilder imaginings, the prospect of the entire world moving to a SaaS model anytime soon is remote. Research firm Saugatuck has noted: “SaaS is going to complicate and hybridise user IT and business operational environments faster, and to a greater degree, than most user and vendor executives understand at this point. The vast majority of user IT departments will simply not have the resources to handle the influx of enterprise-level SaaS.”

"SaaS is going to complicate and hybridise user IT and business operational environments faster, and to a greater degree, than most user and vendor executives understand at this point."

Research firm Saugatuck

That said, Saugatuck predicts that by 2010 at least 65% of companies will be running at least one SaaS application, while fellow research company Gartner reckons that by 2011, 25% of new business software will be delivered as SaaS. That's music to the ears of the likes of Salesforce.com CEO Marc Benioff.

“Customers aren’t going to buy their own data centres anymore,” he insists. “They are not going to buy their databases, they are not going to buy their application servers, they are not going to buy their toolsets. They are going to be receiving them through the cloud and we see tremendous interest from customers of all sizes to move into this new paradigm. This is all about software as a service becoming a new standard, platform as a service becoming a new standard.”

On-demand offerings are also becoming a replacement technology solution as well, says Greg Gianforte, CEO of RightNow Technologies. “What's changed in the last year is people look at RightNow as a viable replacement for their Siebel deployment that has a lot of hair on it. Or their Clarify deployment that's just long in the tooth. Or their massive system that needs to be replaced,” he says. In other words, les enfants terrible are squeezing into the space occupied by the old guard. The revolution is coming – but are we talking game-changing Industrial Revolution or the blood-letting, head chopping French variety?

On-premise problems

The problems of the on-premise model have been well documented over the years: expensive, long implementation times, poor user take-up, inflexible licensing plans that left vast quantities of software sitting unused on shelves and so on. In contrast, SaaS offers a 'pay per drink' subscription model, no IT infrastructure to maintain in-house, better user uptake and shorter deployment periods. On the downside, there have been security and uptime concerns and criticism about the presumed lack of customisation that can be carried out on SaaS applications. On-premise software, however, can be configured to fit exact business requirements and might be better for large companies that have complex integration needs.

"What's changed in the last year is people look at RightNow as a viable replacement for their Siebel deployment that has a lot of hair on it. Or their Clarify deployment that's just long in the tooth. Or their massive system that needs to be replaced."

Greg Gianforte, president and CEO, RightNow

There's also been some debate about the long term total cost of ownership (TCO) and return on investment (ROI) of SaaS. It's the old argument about renting versus buying property. If you're moving to a new town for six months, you'd rent; if you're moving there for six years, it's almost certainly more economically sensible to buy. While ROI is typically realised relatively quickly with on-demand solutions, many believe that the recurring monthly fees make them a far more expensive option than on-premise CRM tools in the long run. Forrester Research has pointed out that although on-demand applications eliminate big initial investments, they can include extra monthly fees – such as for industry-specific functionality, extra storage, integration with on-premise applications, etc.

But it could be argued that long-term cost of ownership of on-premise software is equally unknown. Can you guarantee how much you need to budget for additional servers and storage in five years? Or how costly the next upgrade project is going to be? And you're going to need an in-house IT resource to manage and maintain those systems – will that head count go up or down?

The SaaS model robs users of the headache of systems upgrades. An upgrade doesn't just mean a new version of the on-premise software; it often means upgrading the entire technology stack - the database, the servers, the operating system, the system integrations, etc. The days of IT personnel trudging around the office clutching new software CDs and installing them on networks and desktops and servers – all very time-consuming and expensive – could be over.

Bear in mind as well that a typical enterprise upgrade is likely to involve setting up a test environment, re-implementing everything with the new version and testing the compatibility, functionality and performance of the new configuration and it all seems a costly and tedious process. In contrast, a new release of a SaaS implementation will simply appear when the user logs on via his or her browser on Monday morning. Users don't have to worry about upgrade timing, projects, costs and so on.

Security concerns?

SaaS also aligns customers more closely with their vendors, giving them more clout. At one point, Gartner estimated that around 50% of Siebel licences were shelfware and gathering dust. In that sort of context, there's little or no upsell opportunity for a vendor, so little incentive for the vendor to be responsive to customer requests. On the other hand, SaaS vendors have to live with the idea that their customers – not locked into perpetual licences - can switch them off and shift to another supplier relatively easy. They have to give them what they want and keep them happy or they will churn to another SaaS vendor or slip back into the hands of the on-premise faction.

"While SaaS is gradually becoming another deployment option for companies, it's still a small fraction of the overall apps market, particularly in the enterprise arena."

China Martens, The 451 Group

Security used to be a bigger concern for potential SaaS users than it is now, but it's still something to be thought about. Your data will be sitting on someone else's servers, so you'd better be sure their security is at least as good as yours. But the reality is that the SaaS vendors are essentially better placed to provide more robust security than most of their customers. It has to be: it would only take one really serious security breach to damage trust in a SaaS vendor and send customers running back to their own data centres.

With security concerns on the wane integration has become the major concern. Companies want their SaaS solutions to link to their existing legacy applications or to other SaaS solutions. An enterprise customer with an SAP back-office system might want to run a Salesforce.com CRM front-end, for example. Such a customer needs to know that the data flow between the two systems will be seamless.

"The war of words between SaaS and traditional on-premise software may have led some to believe that it is a case of one or other," says Frank McCracken, founder and executive vice president at SaaS consultancy Saaspoint. "It is true that you need to adopt a different way of thinking to traditional integration, but this should not deter CIOs from embracing the benefits which the on-demand model brings. Traditional software can live with on-demand if you approach it intelligently."

Integration has been a focus for the SaaS pureplays, but also for the hybrid vendors, such Oracle, which has developed prebuilt integration software for its CRM on-demand product and the on-premise Siebel CRM, to provide customers with a single view of their data. The integration is based on the Oracle Application Integration Architecture (AIA) and Oracle Fusion Middleware. "The deep functionality of on-premise CRM and the rapid development and ease-of-use capabilities of on-demand CRM are now powerfully combined for organisations to extract even further value from their Oracle investments," says Anthony Lye, senior vice president of CRM at Oracle.

The burning question

So, back to the burning question again: on-demand or on-premise? It is – as might be expected – very much horses for courses. “While SaaS is gradually becoming another deployment option for companies, it's still a small fraction of the overall apps market, particularly in the enterprise arena,” notes China Martens of analyst firm The 451 Group. “What we're seeing is developing interest from customers in vendors that offer deployment choices so a company could start off SaaS-y and, if their circumstances later change, then bring those apps in-house. Such an approach also gives a comfort level to customers with concerns about SaaS deployments such as up-time and security issues. Should this become a widespread trend, SaaS pure-plays might need to rethink their current operations.

"We are seeing emerging SaaS integrators so that situation is starting to change, but for now, customers may find the lack of integration off-putting."

China Martens, The 451 Group

“We also see many customers looking to SaaS as a department option or an international unit option, they're sticking to on-premise for their corporate operations. One reason could be the lack of integration between many SaaS point solutions as opposed to the tight integration built up over years between on-premise apps, where suites are also common. We are seeing emerging SaaS integrators so that situation is starting to change, but for now, customers may find the lack of integration off-putting. We also hear of customers sometimes requiring sizeable amounts of consulting to bring in SaaS apps, which would seem to be pretty akin to the old on-premise adoption model.”

As a footnote, it's interesting to note that Salesforce.com – the on-demand champion – has just purchased Instranet – an on-premise firm – to flesh out its portfolio. The firm hopes that it will see the Instranet installed base convert over to the SaaS cause, making this acquisition an interesting test of the allure of the on-demand model.

“It’s somewhat ironic the company most closely associated with 'No Software' and 'on-demand' crossed the aisle to buy an on-premise vendor to fill a gap in its product line,” notes AMR Research's Bruce Richardson. “It will be interesting to see if Salesforce.com can migrate InStranet’s 50 customers over to SaaS. If not, will the company also have to support an on-premise version?”

Other articles in this focus report:

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By matthewfrench9
27th Sep 2008 00:26

There is also middle ground between pure SaaS and on-premise deployments. There are SaaS vendors, such as Service-now.com (primary business model is based on hosting the software they develop), that allow customers to choose where to deploy their SaaS technology. In on-premise SaaS deployments, the technology is housed in IT’s data center, but upgrades, maintenance and remote monitoring is handled by the software vendor through VPN tunnels. There are many regulations throughout the world in which IT organizations must comply and for those organizations that are subject to regulations, they may choose to house the technology in their data center.

Additionally, SaaS technology has come a long way since Salesforce.com set the tone. While it is not universal to all SaaS vendors, full extensibility and customization is now available. In the IT service management space this is what has really hurt the traditional players like HP, BMC and CA. Customers have had the liberty to customize to no end, but in return they find it difficult to upgrade. Service-now.com has devised a means to allow their customers to customize the application set to their heart’s content while being guaranteed their changes are preserved through upgrades - whether hosted or on-premise.

My last point of pontification is about the speed in which SaaS vendors can deliver new, innovative technology. Salesforce.com caught up to Seibel functionality in a very short period of time. An argument can be made that SaaS vendors deliver additional value by way of new product releases on a much more rapid schedule. Customers no longer need to wait 12 – 18 months to get new functionality that typically requires a full reimplementation. In a nutshell, SaaS delivers greater agility.
Full disclosure – I am employed by Service-now.com. We have much more to say on this topic such as dispelling the myth about integration issues, but I’ll spare you for now. Integration is actually a strength of many SaaS vendors – think about what SOA is all about.

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