Can off-the-shelf software survive the cloud onslaught?

When it first appeared on the scene three decades ago, off-the-shelf software was revolutionary. Instead of having to hire programmers to code and build systems, organizations and individuals were able to buy complete solutions, spreadsheets to enterprise resource planning, all packaged up and shrink-wrapped within a series of disks. Vendors such as JDEdwards packaged up ERP systems covering everything from finances and human resources into ready-to-roll offerings. Eventually, every enterprise was scarfing up these packages to gain access to needed functions.

Now, cloud computing -- in particular, the pay-as-you go subscription model of Software as a Service -- has become the darling of software-delivery methods. Will off-the-shelf delivery become extinct? A recent study out of the Simon Business School at the University of Rochester looked at the business models of both approaches in the cloud age, and their findings provide insights into why vendors need to offer what they offer.

The SaaS approach has the momentum, and this is likely to continue, conclude Dan Ma and Abraham Seidmann, the report's authors. "Continuous technology improvements, increasing adoption of software standards, and efforts to create a uniform platform for different applications cause us to believe that SaaS will eventually attain a solid position in the market," they state.

The advantages of SaaS include enabling businesses to increase production with fewer people, with access to capabilities without upfront spending. However, SaaS providers tend to "provide limited customization options because they are operating in a multitenancy environment. Multiple customers share the same application, running on the same operating system, hardware, and data-storage mechanism. This is how SaaS attains economies of scale, but as a result, users might incur significant lack-of-fit and integration costs."

Customization and integration are the primary strengths in off-the-shelf software solutions, Ma and Seidman point out. The typical system provides "some APIs with access to the source code of the underlying software so it can be customized and better integrated to the business."

To maintain these gains, Ma and Seidman urge SaaS providers to keep a lid on costs to remain competitive. "The SaaS provider's profit is linear in the total transaction volume; high-volume users are much more profitable than low-volume users. The SaaS provider thus has a strong incentive to compete aggressively in price to get those high-volume users."

For off-the shelf providers, their advice is the exact opposite -- vendors should avoid price-cutting. "For them, lowering prices to make their software cheaper is not a good strategy. Rather, they should actively invest in developing full-feature software and enhancing its perceived value."

Ultimately, software vendors and their customers would be well served to offer solutions that are delivered both ways. "Some providers, for example,Oracle and IBM, have adopted such a hybrid strategy; they typically sell a sophisticated version of their software as [an off-the-shelf] product while leasing a simplified version as a SaaS product."