One staple of my slide presentation when I used to address conferences about the application service provider concept back in 2000-2001 was the notion of rBi — return BEFORE investment — as opposed to simply return ON investment (rOi) at some unspecified point in the future. To me, this was always one of the most important defining characteristics of on-demand applications when compared to traditional software projects. The reason conventional enterprise software vendors latched onto the notion of RoI in the first place was that it was the only way to persuade enterprises to part with the huge investment sums required to get an implementation under way. Often, of course, the original architect of the project would have moved on to new pastures long before the promised RoI ever kicked in.
With on-demand applications, customers don't start paying until they begin using the application, and they typically pay on a per-user per-month basis. So it's quite easy to imagine deploying a procurement application, for example, which achieves enough savings per user in the first month to more than repay the monthly fee. If the fee is billed on net 30 day terms, then the customer achieves the return before the investment has even been made. That's the essence of rBi. (A similar formula applies to web services projects, by the way, as I outlined when I spoke at a CNET conference in San Francisco back in December 2002).
What about setup costs, you may ask? Well, setup costs for on-demand applications are much lower than for conventional software because there's no on-premises implementation. Most of the costs incurred, if any, are caused by integration to existing on-premises applications when required. What's more, the applications are designed to be easy as possible to get started with — precisely because vendors don't get paid until they are deployed and in use.
I was reminded of all this when I saw Dan Farber's write-up on Friday of noted VC and former Oracle kingpin Ray Lane, who sees the same principle in operation with Web 2.0 applications: "the value is derived before [you] pay for it, unlike traditional enterprise applications, where companies buy perpetual licenses up front and wait for the value to come months or years later." Ray looks for a "value before you pay" proposition — what I'm calling rBi — in any new venture he invests in.