Stem the tide of on-demand software?

While leasing business software over the Web may be the latest fad, packaged boxes are not about to disappear anytime soon.

Popularized by Salesforce.com, delivering software-as-a-service (SaaS) makes it a breeze for companies to use applications such as customer relationship management (CRM) and enterprise resource planning (ERP).

That is because companies do not need to own expensive hardware to house their applications, or fumble over disparate systems. Instead applications are hosted on the Internet with service providers such as Salesforce.com, NetSuite and RightNow, and accessed through a Web browser for a subscription fee.

Interestingly, Sun Microsystems had this vision more than 20 years ago, when it proclaimed that "the network is the computer". However, it is only in the last few years that the idea started to take root, with the entry of Salesforce on-demand CRM and online office productivity applications from startup Writely, which Google acquired in March this year.

Detractors who think this new software delivery model is still untested might be right in some instances, but the SaaS wave seems unstoppable. According to analyst firm IDC, worldwide spending on SaaS will balloon over the next few years, registering a compound annual growth rate of 21 percent to top US$10.7 billion in 2009.

Jeffrey Kaplan, managing director of THINKStrategies, a U.S.-based consultancy, said the future of software lies in the SaaS model, because it is easier for users to adopt and utilize software. Compared to the traditional packaged software model, SaaS has the prospect of greater return-on-investment, while reducing the total cost of ownership, he told ZDNet Asia in an e-mail interview.

According to NetSuite CEO Zach Nelson, SaaS offers a good value proposition. He said: "When an on-premise application and on-demand application equally meet the requirements of a business, that business will choose the on-demand every time, because of the reduced cost and increased capabilities of a Web-based application."

But there will always be a segment of customers who prefer packaged applications, and in many situations, packaged applications still make sense, Kaplan noted. "Most organizations will use a mix of packaged apps and SaaS, and many ISVs will have a portfolio of both," he said.

When the cost and effort required to install and maintain an application is negligible, Kaplan added, packaged software will appeal to companies, more so than SaaS. It also makes sense when an organization needs a highly-customized solution that meets its business requirements.

On-demand vendors like Salesforce and NetSuite, in a bid to dispel skepticism that SaaS offerings do not tout the sophistication and customization provided by packaged software, have plugged gaps in their product lineup.

NetSuite has addressed the difficulties in melding on-demand software with mission-critical enterprise applications, a common bugbear among large businesses.

Nelson said: "We facilitate communication between NetSuite and legacy or third-party systems via standard Web services. We also facilitate business process management via our SuiteScript capability for customized business process automation."

Salesforce, too, has its AppExchange platform which, coupled with a deluge of third-party applications, will provide the integration points to legacy systems.

Small and midsize businesses (SMB) have been most receptive to SaaS, forming the largest group of users for on-demand software providers.

Skyline Apac, a Singapore-based distributor of computing peripherals, jumped on the on-demand bandwagon with NetSuite last year. The company has 10 employees.

Felix Chin, director of Skyline Apac, told ZDNet Asia: "We were using Quickbooks which isn't really an ERP solution. With on-demand, our employees can centrally manage inventory and sales over the Web."

SaaS for the big
Nelson said large companies have typically made huge investments in traditional software and, over the years, reported the painful and expensive processes of investment, implementation and integration.

However, more large enterprises are subscribing to the service and reported the benefits of on-demand applications, thereby changing the "SMB-only" label attached to on-demand software.

Nelson said the positive results seen by companies that have chosen on-demand applications prove it is worth the effort. One of NetSuite's largest on-demand implementation is for Nobel Learning Communities, which operates 150 private schools across the United States.

According to Kaplan, adoption rates of SaaS among large businesses are accelerating because the quality and reliability, as well as the integration and customization capabilities of SaaS are improving.

Salesforce already counts large outfits like Nokia, Polycom and Yamaha among its many corporate customers. Avaya, Citigroup, Daimler-Chrysler, Dell, Ford, and Pfizer also use Concur Technologies' on-demand corporate expense management software.

The giants' belated move The large enterprise software vendors are not blind to the brouhaha surrounding SaaS. When Marc Benioff, the then senior vice-president of Oracle left to start Salesforce, many scoffed at his ideas and business model. But one by one, Oracle, Microsoft and SAP have started to gear toward on-demand software in the past year.

However, Kaplan noted that traditional ISVs face enormous challenges trying to keep pace with SaaS.

"First, they must re-architect their applications to make them Web-oriented, more user-friendly and easily provisioned on a user-by-user basis," he pointed out.

But German enterprise software giant SAP does not see that as a hurdle, said John Goldrick, business development manager for CRM On-Demand at SAP Asia Pacific.

SAP's on-demand CRM product, was designed with a consistent data model and architecture based on the company's NetWeaver platform, Goldrick said.

"This allows the on-demand CRM application to integrate data with a company's SAP back-end systems, and bridges the divide between on-demand and on-premise in that, over time, when a company grows, it can take its on-demand CRM on premise," he claimed.

Apart from product design, traditional software vendors must also restructure revenue models to accommodate the subscription pricing approach of SaaS, Kaplan said. "This means they cannot rely on the upfront perpetual licensing fee revenue of the past to finance R&D and other operations."

Microsoft, for one, has relied on packaged software licensing for much of its revenues.

Redmond's approach to on-demand is different from its rivals, because the software giant is letting partners host its on-demand CRM software, instead of doing it on its own.

But according to some industry observers, Microsoft may have to work harder at convincing partners to host the applications, and this move could mean they will no longer enjoy huge upfront licensing payments.

Ruth Connolly, general manager for Microsoft Business Solutions in the Asia-Pacific region, however, said partners see hosted Microsoft CRM as an "and" strategy, not an "or" strategy.

"Certain parts of the market want or need hosted CRM solutions, either tactically for the short term or strategically for the long term. Our partners can expand their opportunities by embracing both on-premise and on-demand offerings," she said.

According to Kaplan, with on-demand products in the fold, traditional ISVs must package their SaaS offerings so they do not completely cannibalize existing products and disrupt financial stability.

However, Connolly does not think the on-demand offerings will cannibalize existing Microsoft products. "We're focused on doing what's best for our customers, and focusing and executing around that is the key to our long-term success in the marketplace," she said.

For SAP, the on-demand business is an "additive" to the company's existing market strategy. SAP on-demand software will take market share from the pure-play hosted vendors, rather than from its current business, Goldrick said.

Goldrick noted: "We believe many of the customers that choose this [on-demand] offering will convert to the on-premise strategic platform, ahead of what they would have done otherwise with a third-party hosted solution.

"While current competitors believe this is the end of [packaged] software, the feedback we receive from our customers tells us that mission-critical solutions will never be completely replaced by on-demand," he added.

Still, Nelson argues: "[Singer-songwriter] Neil Young says it's better to burn out than fade away. Maybe in life that is the case, but in the world of packaged software applications, fading away is more likely the norm.

"There are many reasons why companies keep a portion of their IT infrastructure on legacy applications--often times it comes down to fear of pulling the plug. Change takes time," he added.

Only time can tell.