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Whitepaper: Business Integrated Scheduling for Banking and Finance–Learn about a cost-effective, business-integrated scheduling solution that helps you better manage your business processes.


The Hidden Cost of Software
By Tim Chou

May 29, 2003

Continued from Page 1

Outsourcing Software Services
According to IDC, the market for “software as a service” will reach $24 billion a year by 2005. There is a growing body of evidence that “leaving it to the experts” results in significant IT savings and operational efficiencies. The reasons should be obvious. Independent software vendors (ISVs) do the best job at managing and supporting their own software:

  • Expertise — they know the software better than anyone else.
  • Economy of Scale — they can maintain, support and upgrade a large user base using universal patches, standardized processes and self-service automation.
  • Brand reputation — in the highly competitive software industry, ISV’s have a vested interest in continually upgrading and improving product performance and services.

As I discussed earlier, corporate IT resources can be spread fairly thin. DBAs have wide-ranging responsibilities. Let’s face it: no one can be an expert in 140 different software programs. This lack of resources slows the deployment of new projects. The goal is simply to keep everything going and provide basic services. Little time is left over for innovation or service improvements. Besides which, upgrades create more work (i.e., system failures, user retraining and debugging).

Read and React
“This economy of scale can be achieved only when the ISV manages its own software. One-offs do not support specialization because no two customer environments are alike. Incremental improvements at one customer site cannot be repeated, standardized or shared with other customers.”

Give us your feedback in the ASPnews Discussion Forum

In sharp contrast, large enterprise software providers can commit their worldwide resources and staff to a policy of continuous improvement. Instead of maintaining the status quo, the ISV strives to make its software services faster, better and cheaper. Owning the software you manage provides hard-to-beat advantages, such as directly linking technical support and software development groups to fix existing problems and introduce new functionality. In terms of problem resolution and change management, it is the difference between throwing a few soldiers at a problem versus an army of experts. And as the direct recipients of this focus and specialization, the outsourcing customers profit from continual gains in security, availability and performance.

… At least theoretically, they should.

While outsourcing should be judged on service quality and performance, too often the negotiations revolve entirely on price. Some major outsourcers promise significant savings if the company turns over the entire IT operation to them. Although millions if not billions of dollars are at stake — no cost breakdowns are provided. And to realize the savings, companies are locked into multi-year contracts with stiff termination penalties. Can you anticipate your company’s hardware and software needs in 2012? The analogy that comes to mind is buying a house for the asking price — with no appraisal of the physical structure or cost review of the yearly maintenance, property taxes and major renovations (e.g., the roof will need replacing in the next year or two).

This type of outsourcing deal — known as one-offs — also sets up a conflict of interest. Since each customer environment is unique, we’re back to the costly legacy system syndrome in terms of maintenance, support and upgrades. The knowledge and innovations achieved at one customer site do not translate to the next. Therefore, maintaining all of these different set-ups is expensive, and does not bode well for the future. Like the for-profit HMO model, the scope and quality of services can eventually be compromised. Back to the same nagging issue: cost. What are you getting for those annual IT savings?

The above model also reinforces the largest historic reservation about outsourcing: the customer’s perceived loss of control. Companies have different needs. Logically, they should have flexibility and a voice in how the outsourcing initiative is structured and administered. By researching their choices, customers will find that they can control as much as they want. Today, you can outsource the entire IT operation, or begin with one key business process, such as supply chain management (SCM) or worldwide human resources (HR).

With hosted services, the software can reside at the customer site, with a trusted third-party or at the vendor’s data center. The outsourcer can manage the entire technology stack, including hardware and facility management; or just the software component, covering the applications, database and system management.

Some outsourcers also offer on-demand, or pay-as-you-go services. Like a utility, the customer pays only for actual usage. With this model, companies share the same server, creating tremendous price efficiencies.

Finally, you don’t have to enter a multi-year contract. One-year outsourcing contracts are available with a 30-day cancellation clause. And while all outsourcers guarantee availability, the latest trend is to also guarantee software performance.

Modeling and Standardizing Maintenance Costs
Creating a disciplined approach to software maintenance will take an industry-wide effort along the lines of The Capability Maturity Model for Software. The CMM provides a framework for organizations to move from ad hoc, often chaotic, software processes to organized knowledge-based systems that support a continuous loop of learning and innovation.

The CMM is organized into five levels of software process maturity and provides the principles and practices underlying process success.

  1. Initial. At this level, few processes are defined, and success depends largely on the knowledge and resourcefulness of the IT staff:
  2. Repeatable. Basic project management processes are established to track cost, schedule and functionality. As a result, the organization can repeat earlier successes on projects with similar applications.
  3. Defined. The software process for both management and engineering activities is documented, standardized and integrated for use by the organization.
  4. Managed. With a full set of measurements in place, both the software process and product quality are quantitatively understood and controlled.
  5. Optimizing. Continuous process improvement is enabled by quantitative feedback from the process and from piloting innovative ideas and technologies.

In conceptualizing a CMM-type standard for software maintenance, I am reminded of what works in certain outsourcing models. Real gains in efficiency and cost-savings come from models that support a process of improvement based on: 1) repetition; 2) specialization; 3) standardization and 4) automation.

As the CMM model shows, the first important step in getting a software process under control is the ability to repeat the process and arrive at consistent results. The next step is specialization. The most effective software solutions are highly granular; that is, they address the specific business needs of discrete groups of users. For instance, with an iProcurement solution, all employees use the same infrastructure and tools to order direct and/or indirect goods. However, for the software to serve a diverse corporate population, it must offer the means to control access (i.e., by title or role) and provide different levels of service. This specialization is achieved by establishing a system of checks and controls: such as pre-authorizations, security codes and/or price caps.

Once a specialized process can be repeated, its use can then be standardized across the general user community. Standardization, in turn, facilitates to automation. Returning to the previous example: if online procurement processes are standardized, the e-business software vendor can automate usage with desktop self-service, automatic invoice approvals and routing, and extranet portals for preferred suppliers and vendors.

However, this economy of scale can be achieved only when the ISV manages its own software. One-offs do not support specialization because no two customer environments are alike. Incremental improvements at one customer site cannot be repeated, standardized or shared with other customers.

In the multi-sourcing model, the primary software vendor partners with other ISVs and systems implementers to meet the customer’s full range of needs. While the primary vendor serves as the single point of contact for all customer service requests/problems, each ISV partner transparently manages its own software, typically from independent locations. With direct customer-provider contact, this solution supports the process of specialization, repeatability, standardization and automation. In fact, an improvement at one customer site can be applied to all users through a universal patch. In this way, cost-performance efficiencies are continuously incorporated into the standard software offering.

In the end, the real savings achieved when you do your job better, faster and cheaper reveal the real costs of software.

Do you have a comment or question about this article or the ASP industry in general? Speak out in the ASP Discussion Forum.

Timothy Chou is president of Oracle Outsourcing. In this capacity he has led the strategic and tactical transformation of Oracle from an offline provider of enterprise business software to a provider of online enterprise-class business services through the Internet. Before joining Oracle, he was the chief operating officer at Reasoning Inc., an IT service provider. Prior to Reasoning he held numerous executive-level positions at Tandem Computers.

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