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A Winning Combination: Software-as-Services Plus Business Consulting and Process Services
By Laurie McCabe
January 30, 2004

by Michael Topolovac, CEO of Arena Solutions

There is a new controversy brewing in the software industry: “On-Demand Software vs. Fake Free Hosting.” The controversy deals with a growing number of client/server application companies trying to change themselves into on-demand software companies by hosting their applications on the Web. But the problem with these companies is that both their software architecture and business model are too different to deliver on the value proposition of “true” on-demand software.

I call this technique “fake free hosting” — the software industry’s version of “fake free checking” — because it reminds us of those deceptive free checking accounts that some banks offer, while attaching hidden charges and fine print exceptions that result in costly surprises for customers.

True on-demand software is designed from the ground-up to be delivered as a service over the web and provides tremendous customer benefits in terms of lower cost, risk of implementation and ownership, and higher ROI.

Enterprise client/server software has never been known for its affordability, speed of implementation or low risk deployment. Every company has a horror story about expensive client/server implementations that took too long, cost too much and delivered too little value.

The client/server enterprise software buying of the late 1990s only magnified the pitfalls and unmet promises, resulting in added disappointment and financial upheaval. Because of growing customer frustration with client/server software and innovative Internet technologies, a new model in enterprise software was born, called “On-Demand.”

Over the past couple of years, enterprise customers have begun to embrace the on-demand business model, which delivers software as a service over the Internet. Unlike many client/server applications, on-demand solutions offer substantially lower risk and higher ROI.

Specifically, on-demand solutions provide:

  • Instantly available applications without lengthy or costly implementation
  • No expensive software or hardware to buy and no need for IT staff to manage it
  • A new pay-as-you-go business model
  • A solution that is automatically upgraded, ending software obsolescence
  • A world-class infrastructure with high security, excellent uptime, robust data backup and global access.

Led by fast-growing companies like Arena Solutions, Salesforce.com, RightNow and NetSuite, this new on-demand movement represents an important business model in software development. The delivery model allows the vendor to dedicate a much higher percentage of R&D; to actually developing new features, rather than writing code for multiple platforms and configurations, allowing the software to get better faster.

On-demand creates a business model that is more profitable for the vendor and more cost-effective and predictable for the customer. Perhaps that’s why recent IPOs by on-demand companies such as SalesForce.com and RightNow have achieved such success in an otherwise sluggish market.

What Buyers Need to Know
True on-demand software vendors have built their applications entirely on the web and run them on highly secure and available financial services-grade infrastructures with local and off-site redundancy. By comparison, hosted client/server applications are typically implemented on inferior infrastructures with multiple single points of failure.

By employing a common infrastructure, true on-demand vendors are able to make very large IT investments to provide a massively scalable, extremely secure, and highly available (through multiple levels of redundancy) service. Client/server technology, on the other hand, inherently requires dedicated infrastructure for each installation.

As a consequence, it is not financially viable to provide each hosted client/server application with the same IT infrastructure, which means the solution is constrained to an inferior system with multiple single points of failure and marginal security protections. As a result, security and quality of service to customers are generally compromised.

Because on-demand vendors leverage a common infrastructure and manage only one instance of the software code, they have a huge advantage in the speed with which they can innovate. All development resources focus on evolving the functionality of the core application, resulting in ongoing rapid, responsive and high-value software releases. Hosted client/server vendors are slow to innovate because they are burdened with the overhead of managing upgrades for multiple configurations, versions, and customer requirements.

On-demand software also offers unmatched speed in identifying and fixing software bugs and problems. Fixes are immediately available to the entire customer base, with no need for downloadable patches that may or may not be implemented properly.

Because client/server vendors must maintain multiple versions of the software compatible with different software and hardware infrastructure environments, their customers continue to suffer from the same reliability issues as ever, with slower time to fixes and continual patch requirements.

Furthermore, a hosted client/server application is frequently a stripped down version of the full application and as such is managed as a separate version of the code detached from the company’s core product development. This version is then maintained with minimal investment and often has quality problems and little or no feature innovation. True on-demand software deployment comprises the sole focus of a vendor’s development efforts.

Hosting a client/server application does not change vendor economics. Client/server vendors will continue to suffer from a much higher cost of business, including higher development, customer support and sales costs. Those costs will always be passed on to the customer. On-demand is an intrinsically more economically viable business model.

If we return to the recent history of the late 1990’s, it’s easy to realize that “fake free hosting” is not a “new idea”. It’s exactly the failed ASP business model of the Internet-bubble days. We all remember the billions of dollars lost in the attempt to take old client/server software technology, host it in an offsite data-center, make it accessible over the web, and make money in the process. It didn’t work then for the reasons described above, and it will not work now. Nothing has changed in the fundamentals of this approach.

The general idea behind the old ASP model — to make enterprise software applications available over the Web — is still a good one. However, making that model successful requires a fundamentally new technology platform and business model, which the true on-demand vendors employ.

The fundamental difference between true built-on-the-web, on-demand applications and hosted client/server represent a major story for today’s software industry and its customers.

About the Author
Michael Topolovac has served as CEO of Arena Solutions since founding the company in 2000. He has successfully guided the company through one of the most challenging economic times ever for the manufacturing and enterprise software industries. Topolovac’s vision to deliver cost-effective, enterprise-class PLM to manufacturers and their global supply chains — by using a web-native software architecture to leverage the universal accessibility of the Internet –continues to be the driving force behind the company.


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