The future of on-demand applications

Although corporate adoption of online software delivery models is still relatively low, it is not only the fastest growing sector of the industry, it is also expanding its remit rapidly.

Although corporate adoption of online software delivery models is still relatively low, it is not only the fastest growing sector of the industry, it is also expanding its remit rapidly.

The concept first appeared in the late 1990s under the guise of application service providers, but quickly died away in the face of a lack of available broadband connections and expensive bandwidth costs.

The situation was also not helped by the fact that most players were small, niche start-ups, backed to the hilt by venture capital money in a world that was starting to hear the first rumblings of the dotcom bust. Or that they had built their offerings with a more traditional client/server computing approach in mind, which meant that much of the software of the time was simply not suitable for users trying to access it remotely over the internet.

Effectively, the market was just not ready for the new model. However, nearly a decade on the situation is very different and this has all changed, to the extent that analyst firm IDC now predicts online software delivery will account for 10% of the enterprise applications market by 2009.

This is not least because the entrance of many of the big names such as SAP and Oracle has lent credibility to the sector, which is known variously as software as a service, on-demand or hosted applications.

But in terms of current adoption and where it is taking place, the picture is still mixed and the market fragmented. According to a survey by research firm Freeform Dynamics, about 20% of mid-sized or large enterprises will evaluate or plan to evaluate software as a service over the next six months, although the figure drops to 10% in the small-to-medium business space.

Such uptake will not necessarily be at an enterprise-wide level, but is more likely to occur on an application-by-application basis.

Tony Lock, a programme director at Freeform Dynamics, says, "Adoption varies from organisation to organisation and is increasing every day, but it is nowhere near mature and pervasive. In terms of industry verticals, the picture is quite mixed and the same is true even within individual companies."

Interestingly, however, he indicates that many corporate IT departments are also starting to adopt a software as a service-type delivery model for their own internal applications, which is blurring things still further.

Nonetheless, what this all equates to is a sector that is growing rapidly. Although Ovum valued the UK service provider market alone to be worth about £254m in 2006, it predicts that this figure will climb to £1.9bn by 2011, a compound annual growth rate of about 35%.

So what is the appeal and where exactly are organisations spending their money? For Michael Ross, chairman and e-commerce advisor at fashion start-up Radcliffe Denim, the key advantage of going down the software as a service route was that introducing key business applications became quick, easy and comparatively inexpensive because it did not require the purchase of the necessary infrastructure or the hiring of IT expertise.

A second draw was that the need for ongoing support and maintenance was removed.

"In the classic world of licensed software, upgrading is always painful and there are significant upfront costs attached. But with software as a service, any additional functionality simply appears if you want it. Another benefit is that you can log on from any computer anywhere in the world, and this is a huge advantage for a globally distributed business," Ross says.

Another advocate of software as a service is Neil Aitken, head of central procurement at First Choice Holidays and Flights. One of the attractions in introducing a customised SAP-based online system to help undertake supplier selection and contract management for him, was that it meant the IT department did not have to reinvent the wheel.

Moreover, "Because we are a multi-site and multinational company, there are a lot of people tapping into the system through a portal from all over the world. There is a two-hour window where suppliers can bid for business, so the need to resolve any issues immediately is paramount, particularly when you are working across different time zones."

This meant that it was crucial to ensure 24x7 support, which would have been difficult for the IT department. It also meant that suppliers would have needed to access the system through the company firewall, which would have caused problems, not least in risk management terms. So, "It was an obvious decision really," says Aitken.

Both Radcliffe Denim and First Choice's use of software as a service appear to fit into what management consultancy McKinsey describes as a second wave of adoption.

In the McKinsey report called Delivering Software as a Service, authors Abhijit Dubey and Dilip Wagle state that first phase has been underway for several years.

The first phase involves companies subscribing to "HR applications such as customer relationship management and payroll and collaboration tools that are not mission-critical, involve relatively low data security and privacy concerns, have a distributed user base, require little integration with on-premise applications and little customisation".

The second stage, however, is centred on "transactions between buyers and suppliers, including procurement, logistics and supply chain management". A third wave, meanwhile, will entail "applications more critical to business such as hosted environments for software development".

But all three manifestations mostly aim to replicate the functionality of applications that have been sold as packaged software and hosted on the customer's site, according to the report.

However, "The next frontier - we might call it software as a service 2.0 - will include new classes of application, which are actually better suited for online delivery and seamlessly integrate with on-premise applications."

In this category, McKinsey lists spam or virus protection-based services, "which are superior to e-mail filters because they stop junk e-mail or harmful viruses before they enter a company's firewall".

Other possible contenders include applications that "perform some kind of data reconciliation, like software that reconciles differing stock keeping units between suppliers and retailers. Such products will increasingly rely on repositories in the cloud".

But David Bradshaw, a principal analyst at research firm Ovum, believes that the whole software as a service concept is morphing in other ways. "We call it a market, but it is not a market in its own right. It is a means of delivering software and it is a business model that can be applied to almost anything," he says.

As a result, a growing number of players are starting to use the model as a means of outsourcing individual business processes - although they do not necessarily call it software as a service.

Examples here include ServiceBench, which provides a web-based post-sale service management offering, and credit reference agency Experian. "When you take Experian's credit reference data, but want to analyse it more effectively for fraud activity perhaps, it will send you tools in the form of software as a service so that you can do just that," Bradshaw says.

One organisation that is taking advantage of just this type of service, meanwhile, is Jewson, which sells timber and building products to both the trade and general public.

Last year, the organisation's St Gobain Building Distribution division started using Wesupply.com's electronic trading service, which is based on IBM technology, to automate its supplier ordering processes as part of a bid to improve efficiency.

Stephen Bacon, supply chain director at Jewson, says: "In the very early days, it was about ensuring purchase orders, and acknowledgements were able to go backwards and forwards electronically in a seamless way. But we have since added reporting capabilities so that we can look at the stats to measure both suppliers' and our performance."

This means that the firm can now sit down with its suppliers and work through any issues that might exist because the system provides an extra window of visibility to joint activities. Jewson expects to complete roll out of the service to about 300 of its suppliers by the end of the year.

But Bradshaw does not expect usage of software as a service to stop there either. "My conjecture is that it will invade other relatively standard service areas such as accounting. There is the potential in future for businesses to be provided with a URL to enter their expenses, staff payments and the like and to receive reports online.

"Exceptions would be flagged up and accountants would get back to their customers on the phone, but it would essentially be about online service delivery."

Bradshaw describes this as "services as a service, using software as part of the delivery process" - a phenomenon that he believes has the potential to be highly disruptive to existing business models.

"This could well disrupt business service markets as it allows a greater degree of automation and interaction by enabling people to collaborate more effectively using software as a service," Bradshaw says.

But this does not mean to say that software as a service is destined to take over the world any time soon, although it is likely to become progressively important.

As Lock concludes, "For the foreseeable future, there will still be a lot of on-premise software around. Software as a service adoption will be progressive, but organisations always have to do what is best for the business.

"So, for some applications, it may make more sense to keep them in-house, while for others software as a service will be the answer. Although over time, I suspect that the latter will become the main way in which IT services are delivered."

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