On-demand is in demand

6 Mar 2006

The technology sector is famous for its acronyms and at the height of the dotcom boom at the turn of the millennium none was more famous than ASP (application service provider). This referred to a new way of delivering software — not as just another application sitting on the user’s desktop but as a service over the internet.

For various reasons, the model never took off. For a start, the broadband revolution that was needed to enable this was slow to arrive. Also, businesses were generally comfortable with their traditional way of using software and were slow to embrace something that was radically different and largely unproven. The result was that many of the ASPs — the companies that were going to deliver software in this way — withered away.

Now ASP is back on the agenda, except these days it’s known as on-demand computing. “A lot of industries are getting back into it in a serious way,” says Jason O’Conaill, sales director of Servecentric, a data centre operator based in Blanchardstown, whose facility provides data-hosting services for the Irish subsidiaries of US multinationals, among other clients.

O’Conaill believes the ASP model was let down by the lack of broadband coverage and the high cost of bandwidth but with broadband now more ubiquitous and affordable, it is suddenly a good option again. “Five years ago, bandwidth cost €1,000 per meg [megabit per second]; now it costs €150. This is one of the reasons on-demand computing is a much more viable option now. Also, I think more people just ‘get’ it now.”

Gary Keogh, managing director of telco Colt Ireland, which offers a range of managed services, says such services are taking off because businesses “want to be free from the complexities of managing IT projects, from business continuity and disaster recovery to data storage and routine desktop services”.

Eamonn McQuaid, national manager for technology services at Computer Associates, says on-demand computing offers a number of benefits over the traditional own-your-own-infrastructure type. “Firstly, simplification of management: 80pc of IT budgets go into maintenance and administration of existing IT systems. On-demand simplifies management, reduces the resources required for management and makes the whole process more efficient.

“Second, the creation of a real-time infrastructure: self-managing and self-healing infrastructures deliver increased efficiency and better resource utilisation. Third, utilisation: virtualisation and provisioning enables better utilisation of software, hardware and people resources. Finally, it allows better alignment of IT with the business: the benefits here can be improved responsiveness to market demand or reduced risk in terms of IT meeting requirements for regulatory compliance.”

He adds: “The good news is that because on-demand is not an on or off state, the benefits are received incrementally as complexity is reduced and management of IT improves.”

All the computer heavyweights from IBM and HP down are pushing on-demand as the flexible and cost-efficient way to manage everything from server capacity to IT security. But, as in the old ASP days, the concept is also being applied to software and CRM is the area in which it has been growing fastest.

The company that has become almost synonymous with on-demand CRM is Salesforce.com. Established in 1999 by former Oracle executive Marc Benioff, Salesforce has grown to become one of the software success stories of the decade. It’s not hard to see why. Its selling proposition is as persuasive as it is simple: instead of buying CRM for your organisation why not access it over the internet for a monthly per-user fee?

Salesforce.com hosts the software in its data centres and conducts software upgrades centrally, thereby circumventing the tiresome and costly desk-to-desk installation that clients would otherwise have to go through. Customers have no hardware, implementation or management issues — all they have to do is click on their web browser and their customer information is there. Salesforce.com CRM starts at US$65 (€55) per user, per month or US$995 (€834) for its five-user/one-year Team Edition.

While Salesforce.com has dominated the on-demand CRM market (despite the launch of competing products from Oracle, Siebel and Microsoft) the competitive landscape changed radically earlier this month when German business applications giant SAP — one of the biggest CRM vendors in the world — launched an on-demand version of its mySAP CRM.

Aimed at large and midsize organisations, SAP CRM on demand is delivered over the internet, via a subscription-based licensing model. In a press statement SAP said it had “created the first hybrid CRM solution that transcends on-demand and on-premise, while integrating with core enterprise solutions in both deployment models”. Translated, this means SAP customers can choose either to do CRM in the traditional way or the on-demand way.

“The reason we got into this is that our customer base wanted it,” explains Phil Codd, country manager for SAP Ireland. “They wanted us to provide them with some options, particularly with CRM.”

What was particularly important from the customer perspective, says Codd, was the ability to integrate the on-demand product with the customer’s existing SAP enterprise resource planning systems that run internal processes. “From a process point of view CRM is relatively easy to define and understand but what was lacking in the market was a way of linking on-demand services with their own organisational systems — how to link sales force automation with their manufacturing forecasting environment, how to link order-taking with invoicing and all the back-end processes. That was the big problem.”

There are to be three versions of the product. Available now is SAP CRM Sales, which looks after the sales force automation (SFA) aspect of CRM. Two further modules are to follow in the coming months: CRM Marketing, focusing primarily on campaign management; and CRM Services, which is aimed at field service engineers who need to be able to manage customer callout lists while on the move. Prices for SAP CRM on-demand start at US$75 (€63) per user per month, with discounts planned for customers that buy more than one module.

Codd says it will take around 12 months for all three versions to be available in Ireland. The focus initially will be on large and midsize organisations and tailoring the software to particular industry sectors. After that, the company will look at how to best package the software to smaller businesses with fewer users.

How did Salesforce.com react? In characteristically media-savvy fashion, Benioff pre-empted the SAP launch by circulating a memo — ostensibly to staff but which was circulated widely to journalists as well — in which he derided his rival for its delay in launching an on-demand CRM product. He also predicted that the new product would cannibalise revenues from SAP’s established on-site version of the product, which spawns lucrative maintenance contracts. “Can they actually afford to convert their billions of dollars in maintenance revenue into subscriptions?” he asked incredulously. “This classic innovator’s dilemma engenders painful internal rifts and wastes valuable time while customers’ needs languish.”

Codd insists that the on-demand model will not hurt SAP’s revenues because the CRM software used by SAP’s existing users — which include Glanbia and Irish Distillers — is highly configured and caters for their own particular organisations. These companies would be “unlikely” to want to use an out-of-the-box on-demand solution, while the companies that will be attracted to the new products are those that don’t currently have a CRM system in place, he says.

He adds that if SAP was slow to market with its on-demand offering, it was with good reason. “It’s to do with the maturity of the market. People’s trust in on-demand services was very low in the past. It’s only in the past two years that people have begun to trust the model.”

He feels it would have been premature, too, to launch an on-demand CRM product for SFA five years ago because wireless networks were not as ubiquitous as they are today and therefore users could not have accessed the information they needed while on the move, making the system much less effective.

Although Salesforce.com has clearly stolen a march in the on-demand area, SAP believes its on-demand product holds a couple of notable advantages over its rival’s. For a start, the ease with which it can integrate with SAP’s back-end systems — providing the complete end-to-end integration that many organisations strive for. Next, it is a hybrid solution and so gives customers a choice: on-site or on-demand. In fact, it’s no secret that SAP views its on-demand offering as a stepping stone to the on-site version. In other words, customers that are new to CRM will try the on-demand side first and then graduate on to the on-site version, which can be more finely tailored to the needs of their organisation.

Of course, Salesforce.com argues that organisations don’t need an on-site version at all — they can do it all over the internet, and more cheaply too. According to Chris Boorman, vice-president of marketing for Salesforce.com, the proof of the pudding is that companies of all sizes use its products. “We started out focusing on SMEs it’s true but we’ve broadened out into large enterprises as well. The range of big companies using our software now includes Misys, Nortel and Prudential.”

Salesforce.com’s vision is that on-demand will become the standard way of delivering and using software of all types, not just CRM. To further this ambition, it recently launched a new service called AppExchange, which Boorman describes as an online marketplace for application development and trading. Using AppExchange, companies will be able to build their own on-demand applications and then either use them themselves or sell them to other firms.

He argues that many businesses have grown frustrated with the whole client/server model because it means having to run their own IT infrastructure. Not only that, they have been getting bogged down in complex and costly software implementations that drain resources and slow down their businesses.

The Saleforce.com model is popular because it has been proven to be a better way to deliver business services, argues Boorman, who says the company represents a new type of ASP — “the second wave we call it, where the technology is maturing and there is a proven business model.”

Asked whether SAP poses a threat to Salesforce, he responds that SAP has more to worry about. “It is trying to mix two different business models. We saw Siebel become unstuck by trying to do the same.” (Siebel, once the world’s largest dedicated CRM provider, was acquired by Oracle after unsuccessfully launching an on-demand version of its CRM software.)

Is SAP’s launch of an on-demand CRM product a defensive manoeuvre against the growing threat presented by Salesforce.com or simply a result of its conviction that the market is finally mature enough to make this product really viable? The likely answer is a bit of both. One thing is clear though: for the first time, thousands of large SAP customers worldwide who hadn’t given the on-demand option serious consideration before will now be doing so. If they adopt it in large numbers, the tarnished ASP dream of the dotcom era will finally have come true.

By Brian Skelly