Sarika Patel, National Head of Technology Grant Thornton
The latest generation of 'hosted services' provides a new way of delivering business software over the internet, freeing customers from the hassle of managing their own applications. But is it right for everyone?
While the likes of MySpace and YouTube have been grabbing headlines in the consumer-oriented Web 2.0 world, online services for businesses have also been rapidly expanding. Delivered over the web, they represent a threat to traditional methods of providing software but, as a relatively new business model, they also carry their own risks for providers.
Sometimes billed as Office 2.0 or Enterprise 2.0, this new breed of business service builds on the work of the Application Service Providers (ASPs) that emerged in the internet boom years of the late 1990s. Based on the concept of software as a service (SaaS), it's a form of software outsourcing where providers manage applications and data at their own sites. Users simply access the services over the internet through a standard web browser.
Early providers faced a number of technical issues. Some struggled to redevelop traditional software products for the new web-based delivery model, and many were hampered by the relatively low penetration of broadband, which made it harder for customers to access services over the internet. Today, however, with organisations such as Salesforce.com pioneering the SaaS model in the customer management arena it's becoming established as a trusted delivery mechanism. Traditional software giants such as Oracle, SAP and Microsoft now offer their own hosted services, alongside a broad range of start-ups operating across the software spectrum. "As a result", says Richard Joyce, Senior Manager in the Operations team at Grant Thornton, "many more organisations are now prepared to consider the option when they review their existing systems or go through other organisational changes. We believe that this market will build on the success and acceptance of 2.0 in the social space and offer a real alternative for consideration in the enterprise area".
In theory, the model offers a lot of benefits for customers over traditional software purchasing techniques. For one thing, it takes away the hassle of installing and maintaining systems in-house and reduces customers' IT overhead. As Richard points out, this means that organisations can probably get away with lower investments in infrastructure and resources in IT because their architecture complexity is reduced.
"In addition", says Phil Wainewright, CEO of strategic consultancy Procullux Ventures, "services are usually quicker to implement than traditional applications". As it's all webbased, customers don't have to install and maintain client software on huge numbers of desktops and laptops. There's also less training involved as most people are now familiar with web browsers.
There are also potential financial benefits. Users no longer have to pay a large upfront fee for a software license followed by annual maintenance fees of upwards of 20%. Instead, the software is usually paid for on a monthly, per-user basis (although some companies ask for several months' up-front commitment).
Nevertheless, there are still risks. Security issues are an inevitable concern, although the growing number of companies committing to hosted services suggests that these fears can be overcome. Many customers also worry about internet connections going down – in response, service providers tend to compare their uptime against traditional data centre outages. And there are data and process integration implications – the more service providers you work with, the more likely it is that you will need to spend time tying different services together.
There are also issues for service providers. Firstly, customers don't always compare like with like when they look at the business case, forgetting to include hidden fees such as IT staffing costs when they add up their existing costs. Without a thorough analysis, the business case for SaaS won't always stack up.
Secondly, quite a few applications are now being offered for free. Google, for example, provides basic desktop applications including word processing, spreadsheets and email. Consequently, service providers need to find a niche where their expertise has definable value.
Above all, the economics are very different from the traditional software business model. With the big up-front license fee now removed, software providers find themselves facing the same up-front development costs, but with the return staggered over a longer period. That has clear implications for the way that ventures are financed.
None of this implies that the current generation of SaaS services will face the same fate as the early ASPs, of course – today's market is clearly far more ready for the model. What it does mean is that in the rush to join the Office 2.0 movement, companies need to keep in mind basic business principles, which will still determine the winners and losers.
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