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On-Demand Application Solutions Are a Disruptive Technology
To capture more SMB and mid-market enterprise wallet share, some upstart application vendors are offering viable alternative delivery and pricing models that provide end users with enterprise-level capabilities they can implement rapidly and more affordably without additional IT infrastructure or staff. A careful investigation of the various options can lead to a significantly better TCO for deploying a business application solution.
It's imperative for enterprises to understand how on-demand solutions are changing the IT landscape in SMBs and mid-market enterprises. In his book, The Innovator's Dilemma, Clayton Christensen describes disruptive technologies in the following way: most technologies are "sustaining," in that they incrementally improve the price or performance of a particular product or service over time. But disruptive technologies dramatically reduce the price or performance of a particular product or service and create a new path. These disruptive technologies are pernicious because most vendors that are sustaining their products or services can't immediately adopt the new path since it changes their whole economic model.
The on-demand applications delivery model propagated by vendors such as Salesforce.com and NetSuite can disrupt giants such as Siebel, as seen in its recent financial results. Siebel now offers Siebel CRM OnDemand, which targets the IT-constrained mid-market enterprises.
As described in the May 2005 DecisionNote, Appeal for On-Demand Solutions Is Expanding, almost 50% of medium businesses and mid-market enterprises want on-demand solutions for accounting/finance, CRM, inventory management, merchant services and CRM.
What Does the TCO for the On-Demand Model Include?
The TCO for on-demand models should include the following 3- to 5-year costs for functionally similar solutions: - Subscription costs versus license costs for an equivalent number of users - Application support and maintenance costs - Implementation and customization costs - Host server computers, storage and maintenance costs - Internet access costs - End-user technical support costs - End-user IT support personnel requirements - User training costs
According to Larry Kennedy from New England-based Intente, a NetSuite partner, "Care and feeding costs are where on-demand solutions have gained a significant total cost of ownership advantage over traditional on-premises licensed software. By reducing implementation, hardware, data center and people-related costs, on-demand solutions like NetSuite offer a lower TCO than licensed software solutions. Further, NetSuite's integrated solution covers both front- and back-office application areas and is much easier to use and efficient compared to several applications that have to be integrated." By eliminating the expensive support costs, mid-market enterprises benefit from a lower TCO with an on-demand solution. In addition, the overall value provided by on-demand solutions is significantly higher when you include the IT infrastructure and services infrastructure that is behind the on-demand solutions. SMBs and mid-market users can't replicate this value even with a significantly higher investment.
Exhibit 3 shows similar details for 100 users at a mid-market company. The TCO for Best Software is about 1.25 times that for NetSuite because the Best Software license costs are amortized over a much larger number of users and the infrastructure and support resources are similar to the 20-user case.
A more detailed TCO analysis should include company growth projections and a comparison of the overall value of the on-demand solution as compared to on-premises solutions. As the number of users increases, IT infrastructure and IT support costs may not increase proportionally. Also, if the application vendor has user block pricing, where the price per user drops significantly as the number of users significantly increases, the on-premises solutions could yield a lower TCO during a 3- to 5-year period.
Advantages of On-Demand Solutions
On-demand solutions include implementation, maintenance, training, support and application management services delivered by the application vendor directly and may be augmented by a channel partner that provides integration and customization services and on-site hand-holding to enable a quick and productive ramp-up. The end user accesses the applications through a web browser and pays a monthly per-user cost. Some vendors offer a hosted solution in partnership with a VAR with a disguised monthly subscription fee that includes license, maintenance, and implementation and customization charges, and at the end of the term, customers own the application licenses?more like a financed on-premises solution.
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