Speculations abound about whether the software industry is going to move to a new business model of operations. The most common revenue model is software as a product with upfront payment for a perpetual usage. The trend to offer software as a service with payments over time and based on usage is emerging. Economic pressures may make the new model appear attractive for enterprises and software makers - who are seeing the average license sale price falling down, volumes stagnant or going down and a consolidation beginning to happen in the industry.


Value discerning buyers are beginning to demand :
- Lower cost of ownership of software
- Flexibility to change usage commitments as business circumstances change
- Economically appealing business cases
- Quicker rollouts
- Accurately their ongoing expenses with IT budgets being tightened & assessed for better return on investment (ROI).

The increased awareness and mindshare of hosted services like salesforce.com raise the issue as to whether the software-as-a-service model is suitable for other applications. Applications amenable for outsourcing generally look like reasonably fit for being rendered as service. These include HR/Payroll; Procurement, Financial management; Business-to-consumer (B2C), e-commerce/product catalogs including dynamic pricing models, Loyalty management, Marketing & Sales promotions etc. Instead of a software license being sold, implemented and maintained on customer data centers, the software vendor hosts the system on its own computers in its own data center and sells access to the system on a pay per usage model. The vendor may host a separate system for each customer or may choose to host multiple customers on the same instance of the system. Salesforce.com and Oracle have different models of hosting solutions for customers.

Earlier, timesharing provided a solution to address the high cost of hardware. With ballooning software costs,- the problem becomes one of managing the high cost of software. Customers are wary of procuring expensive software products with huge upfront license fees, infrastructure to procure, maintain and manage, along with expensive professional services to get the product up and running. Not all pieces of software can be delivered, but the model certainly is attractive to be considered during any review/purchase time. Globalised businesses like Web-based collaboration, distributed order management (DOM), manufacturing outsourcing are potential applications that can be hosted as service. International trade logistics (ITL) and global trade management (GTM) applications, are amenable to the hosted solution model. The industry is also seeing on-demand product lifecycle management (PLM) solutions, delivered over the Internet as a fairly secure, rapidly deployed service, for a substantially lower total cost of ownership.

As issues of Internet security, privacy, and multivendor products interfaces are addressed, the number of vendors adopting the software-as-a-service business model will begin to grow. The key concern is amenability to extend and customize and keep aligning the software application to changing business needs and processes. The cost associated and conveniences in making this change happen are significant concerns. Using hosted arrangements will also make sense—both as a solution and as a cost reduction exercise—for manufacturers already outsourcing many portions of their manufacturing operations or are having global presence with supply chain operations at different regions. Like any other decision of strategic importance, the choice whether to go for a hosted applications service requires careful thought and a well conducted due diligence. An entirely new set of issues emerge for the organizations to consider including:

- the technical capability of the solution provider to administer the program;
- the solution provider's industry focus; the applications' customizability and extensibility;
- the pricing model chosen, and SLA negotiations.
- These issues need to be addressed simultaneously while evaluating the capabilities of the software package, and understanding whether the offerings differ from the traditional licensed offering.

In the traditional IT budget of customers, close to 75% of their budgets go towards managing installed systems- the residual money available in IT budgets are proving to be inadequate for customers to buy new software. On the customer side, the TCO of business systems is heavily weighted toward on-going support as the license cost is dwarfed by the support cost. The software manufacturer's cost structure generally have a cost structure where research consumes close to 20% - most of this go towards supporting existing components leaving little to invest for attempting new innovations - with the result the pace of innovation slows significantly. The R&D costs, sales costs and maintenance/ support costs come down for the manufacturer in the hosted model. Across the business chain - every aspect of business of traditional software vendors need to be revamped to embrace on demand model. The application architecture, schema, the business model including dealing with channel partners and switching costs for existing customers are major impediments. Overwhelming organizational changes would have to be managed in the transition to on demand model- It is highly unlikely that existing software vendors could manage the transition smoothly. The inexorable economics of the on-demand model forces new ecosystems to be created. Every business - upon achieving industry maturity gets the edge by strategic lead and operational edge - centered around processes powered by robust IT solutions - one size fit all solutions or solutions not convenient to be changed are clear misfits. This leads to the thinking that big or growing businesses may not consider hosted solutions for running their core processes in the near future - both for want of readiness in solutions , poor maturity levels of adoptions including management of services and shall clearly shun the situation of being forced to potentially remain hostage to a seemingly commoditized infrastructure range of solutions. The big spenders like Telco's, Banking and Financial Services, Healthcare, Transportation players may not find hosted solution a natural fit. The business drivers force them to get cutting edge solutions that would improve competitiveness and not necessarily something that looks to have good architecture and seems logical or fashionable. It will take more time to see what percentage of customers will find these software service offerings attractive, change their buying habits and move to annuity contracts. It is also too early to make a conclusive call on whether the software vendors are going be more comfortable with annuity revenue stream not to speak about the hit professional service firms may be forced to take - In all, not a very attractive path lay to embrace software-as-a-service model.


S. Sadagopan, heads consulting and eBusiness for Satyam in the Asia Pacific and African markets based out of Singapore. He has led several consulting and technology transformation engagements covering multiple industries cutting across wide variety of technologies around the world. Sadagopan's blog is also theindiblog award winner of the technology category in the recently concluded indibloggies contest for 2004.