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Leveraging Technology to Maintain a Competitive Edge During Tough Economic Times -- A Panel Discussion Analyzed Part Three: Applications Hosting

Written By: Predrag Jakovljevic
Published On: May 19 2004

Introduction

At the IFS Executive Forum, which took place on March 29 and 30 in Orlando, Florida (US), leading research analysts and industry experts discussed how companies can still leverage technology to maintain their competitive edge, even during tough economic times. The event was held in conjunction with IFS World Conference 2004, and it included six panel discussions, with each panel including top executives, analysts, and journalists. Some of the renowned panelists were Geoff Dodge, vice president, Business Week; Dave Caruso, senior vice president, AMR Research; Barry Wilderman, vice president, Meta Group; Leo Quinn, vice president of operations, Global Manufacturing Solutions, Rockwell Automation; Dave Brousell, editor-in-chief, Managing Automation; David Berger, Western Management Consultants; and Josh Greenbaum, principal, Enterprise Applications Consulting. Breakout sessions explored such topics as turning global competitive threats into opportunities, increasing the bottom line through operational efficiency, complying with the Sarbanes-Oxley Act of 2002, and using enterprise software to prepare for future challenges.

Technology Evaluation Centers (TEC) was represented at the executive panel titled "The Future of Enterprise Software and How It Impacts Your Profitability", which was aimed at helping companies find out where enterprise software is going in the next five years, and how it can make or break their profitability and market share. The panel, which was moderated by Josh Greenbaum, included the following participants: Barry Wilderman; Peggy Smedley, president and editorial director; Start Magazine; Dave Turbide, an independent consultant and renowned columnist for magazines such as The Manufacturing Systems; and Predrag Jakovljevic, research director, TEC. In preparation for the event, we polled the thoughts and opinions of our experts and contributors: Olin Thompson, Jim Brown, Joseph Strub, Kevin Ramesan, and Lou Talarico, given they were unable to attend the event in person.

Below are the questions and consolidated thoughts and answers that transpired from the panel discussion. We also took the liberty to expand with a few pertinent questions and thoughts that were not discussed at the panel per se (due to the time limit), but transpired from many other interactions and presentations at the conference. Also, some pertinent articles published previously on our site, which may shed more light at the respective topic are mentioned as further recommended readings.

The questions are

Q1. What is the one piece of new software or technology that will be a must-have in the next five years? (see Part One)

Q2. Some pundits say the future of enterprise software lies in service-oriented architectures and component applications. True? False? (see Part One)

Q3. How does the development of new business processes and business process modeling fit in? (see Part Two)

Q4. What are applications hosting and other service models? (see Part Three)

Q5. Radio frequency identification (RFID) is on everyone's mind these days. Let's discuss the software issues around RFID and what kind of software solutions will be taking advantage of RFID. (see Part Four)

Q6. Technology aside for a moment, what can we say about its impact on profitability? (see Part Five)

Q7. With all this new technology, the question is what happens to existing applications and technology. Nobody wants to start over, but how much will existing IT systems have to change? (see Part Five)

Q8. Will the newest and greatest only come from packaged software? What about custom development? What is the build versus buy equation look like in the near future? (see Part Six)

Q9. How will the latest improvements in software flexibility and agility play in the single-vendor versus multi-vendor solution equation at multi-division corporations? (see Part Six)

This is Part Three of a multi-part trend note.

Each of the parts covers questions and answers addressed by the panel.

Questions and Answers (continued)

Q4. What are applications hosting and other service models?

A4: Applications hosting is a model where another company runs the software for a user company, which may or may not own the software license. The hosting party could be the vendor, or some third party, often called an applications service provider (ASP). The value proposition is that some user companies prefer to outsource or pass the customary complexity of maintaining the enterprise application in-house onto these specialized providers. Often, hosted applications can be purchased on a "rental" basis instead of buying the software license by paying a subscription price per user per month. This model might be compelling because it has lower entry costs, and if the company is not realizing value from the software, it can always stop using it (and stop paying for it). Almost all of the initial hosted applications have been targeted at small and medium businesses.

The latest idea, however, is the utility (OnDemand) computing, sometimes referred to as "grid" computing as well, a trend that has captured the attention of technology heavyweights including IBM, Hewlett-Packard, Oracle, and Sun Microsystems, which is to allow customers to purchase processing power and access software as it is needed, much as they do with electricity, telephone or water. This still morphing and emerging model might be attractive to large organizations as well.

However, most of the first-generation hosted applications were not suitable for delivery over the Internet and certainly not appropriate for the small and medium-sized businesses for which the ASP model was regarded as being the most appropriate. Lately though, the difficult economy has created a situation where customers, particularly those with multiple dispersed locations worldwide, seem to prefer the subscription model, as capital budgets have been slashed, and everyone would prefer to avoid one up-front lump payment instead stretching it over a prolonged period of time. Although the move from software as a standalone, or pre-packaged, solution to software as a service will not happen overnight, because of the unsustainable financial model of many early ASPs and many past hosting snafus, in a few year's time, gigantic IT providers such as IBM, EDS, Microsoft, Oracle, Accenture and the like will likely be competing in the ASPs market. This will thereby give hosting another fresh breath of air. Also, the mindset of the users has changed significantly over the yeas, so that certain operations like taxation of some big multinational organizations are nowadays being increasingly processed by third party companies.

Those ASPs that have meanwhile positively thrived have done so by first focusing on one or two core areas, such as sales force automation (SFA); e-mail; HR and payroll or financial software, and by offering only their own software, written from ground up entirely to an Internet-based architecture, and running on shared servers to minimize costs. In addition to deployment flexibility (i.e., a possibility of selecting which individual applications will be run on premises or hosted), the advantage is when the vendor is an ASP as well. While many vendors also provide a hosting alternative, they have to do it through third ASP parties, which often may mean some additional licensing or implementation and service and support intricacies to the end user. This could make winning difference to some customers who prefer to deal solely with one vendor. As to solve the problem of integrating to existing legacy applications, vendors and ASPs have also been looking to Web services, but it will be some time before the above-described technology is mature enough to be able to replace the traditional pesky message brokers and integration hubs that major companies depend on, but which are still the better solution for high-volume processing than Web services.

Further, in addition to improvements in security and reduced prices of bandwidth that bode well for hosting adoption, ASP software nowadays finally looks and feels more like traditional "rich UI" client/server applications because of the use of tools like JavaScript to provide error-checking and validation at the client side and, possibly even more important, the development of dynamic Hyper Text Markup Language (DHTML). DHTML, which allows Web content to change each time it is viewed (by enabling a Web page to react to user input without sending requests to the Web server). This, in particular, has introduced a degree of interactivity to web-based applications that was simply not possible a few years ago when users were either forced to fill in and submit cumbersome HTML forms, or they had to run additional thin client software, such as Citrix MetaFrame, on their desktops. Neither of these approaches has been satisfactory and, while thin client software had seemingly promised a good solution, it still had a number of shortcomings.

First, it increased costs because the software had to be licensed on a per user basis, often causing the cost of the Citrix MetaFrame license to account for more than half of the less-than-enticing monthly fee. Second, that approach was slow and increased the load on the network at a time when bandwidth was at a premium price, because the screen was effectively being "rendered" miles away from where the user was actually located. Finally, users still had to run and maintain the proprietary thin client software on their desktops, defeating the object of running server-centric, web-based software and, therefore, not cutting costs by as much as originally promised.

Outsourcing Advantages and Disadvantages

Outsourcing Advantages:

  • Predictable, fixed cost for a customer.

  • Reduced setup and configuration time, and greater operational simplicity.

  • All upgrades applied to ASP site based servers. No need for client or desktop upgrades.

  • Limited funds required for initial startup.

  • Reduced need for internal IT support.

  • Enterprise package maintenance performed automatically by external experts.

Outsourcing Disadvantages:

  • Outsourcing is still nascent, with customers being early adopters.

  • Potential security risk, since customers' confidential and mission-critical data reside at the ASP's location.

  • Becomes more costly over a long run, especially with declining traditional software license fees.

  • Offers little or no support for software modifications or customizations and integration to key legacy systems.

  • Decreased control over infrastructure and deployment.

  • Limited to direct access points for your ASP or need for secondary Internet access account depending on users mobility plans.

  • Little to no control over hardware and software upgrades.

  • Support costs are essentially negated and a monthly per user charge is assumed.

User Recommendations

Still, the following types of enterprises should consider using ASP services:

  • Those with limited investment capital and those that do not have an IT department.

  • Those that do not anticipate a high rate of change in the way they do business.

  • Those investing in an application to streamline costs rather than to enhance revenue.

  • Those that can jettison most of the organization's aged legacy infrastructure.

  • Those that lack resources for the rapid implementation of a distinct project that possibly does not require complex integration with existing applications (e.g., HR and payroll administration, e-mail, etc.).

Despite bad perceptions of the largely ill-fated first generation of hosted providers, and owing to the positive news that some vendors like Oracle, Salesforce.com, ACCPAC or NetSuite have lately gained from outsourcing, mid-market enterprises might benefit from objectively evaluating the value propositions represented in successful next-generation ASPs. Look for the following characteristics amongst the ASP candidate providers:

  • Amenability to reasonable customization and interfacing to legacy systems

  • Service-oriented architectures (SOAs), Internet-based architecture, and standards-based interfaces

  • Support for specific vertical industries or business processes

  • Hybrid services that can coexist with on-site systems

  • Sound policies for privacy and security

  • A sound track record of service-level agreement (SLA) maintenance at originally quoted price levels and a quick ROI

  • Sound financial viability and geographic coverage

  • The ability to track and provide key metrics for application and network availability.

For more information, see the following recommended readings: Hosting Horrors!

This concludes Part Three of a multipart trend note.

Each of the parts covers questions and answers addressed by the panel.

 
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