Letting someone else run your applications can pay dividends - but only under the right conditions
Online applications | In northern spring of 2002, the 13-person IT department at Keller Williams Realty built an online event registration system so that real estate agents could sign up for training and seminars offered by the company. The system cost $US180,000 to create (not an insignificant sum for an IT department with a budget in the low millions), consumed the time and labour of one-third of the department for five months, and has cost the company approximately $US50,000 to maintain over the course of the system's life.
Today, Keller Williams is thinking about replacing this home-grown registration system with one developed and hosted by Cvent. Jack Miller, Keller Williams's software development manager, says that despite his staff's skills, the hosted system - at least in initial tests - is far better than anything he and his colleagues could create. Plus the trial system was up and running within weeks. Best yet, if the trials pan out, the Cvent system will cost a fraction of what it cost to deploy and maintain the old system. Keller Williams will pay only a small transactional fee each time an agent registers for an event. (Miller estimates the system will process more than 20,000 registrations per year.)
Aside from the cost advantages and quick deployment time, Keller Williams may also switch to Cvent's hosted solution because of the vendor's expertise in dealing with event registration. "We're a real estate company," says Miller. "We don't know anything about the world of events," he says.
Hosted applications work well for Keller Williams (which is also getting hosted online collaboration tools for each of its 360 real estate offices from Intranets.com) because the realtor does not have the IT infrastructure, manpower nor budget to either build its own applications or maintain third-party software. But hosted software isn't only for companies with small IT departments. Many multibillion-dollar organizations, such as Qantas Airways and Unilever, are turning to hosted software and systems for the same cost savings and convenience - except on a larger scale. They, too, want to save money, deploy quickly and concentrate their IT staffs on the most strategic projects with the highest business value. And while some analysts and IT executives argue that the cost advantages of the hosted model will often be a wash after three to five years, companies such as Unilever are still attracted to the idea of a low up-front investment and a predictable expense stream.
At a time when companies are still playing it safe, CIOs are addressing users' IT demands by finding service providers that will host, maintain, and upgrade applications and systems for them. The arrangement usually involves a monthly or transactional fee, and is commonly known as "hosting" or "software as a service" (or, in the dotcom era, "application service providers" - a name with such bad overtones that it rarely gets used these days). In a survey published by Summit Strategies in May 2004, 31 percent of respondents with more than 1000 employees said they currently use software as a service, with an additional 11 percent saying they were in the process of evaluating software-as-a-service offerings.
While hosting can be a very attractive option, it's not right for every company, nor do all applications lend themselves to delivery over the Internet. The following examples illustrate where hosted applications work, where they don't and the reasons why.
When Apps Are Immature
When Unilever decided to replace its transportation management system (which calculates transit times, determines how orders should be shipped, selects carriers and tracks shipments from order through delivery), the first decision the company had to make was whether to move to a hosted system or to buy and install software. It chose hosting.
The total value proposition - including speed to implementation and functionality - was a major factor in Unilever's decision to use LeanLogistics' hosted system, according to Roch Boucher, IT director for supply chain at the $US53 billion consumer packaged goods company. Boucher says he expects the transportation management space will undergo significant changes during the next three years, and "we expect that any system - whether hosted or off-the-shelf - will require frequent upgrades".
If Boucher had deployed a transportation management system in-house, his staff would have been responsible for administering upgrades, enhancements and patches. In the hosted model, the vendor handles such time-consuming tasks behind the scenes. And the associated costs are built in to the subscription fee, instead of popping up as unexpected expenses.
"If you're purchasing a system where there are going to be rapid changes and rapid functionality enhancements because that application area is not mature, it may be worth buying the ability to keep on the forefront of those changes," says Boucher.
When Automating for the First Time
Tama Olver, vice president and CIO of life sciences company Applera, thinks software as a service works best for straightforward applications that serve standard business processes such as payroll, expense report management and travel. She also notes that she's had the most success using software as a service when automating business processes for the first time because there are no legacy processes to replace. "Moving from one automated process to another might require a lot of re-engineering," says Olver.
When replacing an existing capability, the legacy capability is often integrated with existing systems and processes, which increases the difficulty of change management, she adds. "In my experience, software as a service requires that the company adopt a pre-existing process that may be very different from the legacy process in place."
Applera is using hosted software from Concur Technologies to automate its expense reporting and reimbursement process, and is using a hosted online travel booking system from GetThere. Since Applera began using Concur's Expense Service software in November 2003, the company has reduced the number of employees processing paper expense reports from seven people to just one full-timer and one part-timer. The five employees who previously pushed paper now work in accounts payable. And because so many employees are now using the online travel booking system, Applera has been able to reduce its number of in-house travel agents from nine to four.
Olver says the deployments of these applications were painless because the software is so easy to use and the Web interfaces so intuitive. Because software as a service is often geared toward business users, the interfaces have to be easy to grasp quickly, says Olver.
"In every case where I've had real success buying services this way, I've been automating a process for the first time," she says.
When the System Has Become Commoditized
There was a time when the IT department at Qantas, the Aussie airline, did everything up to and including building its own computers. The role of the IT department started to change four years ago when the airline decided to outsource what used to be one of the most important pieces of its IT infrastructure, its reservation system, to Amadeus Global Travel, a technology services provider for the travel industry.
Forty years ago, reservation systems provided airlines with a competitive advantage, says Fiona Balfour, CIO of Qantas. But as the technology for reservation systems matured and became less expensive, every airline eventually had essentially the same reservation system, and there was no longer any competitive advantage - only additional costs. Qantas reasoned that if it could use a hosted reservation system, it could save a lot of money, especially if other airlines used the same system and infrastructure, thus giving the provider the economies of scale that would let it offer the service at a lower price.
Qantas pays for Amadeus's reservation system according to the number of passengers who buy tickets. "When we have a really good year," says Balfour, "Amadeus shares in that windfall because they get more revenue. When we have a bad year, we're not being hung out to dry either by paying for a system that we're not fully utilizing."
Having Amadeus host its reservation system was a precursor to the $US450 million deal Qantas struck with IBM Global Services in May 2004 to outsource its data centre operations. In this arrangement, Qantas is paying for only the computing power it uses, which has helped Balfour drop her fixed costs from 70 percent to 30 percent of her overall data centre budget.
When You Need to Customize
Hosted software isn't for everyone and every situation, however. Customization is one key reason why companies opt for traditionally licensed and installed software over software as a service. Hosted software providers can't provide high degrees of customization because it's antithetical to their business model: The more customized a hosted application becomes, the smaller the potential audience and the higher the overall costs. For hosted software providers, the more vanilla the application, the better.
But vanilla isn't everyone's favourite flavour. Applera, for instance, is moving from a hosted performance management and employee review system to one the company will install in-house, because the hosted system doesn't provide Applera with the flexibility the company's review-and-reward system requires. The one-size-fits-all model of software as a service doesn't lend itself to companies with unique performance appraisal and review processes.
When Dennis Hunsberger was trying to decide between a traditional in-house CRM implementation from Onyx Software or a hosted Salesforce.com system, he asked both companies to prototype how their respective offerings would integrate with his back-end systems. Hunsberger - the vice president of application systems for AgVantis, the IT department for farm credit associations and banks in Colorado, Kansas, New Mexico and Oklahoma - wanted to make sure Onyx's and Salesforce.com's products could do what their salespeople claimed. And he wanted his developers (who'd be doing the customization and integration) to have an idea of what was ahead. Onyx won the contract, in part because it enthusiastically ponied up one of its employees to do what AgVantis had asked even before AgVantis had selected them or paid a dime. Hunsberger says Salesforce.com kept wanting a commitment before it would provide resources. He says Salesforce.com's reluctance to do the prototyping before signing a deal may have indicated the vendor wa s concerned that its system wouldn't be able to do what AgVantis needed when they got down to brass tacks, but Hunsberger says that wasn't the sense he got. "I got the impression that they had limited resources," he says.
Whatever Salesforce.com's reasons, the key was that Hunsberger had done his research. Do the same, and software as a service might find a money-saving fit in your company as well.
Senior Writer Meridith Levinson can be reached at mlevinson@cio.com.
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