Thursday, January 26, 2006

To host or not to host, that is the question

The rise and rise of salesforce.com has triggered a shift in licensing amongst a number of companies, both startups like Rightnow and "me too" defensive offerings from the likes of Oracle and SAP. Siebel missed the boat entirely here, though its problems were by no means confined to its licensing model. The fact that it was massively over-marketed, with surprisingly limited core functionality given its price tag, requiring vast consulting resources to tailor every individual implementation, may have contributed also. A friend who had spent two years implementing Siebel at a bank described it as a "million dollar compiler", since everything that he wanted to do with it required customized programming/consulting.

Leaving Siebel aside, what are the broader implications of hosting and renting software. There are issues both ways. Clearly from a customer viewpoint they don;t have the hassle of installing and doing technical upgrades in-house, so no complaints there. However it is not obvious that a hosted piece of software is any more likely to meet your needs, or to require less tailoring, that one that is installed on-site. There may be (perhaps justified) concerns about the security of your own data, and indeed on related intellectual property. From personal experience I recall needing to back out from a hosted service, and having great difficulty in getting the vendor to export my data into a form that I could easy load into a transportable form - er, hello, this was my data after all.

From the vendor viewpoint there are also pros and cons. If you start from scratch then things are easier. Hosting services are much cheaper to provide than many customers realize, so margins can be very attractive. Because you are in control of the implementation, you have less issues at particular customers, who have installed some wacko combination of middleware (usually the day before some critical business deadline) that means you can't replicate their problems. On the other hand, it is hard to grow as fast. Recurring revenue is great, but there is a danger that it can become "the software maintenance without the license" unless you are one of the vendors who have managed massive momentum (like salesforce.com). This is also a big problem for existing vendors, whose business models and sales force are geared towards license revenue. Also, as a software vendor you may not want to be in the data centre business.

What is the scale of the hosted software market? In a Red Herring article the hosted software market is reckoned to be 1.5% of the total USD 72 billion global software market in 2004 (according to IDC). This may to be a big dent overall, but it is still a fair chunk of software, and one that is growing rapidly (doubling by 2009 is IDC's estimate). Cynics would argue that the whole "ASP" model (remember that) was going to change the world in the 1990s, but the demise of Exodus and other high-profile companies domonstrated the limits of how prepared customers were prepared to go in shifting their data Centrex to a 3rd party.

My instinct is that this is a very real trend, and that the conservatism of corporate buyers may be the major inhibitor at present. Certainly the headaches that big companies have in installing new versions of software is huge - many companies have "standard desktops" that are unpopular with end users and result in an army of people ensuring that everything works (usually on some ancient version of MS Office), so removing this problem has undeniable, and large benefits. For this reason alone, I think many companies will get over their queasiness at having their data stored somewhere off-site, and so this is a trend with real legs.

Ironically this may also prove right those old mainframe die-hards in the 1980s who felt that client/server was lunacy, and that distributing applications around hundreds or thousands of desktops was going to cause far more trouble than it was worth. Certainly more trouble than it ever caused on the good old mainframe, where you knew exactly what version of the packages everyone was using. It is perhaps no accident that IBM is at the forefront of this "on demand" trend, as the desire to centralism is in IBM's corporate bones.

4 Comments:

Anonymous jeff nolan said...

I'm a little confused as to your statement about Siebel missing the boat entirely. Siebel OnDemand was the only product putting in growth numbers while the rest of Siebel was dying on the vine, and the success of that service drove Oracle to publicly support Websphere as part of the acquisition.

6:18 PM  
Blogger Andy Hayler said...

Thanks for your comment. What I meant was that Siebel was very late in reacting to the threat of salesforce.com, initially being in denial and then being too little, too late with its competitive offering. I agree that, when it did arrive, that it was indeed the only product at Siebel growing, but I think that the market had by then perceived it as a "oh well, if we must then" reaction to salesforce by Siebel. By the time it started to get some momentum, Siebel was imploding around it. As you say, it may have helped a lot in getting a buyer for Siebel.

1:54 AM  
Anonymous Anonymous said...

Thanks for clarifying, I agree with your assessment.

8:28 AM  
Anonymous Anonymous said...

You seem to be very knowledgeable on the BI field, I am more than surprised you would agree with the comment that Siebel OnDemand was the only product at Siebel growing.

2:10 AM  

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