Software as a service can benefit customers looking to bring specific application expertise in-house without committing to a large upfront investment. On the other hand, an alternative licensing model could
impede integration with other applications.
Striking a balance between licensed and hosted software and incorporating pay-as-you-go pricing will require network managers
to bone up on their contract skills, make sure integration is possible and work with vendors to find the model that best suits
their companies.
Offered by vendors such as NetSuite, Salesforce.com and SuccessFactors, SaaS involves hosting all or parts of an application
and charging customers on a monthly or annual subscription basis.Pay-as-you-go applies to hardware, too, in which customers
pay for the processing power and storage capacity they use.
According to research firm Saugatuck Technology, CIOs are expected to use about 14% of their 2005 IT infrastructure budgets
on pay-as-you-go services and 14% of application budgets on software delivered as a service. The trend toward subscribing
to software and paying processing and capacity based on what is used is more popular among business executives than IT staff,
Saugatuck says.
SaaS "empowers business units by enabling them to buy, deploy and run software without IT involvement. But many business-led
SaaS deployments require IT resources in phase two of the rollout when users need to integrate with other systems or do advanced
customizations," says Liz Herbert, an analyst with Forrester Research. "Businesses must start involving IT upfront to ensure
that the vendor selected has the architecture to meet phase two requirements."
For Ross McKenzie, the IS director at Johns Hopkins Bloomberg School of Public Heath in Baltimore, the potential draw to SaaS
license models lies in the costs. While McKenzie doesn't currently have such licenses, he says the option to "stretch payments
out over a multiyear period" appeals to him. "It would certainly make software more affordable," he says.
Pricing particulars
Pay-as-you-go services offer a glimpse into the utility computing world that EMC, HP, IBM, Sun , Unisys and others envision. Sun, for example, offers straightforward Sun Grid pricing of $1 per CPU, per hour, and $1 per
gigabyte, per month.
Utility computing services give companies a way to start exploiting new technologies before all the pieces of an ideal system
for automating data centers are deliverable. Such utility computing services may look like traditional outsourcing and application
service provider deals because they provide customers with flexibility and require fewer upfront costs. But there are differences,
such as paying for what you use instead of a flat fee. Those services, which allow customers to house vendor equipment on
site, differ from common outsourcing setups in which the systems are at the service provider.
"These pricing models are one real tangible deliverable from vendors' utility computing plans," says Jeff Kaplan, managing
director of Thinkstrategies, a consultancy in Wellesley, Mass. "Most companies can subscribe for software as a service rather
than having to look at it as a capital expense."
Forrester Research estimates that the initial cost of a hosted application is about $336,000 vs. a licensed one at $440,000.
The upfront cost savings in some cases misrepresent the ultimate investment, though. According to Forrester, by the third
year of deployment, the cost of a hosted application starts to exceed that of an in-house licensed application. By the fifth
year of a deployment, the cumulative cost of a hosted application is estimated at more then $1.6 million, while the licensed
software costs about $1.4 million annually.
"One downside of the [SaaS] model is it tends to be more expensive in the long run,"Forrester's Herbert says.
Striking a balance
While there are noted trade-offs - potential costs and integration worries - industry watchers agree that SaaS models can
benefit IT departments.
"It's lower risk and can deliver a fast return on investment," Herbert says. Thinkstrategies' Kaplan agrees: "Packaged applications
are difficult to implement and expensive to maintain. SaaS costs can be amortized over time as well."
To start, treat the service rollout as you would on-premise deployments, by determining the business requirements for the
service, dealing with the vendor and investigating the degree of customization required for the service. Make sure contracts
with software service providers protect their data, ensure maximum uptime - with vendor penalties if service-level agreements
aren't met -and meet a specific business need.
"If IT managers find it's difficult to integrate, or the degree of customization is high, then SaaS is not the right choice
for them," Herbert says. "The trend for SaaS is growing among mid-market customers, but it's not for highly customized and
specialized IT shops."
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