The Lure of On-Demand Software

In addition to marketing in over 20 countries, Blinc Inc., a beauty products firm based in Herndon, Va., has to coordinate business divisions spread out across the entire country -- from a call center in Colorado to a fulfillment and shipping warehouse in Florida, from an accountant in Washington to a purchasing manager in Vancouver, British Columbia.

"We were relying on Outlook and e-mail to send data back and forth," says CEO Lewis Farsedakis. "We were actually faxing customer data from the call center that then needed to be retyped and recoded for other applications. We had no way to handle it."

Then Farsedakis discovered on-demand software. In January 2006, Blinc put the bulk of its customer relationship data -- along with shipping, accounting and other company information -- online in an integrated bundle of management applications hosted by NetSuite. Farsedakis pays a modest annual licensing fee for the software, and a monthly per-user fee. For that, his 15 full-time employees and hundreds of sales reps nationwide have access to real-time customer, product and sales data -- all of which can be instantly integrated -- at the click of a mouse anytime, anywhere. "It has made us much more efficient," says Farsedakis.

When both Microsoft and Google launched their own hosted application services late last year, they pushed the on-demand software market into the limelight. The concept of Software-as-a-Service (SaaS) and its on demand offerings has been booming in recent months, luring smaller employers with sophisticated and secure online business management applications at a fraction of the cost of building and maintaining in-house systems.

Microsoft CEO Steve Ballmer has called on-demand software the most important trend in the software market over next two or three years. "And at the end of the day, I think it's going to have its most profound impact on smaller and medium size companies," Ballmer told industry insiders at a Washington, D.C. meeting on Dec. 7.

On-demand software is indeed picking up steam, and applications such as those used by Blinc are increasing. Industry wide, global revenue in the on-demand market rose nearly 40% in 2004 over the previous year to $4.2 billion, according to research firm International Data Corp. (IDC). The market is expected to continue rising annually by over 20% in the years to come -- reaching the $10 billion mark by 2009.

Where forerunners like Salesforce.com and RightNow Technologies once provided a few wary business owners customer relationship management (CRM) software over the Internet, today typical on-demand services include online applications for nearly every business need. From human resources management to accounting and inventory, from Web security to e-commerce, procurement, and marketing, these online applications -- along with dozens of others -- can be readily integrated into a company's existing or developing IT systems. And as the cost of buying individual in-house applications continues to grow, the option of renting them online and paying a licensing fee or on a per-use basis is becoming very attractive -- particularly for smaller businesses with tighter staffing budgets for IT personnel.

"Ultimately, customers want their business problems solved and the on-demand model provides another option to help accomplish that important and necessary feat," says IDC research analyst Erin Traudt.

Yet despite the proliferation of hosted services -- and more recent applications that integrate all of them into a single package -- among the most popular with small and mid-size companies are CRM applications, according to vendors and industry experts.

CRM providers, many of whom were pioneers in the on-demand market, allow businesses to manage and share sales, support, marketing, and partner information in real time without the need for costly IT infrastructure. And even as the number of new players grows -- over 500, according to one market survey -- the top five vendors accounted for over 80% of the total CRM market, a separate IDC study showed. Topping that list was Salesforce.com, at 49.5% market share, followed by RightNow Technologies, at 13.5% -- firms that both went public last year. Siebel Systems, recently purchased by Oracle, offers a packaged CRM line, which ranked fifth. Other top CRM firms included Concerto, Digital River, and Unica.