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The Lure of On-Demand Software

On-demand software allows small and medium businesses to leverage robust computer applications at a fraction of the cost of maintaining in-house systems.

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.

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“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.

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“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.

While more applications come online, stalwarts in the industry continue to push the envelope of this powerful way for businesses to employ sophisticated software packages. AppExchange, launched by Salesforce.com, offers a suite of application-sharing CRM services and a platform enabling users to develop and integrate new applications that meet their unique business needs. The firm currently has more than 18,700 customers and 351,000 subscribers worldwide, such as America Online and Avis/Budget Rent-a-Car. Last year alone, sales increased 78% to $82.7 million in the third quarter.

But on-demand CRM isn’t just for big companies. A Web survey by the Yankee Group in October 2005 found about 13% of small businesses nationwide were already working with some form of hosted customer relationship application, with many more planning to in the years ahead.

The main reason is cost, said Sanjeev Aggarwal, the Yankee Group’s senior analyst for small and mid-size business strategies. CRM applications are typically available for about $50/month per user on an on-demand basis, Aggarwal says, “So the risk is far less than signing on to a year-long million dollar contract.”

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Another reason for the growth in CRM on-demand software is the spread of Microsoft Office as the main desktop application for smaller businesses. Most hosted CRM applications can now be integrated with standard Office tools, such as word processing, e-mail, and spreadsheets, making the transition to hosted applications less jarring. Also, hosted CRM applications can often be linked to a small company’s existing network in less time than it takes to buy, install, and troubleshoot packaged applications. And with the host-firm overseeing maintenance, IT workers are free to handle in-house systems full-time. “All you need is a Web browser,” Aggarwal says.

Though adoption by the small business market sounds low, more on-demand applications are on the horizon for small and medium businesses, according to a recent study by AMI-Partners, a New York-based IT consulting firm. That’s because on-demand vendors that have focused solely on horizontal business application markets — like Salesforce.com’s CRM solutions — are starting to offer applications tailor-made for small business needs in vertical industries, including the construction, healthcare, and financial services sectors, the study showed.

What’s drawing small businesses from these industries to on-demand applications, the study found, is a greater ability to collaborate among internal employees, contractors, partners, suppliers, and customers; access to company data anywhere, anytime; and the lure of reduced operating costs.

While most on-demand applications are available separately — from firms like Concur Technologies (expense management), Ultimate Software (workforce management), and WebEx Communications (online meetings) — many are now being bundled together into large hosted application suites, such as NetSuite, which offers a single application covering a broad range of business functions including CRM, enterprise resource planning (ERP), e-commerce, customer support and marketing automation. Bundled suites of on-demand software typically cost around $125/month per user, Aggarwal said. “These are big packages with a single database,” he said. “For small companies this is Nirvana.”

However, there are glitches with on-demand models. Since launching, Salesforce.com has gone offline over a dozen times, including as recently as Jan. 30. After the latest outage, which lasted several hours, frustrated customers set up their own complaints blog: “This is starting to happen all too often,” one blogger wrote, “two days left in the month and the sales team can’t access their data.” Worse still, clients are seldom reimbursed for service disruptions.

Then there are the obvious security concerns of putting the bulk of your company’s working data online. Karen Leavitt, vice-president of marketing for WebOffice, an on-demand application suite from WebEX, said reputable on-demand software providers should offer state-of-the-industry Web-based security at a minimum. Beyond that, the complexity of passwords and expire dates, data encryption — at both the front and back end — and other security features “is left to the discretion of our customers,” she says.

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Blinc’s Farsedakis said he’s confident his company data is in good hands with NetSuite. “NetSuite does a much better job of backing up our data then we could ever do,” says Farsedakis. “So I know it’s safe.” However, as a precaution, he doesn’t store customer credit card information in an online program.

Still, IDC researchers say the benefits outweigh the risks, and they expect more and more businesses to partner with on-demand software providers over the next few years as owners gain familiarity and comfort with the SaaS concept. “The software on-demand delivery model is helping to reinvigorate the software industry and turns an attentive ear to customer needs and wants,” says IDC’s Traudt. In the small and medium business marketplace, this likely means access to more sophisticated, robust business software applications for companies previously unable to afford or maintain them.

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