Wednesday, May 18, 2005

Customized Outsourcing: The Latest on Rentable Software

By Debra D'Agostino
Rent vs. buy isn't only a question for lightweight or non-critical apps anymore. Sometimes it makes sense to let someone else take care of your crown jewels.

Software as a service can take some pressure off the IT department.

At one time or another, we've all been presented with the confounding choice of whether we should rent or buy. Whether it's a home, a car, or even a tuxedo, the questions remain pretty much the same. Can I afford to buy it? How much will I use it? What kind of financing is available? ADVERTISEMENT The idea of renting software has been alternately embraced and reviled for decades. Most recently, the hype around application service providers, or ASPs, proved to be built largely on empty promises.

Alas, stymied by unreliable service, confusing price structures, and applications that weren't easily configurable, companies struggled to make hosted software fit their needs in the late 1990s.

But now a new age of outsourced everything—along with better bandwidth and a more mature market—is making software by subscription, or software as a service (SaaS), a viable option. In fact, Gartner Inc. predicts that renting will be the software model of choice by 2008, with more than 50 percent of all software purchases being made on a subscription rather than license basis.

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"The reality is, it's becoming a standard way of how people are doing business," says Gartner Vice President Joanne Correia.

For small companies, software by subscription is a no-brainer, says Dana Stiffler, a senior analyst with AMR Research Inc. "It's ideal for companies that don't have the staff or the up-front investment, so you can let your people focus on your business instead of running the applications." This was the case for Platform Learning, a small New York City-based firm that provides tutoring services for school-age children throughout the U.S. Platform needed to overhaul its paper-based order-fulfillment system in order to get educational materials to its 50,000 students more quickly, but it lacked the capital and in-house resources to buy the necessary software, says CIO Joe Sorisi.

Renting the software gave the company a no-hassle solution to its problem, and shortened the fulfillment process by three days. "Now we can get curriculum expedited to meet demand," he says. "That increases customer satisfaction, which will help us get new business." Gartner's Correia agrees, adding that firms don't want to pay up-front costs with no guarantee of success. "Companies are no longer saying, 'Here's a million dollars for a license, and I am going to absorb all the risk,'" she says.

But it's not just the up-front costs that are driving people to rent. Stiffler says that companies are fed up with paying maintenance fees. According to an AMR survey of several hundred executives, nearly one-quarter feel their vendor's upgrades for traditional software licenses don't deliver enough value to justify the costs, which have risen as much as 25 percent in the past year.

But there are still hurdles for software as a service. For example, it could end up costing you more money in the long run if you don't do a thorough cost analysis and project it out over several years.

And while the challenges of customization have largely been addressed, there are still major difficulties in integrating hosted applications, both with each other and with in-house software.