Is this the end of IT as we know it?

If you believe the hype, in a few years all enterprise software will be delivered as a service. At the least, you’ll have the luxury of outsourcing many commodity apps

Halsey Minor, CEO of hosted integration provider grand central Communications, has a powerful message for IT: “In four years, ... basically the whole notion of enterprise application software is going to be dead.” He believes application functionality will instead be available as hosted, pay-per-use services delivered by companies such as Salesforce.com. Putting his money where his mouth is, Minor has recently launched a $50 million venture capital fund with his own money to fuel on-demand startups. For its part, Grand Central will handle data and process integration between enterprises and multiple on-demand services.

Marc Benioff — CEO of Salesforce.com, which originated the “no software” marketing campaign — offers a similar view. “Enterprise software is dying out,” he says. “Look at companies like IBM, which says things should be delivered on demand, and Oracle saying things should be delivered on demand. Even Siebel, who for years and years said it would never happen, is now saying it has to happen.”

Bold talk. And when taken to its logical extreme, it could prove more than a little alarming for enterprise IT. One premise underlying the death-of-software argument upheld by Minor, Benioff, and others is that enterprise IT is drowning in complexity. The business side is tired of big licensing and hardware investments, endless software deployment cycles, random outages, and regulatory-compliance horrors. Rather than keep suffering all that, enterprises will pull the rip cord and opt for the hosted, on-demand model instead — or so the argument goes.

But if companies commit to that strategy wholesale, won’t enterprise IT be subject to massive layoffs? Will those poor souls be sending their resumes to the likes of Minor and Benioff ?

On-demand proponents are quick to mute such overtones. “Those IT folks and those resources are going to be reallocated to the stuff that adds value to the organization,” says Jason Maynard, senior North America software analyst at Merrill Lynch, which last April launched an on-demand index that tracks both pure-plays such as Salesforce.com and software-by-subscription from traditional software houses such as Microsoft.

Or as John Girard, CEO of hosted content management provider Clickability, puts it: “Insource the core and outsource the rest.” But why should IT trust on-demand providers to handle “the rest,” when just three years ago so many failed so spectacularly under another name, ASPs?

The answer is that, although the on-demand model is still evolving, many of the problems that scuttled the first round of ASPs have been or are being solved. Web services have helped make customization and integration easier. Identity management is bridging user provisioning between provider and enterprise. And various technologies — much of them developed by a handful of ASP survivors — are making hosted provider platforms more reliable, scalable, and secure.

Such advances lead many to identify on-demand software as the next big thing, although the number of current deployments is tiny compared with the software market as a whole. “In spite of all the hype around it, software as a service is the biggest thing to happen in software in 25 years,” Girard says. “It’s an enormous paradigm shift.”

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This Year’s Model

Even Michael Conlon, a University of Florida technology strategist whose large IT operation has made a point of doing everything itself, is thinking about making the shift in certain areas. E-mail, application monitoring, and HR functions could all be candidates. “You identify things that are commodity, not core, to the business, and [that are] well-defined. If they can be executed off campus, that’s fine.”

One explanation for the sudden openness to the on-demand model has to do with licensing. Customers are tired of the “Costco” style of software purchasing, as Merrill Lynch’s Maynard terms it. “I can’t eat that many cheese nips in my lifetime. A four-gallon drum of licorice; that’s how we buy enterprise software,” he says. Paying for what you consume rather than paying up front for a lifetime of usage fits better with today’s downsized IT budgets.

According to Grand Central’s Minor, botched deployments provide even greater motivation to make the on-demand switch. He points to Avis, which recently sunk $100 million in an ERP system that never saw the light of day. “The pay-and-pray model of enterprise software is over,” Minor says. “Instead, it’s going to be delivered as utility, where you’ll pay for successful delivery like you pay for your phone calls.” Rather than the “big bang” theory of utility computing promoted by IBM, where enterprise datacenters suddenly become self-healing and self-managing, the on-demand model is more like utility computing, one enterprise application at a time.

Poor visibility is another factor for moving to an on-demand model, suggests Todd Johnson, president of Jamcracker, which began as an aggregator of hosted IT services such as VPN and backup and currently provides platform technology for companies in the on-demand business. Today, enterprises are lucky if they can see beyond the next quarter, he says. The risks of an 18-month global Siebel rollout are enormous compared with a Salesforce.com deployment, which, even if sophisticated, should take no more than 90 days — and with zero investment in software licensing or hardware.

Mercury Interactive, which has been offering a hosted version of its application-monitoring solution for years, is in a unique position to observe customer reaction to the on-demand model. “We’re not as religious as some. We offer a choice,” says Christopher Lochhead, Mercury’s chief marketing officer. During the sell cycle, he notes, customers like the idea that they can switch from hosted to internal deployment. But in fact, very few do. Today, Mercury delivers application management as a hosted service to between 3,000 and 4,000 customers, approximately half the installed base for that solution. “When the customer looks us in the eye and says, ‘Hey, what’s the best way to deploy your technology?,’ we lead with the hosted offering.”

Objections and Opportunities

Not everyone is biting, of course. Topping the list of doubts is whether hosted offerings can be properly integrated with internal enterprise apps, and skepticism over the efficacy of adapting on-demand solutions to unique business processes. And some IT managers bristle at relying on an outside host’s ability to run its datacenter impeccably, not to mention maintain a solvent business. Total dependence on a browser-based UI is another sticking point (see “Can the Browser Meet the Demands of On-Demand?”).

Ask any on-demand partisan about the integration issue, and you’ll hear two words: Web services. As SOA (service-oriented architecture) and Web services spread across enterprises and as on-demand providers outfit their offerings with Web services interfaces, data-level integration gets easier inside and outside the enterprise. But in most cases, Web services’ share of the integration pie remains small, which is one of the ideas behind Grand Central: Provide a complete services bus, which supports not only Web services but also legacy messaging protocols.

Grand Central, however, has more up its sleeve than helping on-demand providers and their customers to integrate. The company’s approach not only facilitates customization, it focuses on integrating hosted services before they touch the customer’s enterprise. “No one is going to buy a bunch of services and then buy a bunch of software to try to integrate them,” Minor says. For example, he adds, Grand Central routinely integrates Salesforce.com with ADP payroll processing so that a customer can cut commission checks without leaving the Salesforce.com environment.

As hosted integration gets more sophisticated, customers can also begin developing process-based applications on the host’s platform, an idea touted by Grand Central and by Salesforce.com with its sforce integration and application development platform. In fact, most on-demand providers — including Amazon and eBay, notes Salesforce.com’s Benioff — seem headed in this direction. Customers get a development environment in which they can create unique functionality that, unlike conventional enterprise apps, won’t break when a new version arrives.

Although the host’s API limits the functionality of such applications, the potential for hosted application development doesn’t stop with a handful of providers. As Eric Newcomer, CTO of enterprise integration company Iona, reminds us, one of the original ideas behind Web services was that applications could be built from components published as services across the Internet.

“I think we’re seeing an increase in interest in getting the components instead of the whole package,” Newcomer says. He also believes the reverse is true: Companies are trying to leverage their existing assets by service-enabling them and selling them on a subscription or pay-per-use plan.

For outside-the-firewall integration of multiple services on behalf of a single customer, federated identity management must be in. Grand Central offers this in Version 5.0.

But Todd Johnson of Jamcracker, whose Pivot Path solution helps on-demand providers handle user provisioning, cautions that properly integrating identity and security infrastructures among customers and hosted services is a tough problem — one that defeated more than a few first-wave ASPs. 

Always On?

In the end, the fear that an on-demand provider could fail remains the biggest single obstacle to large-scale enterprise adoption of software as a service. One can argue, as Grand Central’s Minor does, that on-demand providers can afford to invest in redundancy and uptime at levels individual enterprises can only dream of achieving. Maybe so, but customers must be confident that the provider is doing everything right with its architecture, core technologies, security, and choice of partners.

IT has a natural resistance to losing control — and to losing personnel. “I think that there’s some fear, but I’m not sure whether or not it’s a rational fear,” says Eric Peterson, site technology and operations analyst at JupiterResearch. “Out of one side of its mouth, IT says, ‘We’re too busy; we don’t’ have enough people to get X and Y and Z done.’ But it [also] says, ‘We don’t want to give up any of the software that we already own because it reduces the size of our kingdom.’ “

As usual, enterprise customers who see the merits of this paradigm shift — the first glimmers of utility computing — will benefit most. Internet infrastructure has already taken over the heart of the enterprise, causing the line between inside and outside the enterprise to blur. The physical locations of resources matter less and will fade progressively as technologies such as SOA and federated identity become universal.

Meanwhile, a good application is a good application. If an enterprise can get most of the functionality of a great shrink-wrapped solution through the browser with a magnitude less hassle and expense, IT can finally tuck into that backlog of important projects.

And that may be the best job security of all.

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