The End of the Premises-based Enterprise Application?

On Thursday, IBM announced it was buying DemandTec for $440 million.  DemandTec provides specialized analytics of the behavior of on-line shoppers, as a service hosted “in the cloud,” rather than selling licenses for software to be hosted on-premises, by the customer.   A week ago, ERP giant SAP announced that it would purchase SuccessFactors, the cloud-based provider of talent management software as a service (SaaS), for $3.4 billion.  About six weeks earlier, Oracle announced it was paying $1.5 billion for RightNow Technologies, a provider of call center automation, sales force automation, and CRM SaaS.  This deal came right on the heels of Oracle CEO Larry Ellison’s announcement that Oracle would deliver a “public cloud” from which they expect to deliver platform as a service (PaaS) and SaaS offerings.

IBM, SAP and Oracle are the largest enterprise software vendors in the world.  Each of them fields a staff of thousands of software developers, implementers, and customer support staff.  Each of them books billions of dollars in license revenue, maintenance revenue, and consulting revenue every year.  Each is the center of an “eco-system” of vendors, who provide professional services, supporting applications, and increasingly, alternative sources for software maintenance and support, like Rimini Street.  Rimini has grown from a handful to well over 400 customers in the last five years, because it can support legacy applications bristling with customizations.  Many of their customers are in transition, moving from their current enterprise application software base, hosted on-premises, to a services model, accessed via a browser.

Maintaining heavily customized enterprise software is an expensive proposition, and end users are beginning to wonder if they’ve been painted into a corner.  Many of them are several upgrades behind their vendor, due to the disruption and re-engineering required to bring forward the custom features that seemed like they were filling gaps, during their initial implementation.   They realize that some of their “gotta have” tweaks are now available in the baseline product, in a slightly different form, and wonder what it will take to move their records over.  That is, if they can ever get their IT department to commit scarce resources to an upgrade.  And then they see cloud-based service offerings like SalesForce and Workday, which has every customer on the same code base, and rolls out a major upgrade three times a year, with no customer action required.  And the combination of per-head fees, rather than fixed license and support costs, with a consumer-quality user experience and access from anywhere with an internet connection makes the SaaS model look like a software application Promised Land.

So IBM, SAP, Oracle, and other software giants are using their cash to buy in to this new market.  They are locating small companies with complementary offerings, successful operations, significant market penetration, and a good story to tell.  And they are telling those stories, in the hope that they can retain the customers who’ve been paying them for support for years.  But whether they can or not, the trend is unmistakable – corporate users are now willing to embrace the use of software applications that give them an experience similar to shopping on Amazon, and store their valuable data in someone else’s data center.  But maybe more importantly, they’re willing to give up some features to get that cost savings, and that ease of learning.

Is this the end of premises-based application software, customized to meet the requirements of a small group of super-users, who are convinced that their special ways of automating their jobs gives their employer a competitive advantage, sufficient to warrant the additional cost of development?  Probably not, but I think you’re going to see a lot more skepticism among the people who have to cough up the funds for such applications.  And as SaaS implementation timelines and project budgets shrink, it’s going to get a whole lot easier to get “pilot programs” approved.  Consequently, as an IT project manager, you might want to consider hitching your horse to a cloud-based wagon.

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About Dave Gordon

Dave Gordon is a project manager with over twenty five years of experience in implementing human capital management and payroll systems, including SaaS solutions like Workday and premises-based ERP solutions like PeopleSoft and ADP Enterprise. He has an MS in IT with a concentration in project management, and a BS in Business. In addition to his articles and blog posts, he curates a weekly roundup of articles on project management, and he has authored or contributed to several books on project management.