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A quiet but growing revolution: The disruptive technology of on-demand software aggregators

Google, a bellwether of online computing, recently announced OpenSocial -- its next generation answer to Facebook, which had previously opened up its platform. But platforms that allow outside developers to create bolt-on applications are not just for the novelty functions found on social networking sites. The same concepts are being used by software companies like Salesforce.com to add value and functionality to their online platforms. As a result, in the view of Julie Smith David, Director of the Center for Advancing Business through IT at the W. P. Carey School of Business, the whole software industry is -- or soon may be -- all shook up.

2007-11-07

On Facebook, the popular social networking site that links friends and friends-of-friends, you can send a virtual plant to a buddy. At last count, more than 300,000 Facebook users (more than the population of Toledo, OH) were running the Grow-a-Gift application which enables the virtual gift giving. This small disclaimer appears on the application's download page: "This application was not developed by Facebook." Some revolutions are easy to spot, such as Apple's "1984" TV commercial that heralded computing for the masses. But other revolutions are more subtly announced, by little signs like being able to give a friend a virtual blooming daffodil. The change represented by the virtual plant is no less than a paradigm shift in computer software, in the view of Julie Smith David, Director of the Center for Advancing Business through IT at the W. P. Carey School of Business. Like Grow-a-Gift's daffodils and gladiolas, third-party applications that interface with on-demand software platforms (also known as hosted software or Software-as-a-Service, SaaS) are blossoming. Google, a bellwether of online computing, recently announced OpenSocial — its next generation answer to Facebook, which had previously opened up its platform. But platforms that allow outside developers to create bolt-on applications are not just for the novelty functions found on social networking sites. The same concepts are being used by software companies like Salesforce.com to add value and functionality to their online platforms. As a result, the whole software industry is — or soon may be — all shook up. A second wave Since the advent of big enterprise resource planning (ERP) and customer relationship management  players like SAP and Siebel, customers have bought huge (and expensive) software systems, installed them in-house on their own (expensive) servers and then labored through a long, painful (and expensive) process to tweak and customize the big packages to fit their specific needs. After it is set up, running such a package requires a small army of internal IT professionals (who are expensive) to oversee the hardware as well as any additional (expensive) customization that would be needed as the company evolves. These systems are the lifeblood of many companies, integrating customer records, raw materials, shipping, payroll and the like. But changes — even small ones — can mean weeks of work. "Those systems have become so big that they've become much less agile. They're as flexible as cement: great when you're installing it, it will mold in any form that you want, but as soon as you've got it in place, it's absolutely terrifying to try to change it," says Smith David. Salespeople are taught to address a client's pain; with the bulky and expensive enterprise software packages, there is a very real and very obvious pain. Thus, like real daffodils in early spring, it was not surprising that around the year 2000, a number of Application Service Providers sprang up in countless numbers. Their pitch to potential clients was simple: rather than install software on-site and have to maintain it all, let us do it for you and you can access a host of applications through your Internet browser. By analogy, on-demand software differs from locally installed software in the way that Hotmail — where all of one's e-mail and the functionality to read it stays online — differs from the copy of Outlook running on one's desktop. Despite the obvious benefits, most ASPs withered soon after their first bloom, victims of skeptical customers wary about the boldness of the new approach, immature offerings and high overhead. Each client would get its own remote server and software installation instead of one machine and one application being shared among many clients. "Most (customers) seem to understand that the ASP model was an attempt to provide value with products not built to be hosted. They see SaaS as an attempt to provide value with solutions built for the hosted model," says Stan Swete, chief technology officer of on-demand provider Workday. Today's incarnation, which Smith David labels On-Demand Software Aggregators, have a number of advantages over those early ASPs. First, the idea of online or on-demand software seems less preposterous at this point. In the past five years, broadband access has become more prevalent. Additionally, native on-demand providers have created multi-tenant applications which can produce economies of scale -- many different clients share one installation of an application on a single server. Finally, the important new development is the aggregation role of ODSA's such as Facebook's open platform and Saleforce.com with its AppExchange marketplace where more than 700 applications are available, large software companies are now opening up their once cloistered code to outside developers, providing a strong foundation on which innumerable offerings can bloom. A disruptive technology Interestingly, the growth in on-demand software runs counter to what has been common wisdom in the software industry: that customers principally buy software based on how much functionality it offers. While software installed on-site often comprises many modules with a huge range of functionality which can be highly customized, on-demand software and young ODSAs may not offer as much functionality — yet companies are beginning to choose ODSAs over more full-featured local software. "The thing that's interesting about a 'disruptive technology' as it's been defined by Clayton Christensen, one of the authors of The Innovator's Dilemma, is that on the dimension that you used to think mattered most, the new technology actually performs worse," says Smith David. In this case, the appeal of ODSAs isn't the richness of their application functionality, but their straightforward costs and flexibility. Rather than buying hardware and software, customizing it and then maintaining an IT team, ODSAs usually offer subscription plans. This means that companies replace large, unpredictable expenditures with much smaller monthly fees. For those fees, users are provided access to a portfolio of application functionality that is "good enough" to meet their needs. No longer are customers willing to pay for the most complete application portfolio when there are much less expensive solutions that will adequately meet their needs. "It's not necessary that you go for the whole package every time you want to implement something. Now you have the freedom of implementing only parts of it and what is useful for you," says Arti Mann, a doctoral student working with Smith David. "You don't need to worry about the infrastructure costs, implementation costs and upgrading costs, etc. All you need to do now is pay a monthly fee and use what you want to use." On the flexibility front, a company can be up and running with on-demand software practically overnight as opposed to the weeks, months or years needed to set up an on-site customization. If a company wants more or less functionality, it simply adds in a module -- and if the package isn't right, getting out is a lot easier and less costly than dumping a custom system. "It's kind of like you can now go to the store and try on different outfits until you find the one in which you look good," says Smith David. The radical innovation: Open platforms Providing open access to what used to be highly controlled software platforms could tilt the software balance and radically change the whole industry. With locally installed software, a company typically needs to bring in an integrator to tailor the software or develop new functionality, such as an application to predict future inventory levels and reorder points. The integrator in this case delivers a service, not a product. With an online application, companies have been limited as to the functionality they can tailor. Even if companies were willing to spend time and money to tweak their on-site installation, the online hosting companies didn't allow them much freedom to do so, and add-on modules were rarely offered. Now with some ODSAs, Mann says, companies can have the benefits of an online application and more functionality — probably not most functionality available, but an improvement over prior on-demand solutions. Making substantially more information and linkages available to developers, ODSAs like Salesforce.com enable the creation of applications and make them available as a service to all of Salesforce.com's customers. At the same time, thousands of Salesforce.com customers have hundreds of applications they can easily install without the hassle and expense of commissioning custom development. "The developers, all of a sudden, have access not to one client for whom they're customizing, they've got access to the whole world of clients. So if I come up with a clever solution to a healthcare problem, I can host that at [Salesforce.com's] AppExchange and any healthcare company can start using it going through that infrastructure. From the developers' point of view, the platform provider really becomes the intermediary," says Smith David. However, despite all of the existing and forthcoming applications, Smith David says that it may still be some time before large companies, particularly multinational corporations, adopt the ODSA model. The complexity required to handle such large processes, multilingual programs and international accounting standards stand in the way. But software firms still see huge companies as a potential jackpot -- if they can deliver sufficiently robust solutions. "It will take a couple more hugely expensive upgrade cycles for big companies to realize that they are spending huge amounts of money and time just to stay current on their ERP platform This will cause them to consider their options each time they are faced with an upgrade. This should get SaaS vendors like us more chances to show modern functionality with dramatically lower cost of ownership," says Swete of Workday. A unified platform Applications like a growing plant gift from a social networking site may seem far removed from those that play a fundamental part in the business world. But the line is blurring quickly between the two as a result of the OpenSocial initiative launched last week. Spearheaded by Google, OpenSocial is akin to the "common application" implemented by many colleges and universities. Instead of writing one program for each ODSA, developers need only use a common language for the same application to work among a host of participating sites. OpenSocial works with social networking sites like Friendster and MySpace, business networking applications Plaxo and LinkedIn and even Oracle and Salesforce.com. When a single provider like Salesforce.com opens up its code, customers can access a broader universe of applications. When numerous providers commit to an open platform, choice should multiply. A number of standards-setting bodies are working to develop common parameters that will enable software companies to better share applications and functionality. Arriving at a perfect compromise takes time, however — time that the software companies think they cannot spare in this new era of openness. "What I find so fascinating about the platform developers is they're saying, 'We don't have time to wait for that. We'll make our standards open,'" says Smith David. Bottom line

• As opposed to software that is installed on-site at a company, on-demand software is hosted remotely and accessed over the Internet. It is analogous to Hotmail being an online e-mail application and Outlook being an e-mail program that is installed on-site.
• Open source software lets developers look at the entirety of a program's code and, therefore, allows for maximum customization and understanding.
• A number of online application providers have recently opened up a considerable portion of their offerings to third-party developers. Notable among these is Facebook on the social networking side and Salesforce.com in the business CRM space.
• Facebook now offers more than 7,000 add-on applications while Salesforce.com's AppExchange has more than 700, which gives users more choice and enhance the sites' functionality.
• On-demand Software Aggregators (ODSAs) are replacing the largely unsuccessful Application Service Providers (ASPs) that sprang up around 2000. Both offer on-demand or hosted software, but ODSA's capitalize on newer approaches to software development, and then make their software platforms open to developers throughout the world.
• Multi-tenancy is a key part of today's on-demand applications; it allows multiple customers to use one server and one application of a program. ASPs typically would devote an entire server and software installation to each customer.
• On-demand providers shoulder the burden and expense of installing and maintaining important enterprise software; customers pay on a subscription model for the number of users and the functionality they require.
• ODSAs allow companies to get up and running quickly without a large initial investment typical of on-site installations.
• By allowing third-party developers more access to ODSA platforms, companies like Salesforce.com make it easier for their customers — typically small- and mid-size businesses — to sample a wide array of small add-on applications.
• The ODSA model allows developers who do custom development work to package their experience into a product and sell it to hundreds or thousands of customers.

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