Cloud // Software as a Service
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10/8/2009
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Alternative IT

CIOs are more receptive than ever to new software models -- and not because they’re trendy.

Ripple Effects Beyond Cloud

Another trend that has gained traction in the recession, as it did in the last one, is offshore outsourcing. Since its merger, JohnsonDiversey has used India-based Wipro Technologies extensively for support and systems management, cutting its IT budget in half while delivering better service, Hoag says. The company's IT staff is now just 75 people, who mainly set software and infrastructure strategy, work with the business units on IT strategy, and manage outsourcing contracts. "The lowest-level person I have on my team is a program manager," Hoag says.

Yet online software will change how CIOs look at outsourcing. When signed on for Gmail and Postini, it dropped e-mail server support from its Wipro contract; it goes directly to Google with any problems. Wipro still provides help-desk support for other applications, including Microsoft Office, which remains the company's standard suite.

At Avago Technologies, the only choices CIO Bob Rudy is considering for a new human resources system is to totally outsource it or buy an online application. The electronic components manufacturer uses an old PeopleSoft version Rudy doesn't want to upgrade. He's looking at business process outsourcing to provide broad HR services, including running any apps required. If not, he'll look to subscription online options, such as Workday. "I'm not a believer in buying software anymore," says Rudy. Rudy also moved Avago to Gmail and Google's Apps and Sites. Still, he'll keep buying licensed CAD software, since that development and engineering innovation is core to the business.

To Julian Koski, CEO of Transparent Value, an asset management unit of Guggenheim Partners, cloud computing is just low-cost IT outsourcing. "The more we can outsource and have someone else do the heavy lifting, the better," Koski says. The company's using an online app from Navatar Group, built on Salesforce.com's Force.com platform, for managing mutual fund investments for its customers. "Most of my life I've dealt with custom on-site apps," Koski says. "These ready-made apps from Navatar made a huge difference. I didn't have to sit down and write specifications." It pays monthly per-seat fees to Salesforce and Navatar.

And while financial services companies are seen as unlikely users of cloud-based applications, given industry security and other regulations, Koski considers the physical location of his mutual fund customers' data a nonissue because Navatar and Salesforce have solid security technology and policies.

Koski's and Hoag's decisions show how cloud computing could replace some of the app support and development work that offshore outsourcing --a disruptive model itself earlier this decade--had captured. The pressure increasingly will be on outsourcers to work even more closely with customers. Infosys, for example, says more than half of its deals carry some element of "outcome-based" pricing.

The increasing use of smartphones as an alternative to desktops and laptops will fuel more interest in Web-based options. Hoag notes that, with Google's Web-based mail, JohnsonDiversey no longer needs to buy and maintain Research In Motion's BlackBerry server for BlackBerry users to download e-mail; most smartphones can access Gmail. "We have lots of increased flexibility for people to work anywhere," he says.

Not all alternative IT models look like surefire winners. Consider the alternatives to paying annual software maintenance fees. Some CIOs we talk with say they're unhappy with the traditional model, whereby they pay annual fees, typically 22% of the up-front license cost, for maintenance and upgrades. SaaS is one option, and while providers such as RightNow, Salesforce, SuccessFactors, and Workday have momentum and have landed marquee enterprise customers for their subscription-based CRM, HR, and other apps, their revenues remain a small fraction of Microsoft's, Oracle's, and SAP's.

Another option is lower-cost support from third parties such as Rimini Street, which claims to charge half of what SAP and Oracle do. Rimini Street has won some big names such as trucking company J.B. Hunt, and its bookings will double this year to around $150 million, but it's still a tiny fish in a huge pond. Ray Wang, an analyst with Altimeter Group, says some third-party maintenance startups have failed because traditional integrators consider them too controversial to work with.

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