Why Every CIO Should Have an On-Demand Strategy

October 31, 2006 Appirio

As recently as the 1950s, U.S. companies routinely planned for a full power plant to provide electricity to new office buildings, believing that the whole notion of an “electricity grid” was not to be fully trusted for business purposes.

The notion of a corporation installing, operating and upgrading business applications will, in time, be regarded as equally archaic.

[Core vs. Context] Understanding Core vs. Context In Your Business

Businesses understand they must separate “core” and “context” activities. Core activities differentiate a business from its competition. Context activities consist of everything else needed for the business to operate. In Dealing with Darwin, Geoffrey Moore further divides activities by mission-critical versus non-mission-critical. Context activities may be mission-critical, but they do not help a business win in the market. For example, while manufacturing and supply chain management remain mission-critical activities for Apple, their ability to create innovative designs is core to their business success.

Businesses have long been comfortable outsourcing basic context functions; increasingly, they are also delegating context areas that are mission-critical. That’s why nearly every company outsources payroll to ADP or Ceridian, building management to facilities firms, and technical support to partners.

Soon, running servers and maintaining business applications will be seen in a similar light – as context functions that distract a business from focusing on its core.

As businesses accelerate their adoption of on-demand applications, they will realize greater IT flexibility. This, in turn, will lead organizations to leverage on-demand applications even for core areas, because of the substantial advantages of on-demand over on-premise in fostering innovation and differentiation.

Handling the Mission-Critical

Most companies, especially non-technology companies, can not match specialized vendors in their ability to operate data centers, hardware stacks, and server operating systems. The idea that they could is as far-fetched as the idea that a single building owner could produce electricity more efficiently than an energy company. Amazon, eBay, Yahoo, and Google operate far more reliable and scalable mission-critical server data centers than even the most sophisticated corporate environments. Each serves tens to hundreds of millions of users each day, in a true 24×7 environment. Google alone operate over 100,000 servers at a time. eBay handles over 10 billion API calls per year.

Yet today, companies continue to maintain their own software systems, mostly out of IT habit. We still regard it as natural that a cosmetics firm or a beverage company would have IT staffers who install and maintain SAP or Oracle Applications, troll message boards to stay informed about new patches, watch storage devices for error conditions, and run complex systems monitoring packages to keep their data centers humming. Turning over these “IT operations” functions to classic outsourcers like EDS doesn’t change the underlying dynamic that companies themselves, as customers of enterprise software vendors, willingly agree to host and maintain the actual software.

Because businesses still run mission critical systems to support context activities, the cost, complexity, and sheer attention required is quickly consuming the lion’s share of the IT budget. As a result, business owners are increasingly frustrated with IT’s inability to innovate. The longer a software system is in place, the more expensive it becomes to maintain. Years of customized fixes, workarounds, and undocumented dependencies with other systems accumulate until the systems become rigid, inflexible and dated. The total cost of upgrading systems is very often several times the original cost of the software.

Can On-Demand Work for the Core Areas of my Business?

In a 2003 Harvard Business Review, Nicholas Carr’s article, Does IT Matter, stirred controversy by questioning IT’s ability to create sustainable competitive advantage. Immediately, large software vendors challenged the claim, citing their own studies.

On-demand applications address many of the issues Carr raised with IT. For areas the business regards as a commodity IT services, on-demand provides mass standardization (resulting from multitenancy) that inevitably lowers the cost of infrastructure and operations. But even in areas organizations see as providing core functions that deliver differentiation, on-demand applications provide an ability to customize that is unmatched by on-premise enterprise applications. From the beginning, on-demand vendors have been forced to provide robust facilities for adding functionality and embedding customer specific logic because they do not expect their customers (e.g. the cosmetics manufacturer) to regularly edit and manipulate source code.

On-premise vendors, by contrast, have fallen into the ugly habit of often “working around” their inflexibility by forcing customers to customize via direct manipulation of source code libraries, database schemas, and the like. This kind of customization is not only difficult enough to stifle all but the most motivated programmers, it leads to more brittle systems that become unmaintainable over time.

By comparison, on-demand vendors like Salesforce.com make customizations look easy. Customers experience an “aha moment” the first time they use drag-and-drop browser features to create custom tabs, objects, and relationships that model their own business – in just minutes. Salesforce.com provides richer, more innovative customization capabilities than any on-premise vendor – in part because they can’t just throw source code at the customer.
On-Premise – Innovation Uphill

On-premise software vendors simply don’t focus as much on easy customization or enabling innovation without modifying their code. Once a vendor builds up its install base and reaches a level of industry maturity, it finds itself burdened with supporting numerous versions of its own software. Permutations of hardware stacks, operating system levels, and its own software versions and patches quickly multiply beyond what any vendor could QA. The vendor is forced to weigh investments in innovation against the cost of maintaining code already deployed by its customers, and the nightmare of preserving viable upgrade paths for each environment permutation in its customer base. A software company’s “legacy codebase” becomes a millstone, causing every innovation to be vastly disruptive to their customers.

As a vendor loses the ability to innovate with its own products, its customers’ ability to innovate also rapidly declines. The customer is forced to take a more active role in implementing innovative features into the packaged software – features the vendor should have been responsible for. Soon, customers are distracted from their own more advanced priorities as they pour resources into innovating on what should have been provided. Finally, because of the lack of easy customization capabilities most of this extra work involves low level code development.

On-Demand – Differentiation Within A Standard Codebase

On-demand software vendors like Salesforce.com enjoy a fundamental structural advantage. With just one codebase and one production stack to maintain, the costs of maintenance is more easily managed. Rather than solving issues dozens of times – once for each combination of version and technology stack – the collective intelligence of the engineers of Salesforce.com and third parties can be focused on true innovation. This has enabled Salesforce.com to develop such a flexible, interesting customization environment. Customers get the benefit of focusing on their own core, without worrying about making up for the shortcomings of the software itself.

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