In order to remain competitive and improve the bottom-line, companies have adopted the mantra: reduce the costs of doing business. Increasingly, companies are recognizing that one of the quickest and most-effective methods of achieving this goal is through better management of corporate spending.

For companies that are interested in Spend Management application such as spend analysis, e-Procurement and E-Sourcing, a new breed of so called “on demand” solutions is providing an alternative to the enterprise software model. This article defines what is meant by “on demand” and examines the key differences between the “on demand” and software options.

What is “On Demand?
“On Demand” is a term that describes a new model for delivering business applications as services to companies. In layman’s terms, applications are delivered in a similar way to how gas, water and other utilities are delivered to consumers – based on usage and without needing to implement the “hardware”. There are three components to “on demand” solutions:

Priced based on usage. Companies pay based on how much they use a solution over time. Note that “on demand” providers leverage a multi-company model (again acting like a utility provider) providing economies of scale that are passed on to customers through lower pricing.

Applications delivered as services over the internet. Applications are accessed via an internet browser without the need to install software at the company site.

Supporting Services included. “On demand” solutions include key services such as supplier enablement; IT management and end-user training. These services are also provided by software vendors but tend to be considered as options and priced separately.

How does cost of solutions differ?
There are a number of ways in which the cost of “on demand” and software solutions doffer. A key premise of the “on demand” model is that the vendor rather than the customer invests in the technology, hardware and supporting services. For this reason the total cost of ownership of ‘on demand” solutions appears to be 5 – 10X lower than the cost of software (reference TCO comparison after three years of ownership. Source: Industry Analysts, 2002). When breaking down these costs it is interesting to note that the software cost is usually the least expensive line item. So called “hidden costs” such as costs associated with implementation, supplier enablement, supporting software and training push the total cost of ownership for Spend Management software to more than $4M in the first year alone.

This was a key decision factor for Kennametal a $1.8B manufacturer from Pennsylvania. According to Jim Cebula, Director of Purchasing, Kennametal looked at over 40 different options to meet their needs in the areas of e-Procurement and supplier enablement before ultimately selecting an “on demand” model.

Another difference in costs is the method used to charge customers. Software vendors charge large sums upfront and then an annual maintenance fee to cover customer support and upgrades. This model became popular in the 1990’s with the rise in popularity of ERP systems. “On demand” solutions on the other hand spread the cost of the solution over the lifetime of a contract and are based on a company’s usage over time. It is not surprising that this model is growing in popularity. Mitch Plaat, Director of Contract Services at CNF agrees with this saying “we were bought into the value proposition of spend management a long time ago. The problem for us was that we could not justify a business case that required us to pay millions of dollars in upfront license fees”. Ultimately CNF decided on a joint solution – an “on demand” Spend Management solution from Ketera Technologies integrated with the American Express Corporate Purchasing Card solution.

What sort of solution architecture is required?
“On demand” sounds so compelling, why aren’t more vendors offering this model? The answer to this question is that vendors do not have the solution architecture to offer true “on demand” solutions today. One of the notable exceptions is Ketera Technologies. Ketera’s spend Management solution consisting of applications such as spend analysis, e-procurement and supplier enablement is deployed on a single platform – multiple company model. Ketera’s customers share the same infrastructure but have absolute privacy and security. This architecture enables Ketera to use it economies of scale in operations to offer it’s solutions at a far lower cost – between 5 – 10X less – than competitive models. Ruby Sahiwal, Ketera’s COO claims this as one of Ketera’s competitive advantages, “With Ketera, companies get to use electricity as opposed to having to buy the electric company and then assemble it themselves” Sahiwal said commenting on the large upfront and annual maintenance fee model used by enterprise software vendors.

Where is “On Demand” a good fit?
“On Demand” solutions are not for everybody. Because ”on demand solutions” are not implemented behind a company’s firewall, companies will need to ensure that their corporate culture is accepting of a solution that is accessed over the internet. Concerns regarding privacy and security have largely been addressed but this should be an important question to ask of potential vendors.

Another key question is what business processes should be considered a fit for “on demand” solutions. Many companies will be hesitant to move strategic applications to an “on demand” environment. Another consideration is the level of integration required. An example of an application that is both strategic and needs to integrate to multiple systems is a company’s automated manufacturing planning system such as MRP. Spend Management solutions are being used by many companies in spend categories that are non-strategic to a company’s core business yet can yield substantial savings. Integration needs to occur but batch rather than “real-time” integration will suffice. For these reasons Spend Management is one of the business categories where it makes sense to consider the “on demand” model.

Summary
“On Demand” promises to change how we think and pay for enterprise applications. “On demand”s double punch of usage based pricing and rapid deployment are timely as many companies are weary of the high upfront cost and lengthy implementation associated with enterprise software applications. While it is unrealistic to expect “On Demand” to become a dominant model in every application area, Spend Management is a logical fit for the model and ought to be considered strongly by companies looking at solutions.

Ruby Sahiwal is the Chief Operating Officer of Ketera Technologies. Sahiwal's operating experience includes line roles at GE, i2, Tradeum & VerticalNet.