As we all know, firms across the globe have been using enterprise software for decades now, that serve very well the requirements of functions such as accounting, ERP, banking, and HR. The delivery mechanism of such software has typically been ‘on-premises’, which involves installing the software on customer infrastructure.

However, over the last few years, concepts such as cloud computing, on-demand software, and Software-as-a-Service (SaaS) have been gaining ground as alternatives to on-premises deployment, and such software is being successfully offered for functions such as CRM (customer relationship management), accounting, and even ERP.

Changing Trends
On-demand software, in fact, has gone from being an interesting concept to a real option that most enterprises consider seriously. For instance, Gartner has named cloud computing in the number one position in its list of top 10 technology trends for 2010. When considering software purchase, a strong factor to consider is the economic downturn and resultant pressure on companies to stay competitive, while keeping costs under tight control. In such a situation, it’s difficult for companies to justify high capital expenditures on implementing traditional on-premises enterprise software. SaaS or on-demand software, on the other hand, become far more viable options for organizations to consider. In my recent interactions with CEOs and CIOs of firms across various segments, sizes, and markets, I found a noticeable shift in attitudes. There is more willingness, acceptance, and openness to consider such an alternative; in fact, in some cases, there exists a preference to implement on-demand solutions.

Concerns Against On-demand Software – How Relevant are These Today?
Before we speak about the benefits of on-demand software, let’s take a look at some of the traditional concerns against on-demand software. While on-demand always seemed like a compelling economic argument with lower upfront capital expenditure, companies have always been wary of data and applications hosted on external infrastructure due to concerns on data security, lack of control, and user experience.

But I see that changing, and changing fast, even in the most traditional markets. Besides economic and competitive compulsions, the emergence of Web 2.0 technologies and better broadband penetration have, in general, made the Web a better platform to operate from. On the consumer front, data and communication have moved online in a major way through free hosted email, social networking sites, and applications provided by companies such as Google.

Let’s consider some of the key developments related to this.

Security: When you consider security, there are many factors that help boost customer confidence.

There are auditing standards, strong built-in authentication mechanisms, secure messaging, and data encryption, all of which help increase trust.

User experience: Newer technologies are allowing vendors to provide richness to GUIs – we now see applications that present excellent graphical representations, drag and drop features, ad hoc customization, and reporting options, at speeds and capabilities that blur the difference between desktop and hosted applications.

Control: A key concern with software being housed externally is that enterprises have little control over performance and reliability of the solution. They need to depend completely on the vendor to ensure smooth operations. But if we just take a look at the infrastructure capabilities that data centers today have – backup capabilities, virus protection, disaster recovery, and the cost at which these services are provided, it’s not so easy any more to justify having on-premises setups. As a worst case, hosting applications on vendor infrastructure can be as safe or as unsafe as hosting it on the customer side.

Integration with other systems: Sometimes a valid concern, but vendors are now providing solutions and technology options that enable much of this possible, either through standard adaptors and APIs, or through traditional interfacing methodologies including partnerships with SIs.

Why so many companies are reassessing their IT strategies, or why on-demand software makes sense? There are many reasons, and all of these are closely intertwined with an organization’s business strategy in difficult market conditions such as today’s. With more product options available, organizations now have the flexibility to select what works best for them.

Costs: High upfront capital expenditure matched by shrinking IT budgets clearly ranks high on the list. On-demand solutions provide an effective way to turn enterprise software into an operating expense instead of a capital expense.

Ease of use: Another key factor is the ease of use. With global, 24x7 complex markets, users require the flexibility to be able to use their software anytime, anywhere, with lower training requirements. SaaS applications are generally easier to learn, use, and manage.

Scalability: From a longer term perspective, on-demand solutions allow enterprises scale up or scale down as required by the business. They can deploy the software as per their needs at any given point, making it easier to account for the expenditure.

Maintainability and lower running expenses: Upgrades and regular maintenance processes are painless. There is virtually zero user interference required during this process. This results in considerable saving of time and resources, lowering IT administration and hardware costs, faster deployment, and more efficient use of computing resources. Having data at a centralized location makes it easy to backup.

Caveats
So, while all this sounds well and fine, there are caveats that companies need to consider before selecting a SaaS vendor. Sufficient knowledge about the vendor and proper attention in preparing the service agreement are quite important, whether considering uptime guarantees, hidden costs, escalation clauses, data ownership and segregation, and exit clauses.

The bottom line
On-demand software applications are here to stay, and will be considered more and more by companies seeking to be competitive in increasingly difficult market conditions. While standardization of processes has already enabled large opportunities in certain segments such as CRM, I expect more and more business functions to fall under its purview.