Warren Suss | Another View: Software as a service

On-demand software: The next big thing in federal IT

An abbreviated version of this commentary piece was also published in the Commentary section of GCN's Oct. 9, 2006, print edition.

Warren Suss

Corporate America is replacing traditional buy-and-run-your-own IT application models with software-as-a-service purchased by the seat from Oracle, IBM, Microsoft and SAP, as well as from newcomers like Salesforce.com, 24SevenOffice and eProject.

The best way to appreciate what's happening with on-demand software is to look at the Salesforce.com example. Salesforce.com provides on-demand customer relationship management (CRM), including sales force automation, marketing automation, customer service automation and analytics, as well as forecasting, contact management and online lead capture. Not only has Salesforce.com grown at over 1,000 percent during the last four years, but it has also begun to capture business from major U.S. corporations, including ADP, SunTrust Bank and Staples. Two-thirds of major corporations recently surveyed are either using on-demand software or are currently considering its use.

The acceptance of on-demand software by major corporate users is important. The federal government models its IT best practices on the best IT practices in corporate America. As the Office of Management and Budget's power grows in determining federal IT investments, the government increasingly takes its lead from corporate IT business case models. In addition to top-down pressure from OMB, as the top layer of federal CIO leadership becomes increasingly populated with corporate executives, there will be growing agency-level pressure to adopt the latest corporate models in the search to maximize value from agency IT investments.

On-demand software isn't just the return of another IT fad. There are strong business-case justifications for the move to software as a service. System upgrades are free. The direct cost per user is lower. The total cost of ownership is lower. These savings reflect reductions in software costs as well as efficiencies based on outsourcing software support functions. There are reduced requirements for agency and contractor system development personnel, system managers, system operators and help desks. By using on-demand software, application development and implementation times are shorter. And when important applications get into the hands of users earlier, users are able to get program results sooner. The total-fixed-price-per-user, on-demand software model also reduces risk in the budget planning process, which is often just as important to agency decision-makers as total-cost-of-ownership considerations.

These reasons are strong enough to suggest a rosy future for software-as-a-service in the federal space. The Salesforce.com example is particularly significant because it points to the potential for the promoters of on-demand software to overcome key points of resistance to outsourcing federal applications. Agency officials worry about moving mission-sensitive applications and databases away from the federal premises. They have concerns about security as well as control. One thing that makes Salesforce.com such a powerful model is that corporations are beginning to trust their most competition-sensitive applications and data to a Web-based service provider. If corporate America can trust these types of applications to an outside service provider, the federal government won't be far behind.

Who will win?

Who is best positioned to deliver the next generation of federal software-as-a-service solutions? Will the competitive advantage tilt to the carriers? Not necessarily. Carrier services, up to now, have focused on transport functions. Intelligence resides in the application space, where the integrator reigns supreme. To oversimplify the competitive lines of battle, the carrier dominates the wide-area space up to the service connection point, and the integrator owns the turf from the service connection point to the keyboard. Transport-heavy deals favor the carrier. Application-heavy deals favor the integrator. So what happens as more intelligence moves into the network and the Web? Does the carrier win? Does the integrator win?

Based on the evidence we've seen so far, the answer may be' neither one. By and large, the integrators shine when an agency requires the design, development, implementation and operation of one-off, project-specific application solutions. The carriers have provided lots of intelligence in terms of network monitoring and network management, but, with the exception of utility functions like e-mail, they have generally steered clear of user-level business functions.

In the commercial space, it's been specialized companies like WebEx, SAP and Salesforce.com that have been playing in the brave new world that we've been describing. And the new powerhouse content providers like Google and Yahoo may be as well-positioned as the carriers or the integrators to move into the emerging federal market sweet spot for software-as-a-service.

If the carriers or the integrators are to succeed as early entrants into this new opportunity space, they'll have to step up to major transformations in their current business models. The integrator business model is organized around individual deals. They're good at business development. They're good at capture management. They're good at proposals. But they don't have a clue about making up-front investments where efficiencies are achieved through centralized operations and where revenues are recovered by turning sales streams into new products across a large base of customers. Their business model won't easily fit the types of investments, operations, sales and marketing required to build federal analogs of Salesforce.com.

The carrier business model is great when it comes to investing in network-based technology and utility applications. Unlike the integrators, they are very comfortable with making up-front investments in facilities and recovering these investments through aggregate revenue streams generated across a broad base of users. But the carriers can't hold a candle to the integrators when it comes to addressing the niche application requirements in the substantive areas where federal programs have their greatest needs'like command and control, border security, emergency response, health, travel and grants. Their business model works when they focus on packaging infrastructure services where they can spread costs across a large base of users. But they don't do much with niche-specific application and business development.

The carriers and the integrators should both have plenty of motivation to make the changes in their business models needed to target the intelligent network opportunity space. Whether they acknowledge it or not, their current business models are under attack. The carriers need to move up the value chain as the commoditization of transport drives down their margins and makes it more difficult to differentiate themselves from their carrier competitors. The integrators are finding that their agency customers have a diminishing appetite for last generation's high-cost, high-risk and high-maintenance applications. And both sides may be under attack sooner than they think from Google, Yahoo, AOL, WebEx, SAP and other emerging commercial marketplace superstars.

In the end, the competitive outcome will be determined by customer behavior. Initiatives like Networx, Alliant and NCES are likely to change the way agencies buy IT services. The federal customer may be conservative when it comes to issues related to security and reliability, but once industry overcomes these two major resistance points, my bet is that agencies will embrace the business case for software-as-a-service. The prize will go to the industry players with the vision and the guts to get beyond yesterday's business models.

I don't know if the winners will be carriers, integrators, or the new content and application providers. But I do know that the competitive battlefield is changing. The ultimate winners will be the companies who will make IT services a more powerful, more cost-effective tool in winning wars, sustaining peace, responding to national emergencies and making good on our nation's promise to deliver results to the American people.

Warren Suss ( warren.suss@sussconsulting.com) is president of Suss Consulting Inc., a federal IT management consulting firm in Jenkintown, Pa.

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