Software-on-Demand: The Beginning of a New Business Model

28 Mar ’05

Frank Scavo has a fascinating post today on the business case for software-on-demand. Frank’s lead observation is quite compelling:

I’ve long been convinced that the “on-demand” model for business applications has much to offer. Now, after listening in on a conference call with Timothy Chou, former head of Oracle’s On Demand business, I’m even more persuaded that we’re at the beginning of a major change in how business systems are sold, implemented, used, and maintained.

Money quote (from Chou):

On the side of the customer, IT guys are spending 75% of their budgets managing installed systems, and the percentage is growing. At the end of the day, if we as an industry do not solve this problem it will be the end of software, because there won’t be any money left for customers to buy new software.

The rule of thumb is that a customer is going to spend four times the purchase price of the software per year to manage the software. For example, Oracle’s E-Business Suite costs about $4,000 per user. Therefore, the support cost is $16,000 per user per year, or $1,300 per user per month!. Gartner reports similar numbers for SAP. This ratio is even true for applications such as e-mail. This is why IT department budgets are dominated by the costs to maintain existing software systems.

But if I can come in and say, it’s not $1300 per user per month, but $100, why would a customer not take my offer? Particularly if I can argue that I can do it better than he can.

Much, much more in Frank’s post.

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