Software hosting is causing tremors

SAN FRANCISCO (10/31/2003) - IBM Corp.'s OnDemand e-business hosting initiative is picking up steam. Case in point: Siebel Systems Inc.'s partnership with Big Blue to sell CRM OnDemand and Siebel's purchase of UpShot Corp., a hosted CRM competitor of Salesforce.com Inc.

If the concept of buying software as a service, also known as utility computing, takes off, the repercussions will touch every part of the IT industry, including the reseller channel, and particularly VARs (value-added resellers). And if it changes how companies buy software and how software is supported, it affects IT. Or should I say it will affect those still left in the IT department?

John Parkinson, chief technologist for the Americas at Cap Gemini Ernst & Young, sees the early signs of a critical trend. "There are a lot of companies out there that would like not to have to deal with the complexity and cost of running IT but had no real alternative."

The trend of software as a service will gather momentum for a number of reasons. Among them, the large application vendors like SAP AG, PeopleSoft Inc., Oracle Corp., Microsoft Corp., and IBM Corp. are gradually expanding their footprint in the enterprise, but provisioning one customer at a time may not be economically sustainable much longer.

At the same time, companies must configure for peak demand, not average demand, so they buy more stuff than they really need. Add to that the refresh cycles and constant care and attention required. It is all becoming too expensive. Hosting solves these problems. "It takes the cost of infrastructure off the balance sheet and replaces it with an operational cost on the profit and loss statement," Parkinson said.

If the trend is real, VARs have no choice. If they ignore the on-demand phenomenon they risk being taken out of the sales cycle, or disintermediated, as it was called in the dot-com heyday. Or they can sell products to the hosting market or offer to host applications themselves.

"VARs will have to go from selling systems to selling services," according to R. David Schmaier, executive vice president at Siebel.

Schmaier points out that Siebel doesn't have a very large VAR channel and sees VARs as competitors to hosted service providers. Siebel's "primary bet," says Schmaier, is on the hosting service providers.

There is enough evidence to indicate that Schmaier and Siebel are not alone in this reading of the market. Besides, there are at least a million smaller companies that giants like Siebel can't get to easily. It's a distribution challenge to reach them in a cost-effective way, Schmaier adds. For Siebel, IBM's OnDemand becomes its reseller channel.

Both Schmaier and Parkinson believe hosting represents a sea change in the VAR network. And if the VAR elects to host software, it becomes the enemy to IT, promoting the value of hosting over in-house staffing.

Parkinson believes hosting will, over time, reduce the IT head count by as much as 40 percent.

In the short to midterm, hosting is another thing you have to think about without being clear how it will work or whether it's right for you at this stage.

Will hosting reduce the IT head count? Will VARs be after your job? Will the hero save the fair maiden tied to the tracks?

Parkinson says until this thing shakes out, "Everything you can imagine is going to happen."

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