Is On-Demand in Demand for Small and Medium Enterprises?

The fact is that it’s tough to make an unequivocal statement about how focused SMEs are on on-demand software. While analysts agree that many SMEs include on-demand as part of their overall information technology (IT) strategy for 2006, they also acknowledge that SMEs are a diverse group with widely varied IT priorities. Even for SMEs within the same vertical industry, IT needs vary greatly.
Still, analysts do say that on-demand software, also called software-as-a-service (SaaS), is on the SME radar. They also say that hardware, infrastructure software and security software are near the top of the SME priority list. (Editor’s note: SME and SMB are interchangeable terms.)

Spending not red-hot

IT Spending Priorities for SMEs
IT Spending Priorities for SMEs

“IT Spending is heating up, but I wouldn’t call it red-hot,” says Steve Hilton, director, Global Business Communication Strategies, for the Yankee Group in Boston, Massachusetts. “SMBs generally believe if it ain’t broke, don’t fix it. So expecting massive increases in IT spending in any single year is unreasonable.”
For 2006 Hilton predicts SME IT spending increases of 7 to 10 percent, in a trend he calls “continued positive, rational growth.” He says hardware is expected to be a top IT spending priority for SMEs this year, followed by infrastructure software and other technologies. Security and disaster recovery solutions are in demand because they protect SMEs from risks that threaten their businesses, he notes.
Another research firm, Forrester Research, in Cambridge, Massachusetts, predicts that SME spending will rise 7.2 percent this year, compared to a rise of 4.8 percent last year. “The top IT initiatives for 2006 include upgrading applications, which will contribute to server spending; upgrading the security environment – a perennial hot issue –; and Internet and e-commerce activities,” writes Forrester analyst Michael Speyer in “2006 IT Spending in the SMB Sector.”
The report goes on to say that 55 percent of SMEs surveyed plan to increase spending on personal computers, 51 percent plan to increase spending on networking equipment, and 48 percent plan to increase spending on servers. As far as software, the report says 50 percent of SMEs plan to increase spending on security software and 42 percent plan to increase spending on Web applications. Twenty-nine percent will increase spending on outsourced maintenance, development and support of applications. The report notes that SMEs are likely to turn to local and regional consultants and resellers for those needs.
Regarding the types of on-demand software SMEs are buying, Hilton notes that SMEs are showing greatest interest in payroll, merchant services, human resources and customer relationship management (CRM) solutions. And, SME interest in on-demand varies from industry to industry. Companies in the financial services, professional services, wholesale/distribution and IT services industries have the greatest interest, according to Hilton, citing data from Yankee Group’s “2005 SMB Business Applications and Web Survey.”

Why try on-demand?

Robert Bois, AMR Research
Robert Bois, AMR Research

“SaaS may be the only option for some SMBs, whereas large enterprises may have the luxury of more choices if they have a large amount of IT resources available to them,” says Robert Bois, research director at Boston, Massachusetts-based AMR Research. So what drives an SME, usually with a limited budget, to try a relatively new type of software such as on-demand? According to Bois, financial constraints and business needs combine to create a compelling motivation. On-demand software tends to be less expensive to get up and running than enterprise software while offering similar capabilities, plus it can be ramped up faster.
“SMBs tend to have more limited IT infrastructure, resources, and funding than their larger counterparts. However, their business processes are no less complex than larger organizations,” Bois says. “SaaS brings SMBs enterprise-class applications with much lower risk and startup costs, and requires less care and feeding from the IT department.”
Licensing for on-demand software may require an annual commitment and relatively low upfront fees. Compare that to the high costs and 15-year licenses required with some enterprise software. It’s easy to see why a shorter, less-expensive solution is attractive to an SME, especially if it is trying a particular type of software for the first time. With on-demand, if the software ends up being a poor fit for the SME, the company can drop it or switch to something else.
Hilton agrees that on-demand software can be a benefit to SMEs via more manageable IT, including less need for costly in-house IT staff. “On-demand software solves two of the top business challenges of SMBs, namely lack of capital budget – for one-time large expenditures –, and lack of IT staff,” he says. And it can be integrated with other on-demand and premises-based software solutions already in use. That helps keep IT costs down.

Caveat emptor

The use of on-demand software, however, comes with inherent risks, both financial and IT. Bois stresses the importance of evaluating the total cost of ownership (TCO) before signing an on-demand contract. While conventional wisdom says that on-demand is cheaper than on-premises software when deployed for three years or fewer, there are instances where the opposite is true and on-demand costs actually top those of on-premises solutions. Because IT systems differ greatly from company to company, the only way to determine short- and long-term costs is through a comprehensive TCO evaluation.
Bois also says that consulting and deployment costs must be included in the TCO evaluation. “While the technology components to a SaaS deployment are cheaper and easier, the business process piece still needs considerable time and effort, as well as cost.” And, if an SME customizes the on-demand application, it will need to continue subscribing to it for as long as it wishes to use the customized components. That can add up to a costly situation.

Key warnings
Key warnings

Hilton notes that there can be issues of IT control and solution longevity with on-demand software. “An SMB has little control over the software upgrade path for on-demand solutions,” he says. That path is determined by the vendor. “For those SMBs that have a predilection to controlling their IT environments, movement toward an on-demand solution can be quite frightening.”
He also advises companies to select an on-demand provider with a proven track record and positive future outlook. “Pick an on-demand solution from a reputable company that has industry longevity. No SMB needs to get itself into a here today, gone tomorrow scenario with its critical business applications.”

Sarah Z. Sleeper
Sarah Z. Sleeper