In-Depth

Options on demand

• By Alan Joch
• June 1, 2006

Customer incentive programs are ripe for automation software. At least that's how Callidus Software in San Jose sees it. Callidus recently formed a relationship with Sun Microsystems that will match its incentive processing software with Sun's grid computing services. The software company is launching a service that will enable customers to process incentive programs on demand.

Companies perform incentive calculations sporadically, in intense spurts. This type of processing requires an infusion of IT resources, followed by periods of downtime. With Callidus's on-demand model, customers will pay a monthly fee based on the number of agents serviced and avoid upfront IT investments and maintenance fees.

The alignment with Sun could also help Callidus ply new markets. Callidus sells its TrueComp Enterprise app to financial and telecom giants with $1 billion or more in revenues; an on-demand version could bring in business from mid-size companies. "The key is we will provide an application that's benign to the IT department," says Shanker Trivedi, Callidus's chief marketing officer.

Callidus is joining a growing list of companies that see potential in on-demand architectures to expand their business or cut internal IT costs. However, some companies find not all apps are ready for on demand without fundamental rewriting. The ROI, while potentially significant, is also difficult to nail down at the start of an on-demand effort.

Matter of semantics
Computer resource suppliers and software developers are trying to use on-demand concepts to tap into customer desires for greater flexibility in IT investments. Some vendors are capitalizing on the concept with worthwhile offerings. Others just "stick to their old delivery model and throw an on-demand tagline somewhere on their Web site," warns Robert Bois, research director for AMR Research, Boston.

Part of the problem is that defining on-demand computing is tricky. “There's a lot of confusion about these terms because they are used very liberally,” Bois says. See separate story, “Variations on the on-demand theme.”

One take on on-demand is utility computing; the strategy of setting up a large, provisional pool of CPU and storage resources that people can tap into to meet demand spikes. These flexible resource pools may be run centrally by a company's IT department or exist off-site, managed by a third-party service provider.

If IT managers are considering re-architecting one of their proprietary applications to offer as a SaaS product, the first step is to step back and consider whether the program is built to handle multiple companies or multiple end users.

"Many times when you architect for on-premise use, you don't necessarily think through the fact that the software doesn't have the concept of security for multiple companies," says Colleen Smith, director of SaaS, Progress Software.

Similarly, to take advantage of pooled utility processing power, an app must be written specifically for processing by a large number of CPUs. "Some non-grid enabled applications may be able to use just one or two CPUs," says Aisling MacRunnels, senior director of utility computing, Sun Microsystems. "A grid enabled application can actually sprawl over as many CPUs as are available to it, and that's where you see the optimal benefit."

Costs for these delivery models are still being worked out. Sun currently prices its grid-computing services at $1 per CPU, but the company expects that within a couple of years, on-demand resources will be priced per transaction or per user. End users need to factor in additional costs for software licensing if it's not bundled into a monthly subscription fee.

End users may contract with a software provider that in turn subcontracts with a data-center specialist for processing power and builds that hardware capability into the subscription fees. This is the model being offered by both Callidus Software and insurance adjuster F.A. Richard & Associates (see main story). Otherwise, utility computing providers "are not going to get involved in the licensing of third parties for the most part," MacRunnels says. "You need to bring your apps with you."

Finally, ROI is a two-pronged consideration, MacRunnels says. Depending on a company's size and volume purchasing power, it may have the resources to create an internal data center that is cheaper than a utility-computing service charge of $1 per CPU. By contrast, smaller companies may not be able to beat that rate or justify the upfront costs for a reliable data center. If that's the case, the org should consider whether an investment delay precludes it from entering a market or expanding in an existing area. "It's not even comparing $1 versus $1.20," in CPU costs, MacRunnels says. "There is no math to it. It's a question of, 'Can this approach help you beat your competition?'"
-Alan Joch

A similar approach, Software-as-a-Service, provides for variable access to key apps without forcing companies to purchase licenses or pay fees for program maintenance and updates. This delivery method is in contrast to dot-com era Application Service Provider models where an end user bought a perpetual software license and contracted with a service provider to host the app and manage related IT activities for customization and maintenance.

"From a cost perspective, the ASP model tends to look more like just buying an application in house," Bois says. Instead, SaaS delivers individual apps over the Web and gives end users access to the programs through standard Web browser interfaces. "With true Software-as-a-Service, there are no up-front charges because service providers just do a little configuration and then turn on the application for a customer," Bois says. "All of the support and maintenance are part of the monthly fee."

Off premise, off the charts
Callidus is taking advantage of Sun's utility computing grid to build a business strategy around SaaS. A number of large vendors are promoting different takes on the on-demand model, including Hewlett-Packard, IBM and Oracle. Even software-license king Microsoft is keeping its on-demand options open. At a recent user conference Chairman Bill Gates said that SaaS is "something we believe in a lot."

Market researchers are also beginning to see SaaS gain traction. According to IDC, worldwide spending on SaaS reached $4.2 billion worldwide in 2004. By 2009, the segment is expected to more than double, topping $10.7 billion, analysts say. Before that happens, many software vendors must transform their products and licensing arrangements.

Progress Software, the venerable marketer of database, app server and dev tools for ISVs, laid the foundation for its SaaS push about 5 years ago when its partners began eyeing ASP approaches. Progress "started to give away tools and technology and said to partners, 'As you start to host these applications and deliver them to your clients, then we will share in a portion of the return,'" says Colleen Smith, director of the company's SaaS business. About 150 of its 2,000 ISV customers worldwide now use this payment model. The ISVs pay Progress 15 percent of each SaaS contract.

Variations on the on-demand theme

On-demand computing means different things to different people precisely because it's still a maturing area that continues to evolve into new variations.

One of the latest permutations is Business Process Outsourcing, which takes the utility computing and Software-as-a-Service models a step further. BPO adds the human capital component to the equation to create service centers to fulfill a discrete function common to many companies. For example, an org may outsource its entire payroll processing requirements to a provider that manages all the resources necessary to gather relevant personnel data and cut checks.

Another variation on the SaaS model is "multi-tenancy" architectures. In this approach, service providers divide the database pie into individual slices for each client. "One database version serves all the customers," explains Robert Bois, research director for AMR Research. The advantage of multi-tenancy is that the cost of adding customers is low compared to a more traditional ASP approach, where providers set up a new instance of hardware, the app, middleware, and the database for each customer, Bois adds.

But some SaaS providers believe they can offer higher levels of data security for their customers with separate databases. Callidus Software architected its incentive processing program for individual data stores. "We think [multi-tenancy] is flawed for enterprise computing," says Shanker Trivedi, Callidus Software's chief marketing officer. "When every customer shares the same instantiation of the database, there are security holes."
-Alan Joch

SaaS will change how developers approach their jobs, says Smith. "It's making people see a software developer as someone who has domain expertise to automate a business process." ISVs targeting legal markets, for example, may write custom on-demand apps for case management.

Rewrite or not
F.A. Richard & Associates, a Louisiana insurance claims adjuster is one example. Like Callidus, FARA is using SaaS to tap into a new revenue stream.

A number of years ago, the 28-year-old company couldn't find an app to handle its business activities, so it gave internal developers the task of building a "green-screen" program. As other insurers learned about the app, FARA began leasing a turnkey solution comprised of software, terminals, servers and PC emulators. Eventually, FARA gave the internal app, now known as iClaimsExpert.com, a Web presence, with the help of Progress Software tools. The revision required a "complete rewrite from the previous character-based application," says David Richard, division president.

The Web version also made it possible for FARA to sell access to the program through a hosted subscription service. "Our customers essentially said, 'Here's our data, help us convert it and put it into your system,'" Richard recalls.

What did it take to transition from a standalone, internal app to one ready for SaaS? "From an architectural standpoint, we engineered the program as a user would see it," Richard says. "Once they log in, we know who they are and they see graphics customized for that particular company and tailored to look like their own application."

FARA also created internal controls to make it easy to toggle about 500 program features to suit the needs of each client. One utility within the app flags claims that may need an agent's review because of missing information. "Customers can choose to leave that service turned off," says Richard. FARA also uses discussions about customer preferences to guide what features it adds to the app.

The biggest technical hurdle was accommodating the majority of customers that wanted on-demand computing resources along with the flexible software arrangement. Rather than building its own data-center services operation, FARA contracts with a third party, which not only provides the processing power but manages the redundant systems needed to meet FARA's "99.5 percent uptime" service-level requirements.

Unlike FARA, the rewriting Callidus had to do to make its app accommodate SaaS was minor. "It's the same product we sell to our largest customers," Trivedi says. "We transfer data between a customer's system and ours through a secure FTP connection. A lot of customers are not happy about their connections into their own live networks."

What has changed is the way TrueComp uses grid computing to address its computational needs. Trivedi expects customers will each process 500,000 to 10 million transactions a month, all happening within tight scheduling windows. Incentive data will flow from a variety of transactional systems. Callidus will have about an hour to process daily results, and perhaps a day to complete weekly analyses.

Suited for SaaS
Before choosing a utility or SaaS approach, IT managers need to analyze their needs, rather than simply adopting the latest and greatest trend. "Take a step back and really evaluate the vendors based on the merits of their software first," AMR's Bois says. "You don't want to eliminate a vendor that may have a great solution for your company, but which you didn't even look at," because it lacked an on-demand delivery model.

Some vendors will begin offering multiple payment or delivery options. "If the program fits your needs, then you can talk about whether you want it delivered as a service and how you want to pay for it," Bois says.

Progress Software's Smith says upfront cost estimates are an important clue for distinguishing between a valid SaaS offering and one that's adopted the buzzword. "Ask the service provider how long it will be before you'll get value from the system," she says. A delay of more than a few months before the app is fully launched means too much customization may be required. Significant customization "is where you are going to lose your money," she says. "The reason to choose a Software-as-a-Service application is so there won't be high implementation costs. Otherwise it probably means the vendor has taken an on-premise application and just said, 'Now it is hosted.' If I'm the IT manager, I'm not getting the same value for my money in that case."

The types of apps best suited for SaaS include vertical or function-specific programs. See separate story, "On-premise apps ready or not for on-demand," on page 33. A specialized ERP program for the building industry may automate business processes common to that market. "If an ISV has domain expertise, there isn't a lot of customization required for that next building industry proprietor to use that application," Smith says. "If it is a generic application that you have to customize in order to use, I don't think it is a good application for Software-as-a-Service."

Alan Joch is a business and technology writer based in New England.