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Buried in software licensing

Robert L. Mitchell | Aug. 13, 2013
The transition to cloud-based services is ratcheting up traditional enterprise software costs and adding layers of complexity.

"With cloud, you need to adjust your business processes to align with the software," he says. That model will require an expensive business process redesign, and that kind of change won't come easily. "The hardest part is getting the business areas to readjust their business processes, which add overhead to whatever we do," he says. But in the long run, he adds, "we will be more sustainable going forward."

A New Era?

At Red Hat, 40% of the enterprise software runs as cloud-based services under a subscription model, but the vendor of open-source software also has a traditional implementation of core ERP applications running on premises to support its 5,600 employees, according to CIO Lee Congdon.

To Congdon, the key to moving forward is to create a viable option for moving off of those platforms. He worries not just about cost but about being locked into a vendor's software with a highly customized implementation that might lead to inflexibility -- and competitive disadvantage. "What happens when your competitors move to new systems with different attributes?" he asks.

Congdon is worried about the potential competitive threat from startups that aren't tied to legacy on-premises ERP systems. And IDC's Dover says that's also a valid concern to have about global competitors in emerging markets. "In places like India, they didn't buy traditional on-premises systems and they're going right to cloud," she says.

Congdon says Red Hat is "creating the option to move [by] working to keep our business processes straightforward and minimize customizations."

But the SaaS model has its own potential pitfalls, IT executives and analysts say. "My worry is that the SaaS vendors are going to do to us exactly what the big vendors did to us," Steinour says. "We have to make sure we have a rock-solid contract and an exit strategy."

From a vendor's standpoint, moving customers to a subscription-based service should be more attractive because software maintenance costs can be rolled into a single monthly fee. For the customer, however, a move to SaaS simply means maintenance fees are hidden within monthly subscription fees.

"You can't go off maintenance with Salesforce.com," Scavo says. And while subscription-based services can get IT off the upgrade treadmill and allow it to replace multimillion-dollar capital investments in software and hardware infrastructure with subscription fees, they may not be cheaper in the long run.

Already, Scavo says, "cloud vendors are able to charge a premium because of the limited amount of competition in some markets." For example, Salesforce.com already dominates the CRM market. While today the cloud is cost-competitive, vendors such as Salesforce.com could become tomorrow's SAPs and Oracles.

As cloud usage grows more common, there will be increased competition, Scavo says. But IT should be prepared for the possibility that a few vendors may dominate some markets.

 

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