CRM’s disruptive innovation

Will Hosting Take Over the World?

No, but as a solution to the vexing issues of reliability, ease-of-use, and affordability, hosting provides a strong case that is not easily trumped. Conventional, non-hosted solutions will be measured against the hosting model, and many conventional vendors

will find the hosting issue increasingly difficult to deal with. In the short term, hosting will not be for everyone. There are many barriers still in place, many of which concern user preference. Although there are few technical reasons for any organization to shy away from hosted applications, personal preference will continue to drive organizations to licensing their software rather than paying by the drink – at least for now. And although CRM can take much of the credit for the budding success of modern hosting, the disruptive innovation will not be confined to this market. Look for hosted solutions to become part of enterprise software in general, not just the CRM space. Already, vendors in many different front- and back-office software markets are experimenting with the model and finding they can get traction.

Hosting’s Effects Will Be Broadly Felt

Broad acceptance of the hosting paradigm for delivering software functionality will have ripple effects that are far-reaching and that will affect more than the software industry. Certainly, computer hardware and networking companies will be challenged to augment their products to meet the demands that hosting will place for very large server farms, massive storage, and high-bandwidth communications – and more challenges remain to be discovered. Although application vendors’ offerings will function more like today’s Web sites, the load on servers will be potentially greater than what is experienced on a Web site. For example, application demands for both serving and storing data in many large applications will eclipse some of today’s largest Web site traffic demands. All of this will cause hardware manufacturers to configure and build very large systems in volumes not previously seen.

At the same time, hosting will shake even the largest software companies to their business and financial foundations. The hosting paradigm will cause software companies to resemble utilities from a financial perspective. Aberdeen research indicates that successful hosting vendors can forecast the majority of their revenues at the beginning of a quarter because of the long-range contracts in place with most clients. Such predictable revenue streams will take much of the drama out of the financial equation, resulting in less volatility in the stock prices of public software companies. On the other hand, although Wall Street may like the greater reliability of earnings forecasts that software companies will be able to project, the street may also need to reassess the way it values these companies.

Even more fundamentally, though, the nature of the business in which software development firms engage will be different. A hosting provider can be in intimate business contact with clients every day. What will be the nature of that interaction? For many providers, there will be a perceptible shift from delivering software and implementation services to providing software as a service and bundling additional services that optimize the client’s use of and benefit from that software. For example, CRM vendors will be able to offer a broad array of services for special projects, such as marketing campaigns, lead generation, and much more. By augmenting the client’s staff on an ad hoc basis, the CRM vendor can enable the client to run a more lean operation and boost the client’s overall ROI. The same may also be true for specialized freelance services that need password-protected access to client data from anywhere on the Internet.

Aberdeen Conclusions

After decades of acting as a change agent for modern business, the software industry is poised to confront a disruptive innovation that will fundamentally alter the way it does business. The software-hosting paradigm has gone through its early development and shakeout period, resulting in a stable business and technology model. A few emergent companies are now ready for rapid growth and others – including some of the biggest names in the software industry – will join them. Initially, some of these commitments to hosting will be defensive. In the long term, though, hosting will become an increasingly important part of the software industry, not simply CRM.

As a driver of economic growth, hosting offers numerous possibilities. It will drive changes in the design of servers, storage systems, and networks. It will offer new niches for service offerings from primary vendors, as well as from independent providers. In addition, it will change the business profile of software companies, making their financial results more predictable and removing some volatility from their stock prices. At the same time, the stock price upside potential for these companies may be limited. It will be interesting to see what effect hosting may have as the economy attempts to climb out of recession. Established software companies will have the most at stake as the paradigm shifts, and not participating in the change will not be an option.

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Jim Love, Chief Content Officer, IT World Canada

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