Enterprise software has gained a well-deserved reputation for lengthy and expensive implementations, followed by high ongoing costs and inflexibility. This was the result of the unholy alliance between enterprise software companies selling up-front software license fees and consulting firms selling per-hour customization services.

But today, a new breed of enterprise software solutions built for the Internet combine quick implementation, zero technology or customization costs, and much lower ongoing costs to deliver higher value to customers at a small fraction of the typical total cost of ownership. By eliminating substantial costs--combining software development with implementation and operations--and taking advantage of a single Internet-only infrastructure to further reduce costs and increase agility, these new players have created a new business model for enterprise software called Business Service Provider (BSPs).

The trouble with enterprise software
Implementing typical enterprise software requires a huge up-front technology investment for software license fees, various hardware components, and infrastructure software such as databases. All these technology components must be paid for up-front, and the IT group or consultants must install and assemble them, configure them to work together, and test the assembled components for robustness, security, and performance.

This costly technology assembly is just the beginning--at this point the consultants take over to perform a �gap analysis� to determine what customizations to build. The customization process can add many months to an implementation project, and the �off-the-shelf� enterprise software installation project instead becomes an expensive and time-consuming custom development project.

As a result, the entire implementation project cost can be five to ten times the cost of the enterprise software for large-scale implementations, and can take literally years before the software is implemented and business benefits can begin to be realized.

Even after incurring these high implementation investments, the worst is yet to come--Gartner Group has estimated that 70 percent of the total 5-year cost of ownership for enterprise software comes after implementation.

For every technology component that was assembled together, IT must apply patches, update security, perform backups and recovery, monitor performance, plan for capacity, and handle user issues. Every technology component also has its own maintenance fees--typically 18 to 25 percent of each component�s up-front cost must be paid each year.

Customizations that were applied during implementation add even more long-term cost to the solution--the customizations must be maintained by hourly consultants and upgrades to the enterprise software cannot be performed without customizing all over again. Finally, after deployment, enterprise software solutions freeze business process innovation. Once enterprise software has been customized, additional changes require either further customization or upgrading to a new version of the enterprise software, both of which are time-consuming and expensive. As a result, most enterprises decide to endure with their current version and limited capabilities until another large capital expenditure can be justified.

In short, attaining the business benefits of the solution not only requires a large up-front investment in technology and personnel, it also requires patience--benefits aren�t realized for many months or years after the decision to adopt the software. Ongoing benefits are then eroded by the high cost of ownership, including maintenance fees, system administration time, and upgrade project costs.

A better model--business service providers

Faster innovation, higher quality, lower costs

A Business Service Provider (BSP) provides a complete outsourced process by combining all roles needed to deliver a software-enabled solution � software development, implementation, operations, and ongoing process improvement. BSPs are leading the way in their software segments to quickly deliver value to customers for a fraction of the total cost of ownership.

BSPs design and build Internet-based software that only requires a web browser to use, so there�s no on-site installation, and architect the software so multiple customers can run on the same infrastructure, which reduces the cost of ownership for each customer by an order of magnitude. Customization is avoided by making the software highly configurable, so each customer�s process requirements are satisfied by arranging process steps and enabling the right business rules.

As a result, BSP implementations take a few weeks instead of many months or years, and for a small fraction of the cost. In addition, the customer�s risk is greatly reduced--instead of committing millions of dollars and years of organization focus to fully implement and deploy the solution, no up-front capital is needed and benefits are apparent within weeks.

The BSP business model also allows BSPs to eliminate many activities that enterprise software companies must perform. To support customer installations on a variety of platforms, enterprise software companies have to maintain and update many versions of their software, port their software to a wide variety of platforms, and support diverse customer configurations. As a result of all this complexity, The Economist has estimated that as much as 70 to 90 percent of their programming activity is for maintenance. BSPs, on the other hand, avoid almost all of these non-value-add activities, so their maintenance percentage is only 10 to 30 percent, allowing almost all of a BSP�s programming effort to focus on new value-add functionality.

This new functionality and resulting process improvement also is delivered to customers much more quickly--instead of avoiding upgrades due to the high project cost, the BSP automatically upgrades the solution on a regular basis for customers for no additional cost. For BSP customers, the result is much higher adaptability and speed in applying new innovations.

In short, the decision to implement a BSP solution is altogether different than deciding to implement typical enterprise software � there are no up-front technology costs, IT resources don�t need to be pulled off other projects, ongoing costs are greatly reduced, and benefits start accruing in weeks rather than many months or years.

The future of enterprise software
In order to adapt, large incumbent enterprise software companies will strive to reduce their cost structure and increase their productivity to reduce the total cost of ownership of their software, through methods such as outsourcing development and maintenance. However, this will be a gradual, long and ultimately futile process, for software that is architected for large custom installations will always have the high-cost and slow-adaptability issues that were described above. Although the large incumbent enterprise software providers will continue to expand their offerings to gain a firmer hold on their customer base, over time more and more of their revenue from yearly maintenance fees.

BSPs, on the other hand, will continue to gain momentum as they deliver real benefits to customers and use their inherently higher development productivity operations efficiencies to extend their lead in capabilities and cost structure. BSPs will easily prevail in the mid-market, as these customers do not have the capital or internal resources to accomplish customized software installations. BSPs will also be successful with large enterprises that need quickly-implemented, low-investment, best-of-breed solutions for specific processes.

The BSP value proposition will be further accelerated by technology advances in web services, which provide faster and lower-maintenance connectivity between software systems. This will permit Internet-based software to exchange information quickly, securely and robustly, eventually allowing suites of different web-services software to transparently and efficiently provide complete solutions across many processes.

Conclusion
BSPs are the next generation of enterprise software--a better business model that achieves higher benefits for customers, more quickly and for much less cost. By eliminating all up-front capital costs, implementing in just a few weeks, and efficiently delivering a complete end-to-end solution, BSPs overcome the inherent problems of today�s enterprise software to provide quick business results and fast adaptation at a small fraction of the total cost of ownership. Higher benefits, faster execution, and lower risk, all at a fraction of the cost--it�s no wonder that BSPs are quickly gaining momentum in multiple segments of the enterprise software market.

biography
John F. Martin is Senior Vice President, Corporate & Product Strategy for IQNavigator, Inc. where he leads the company's global technology and marketing teams. Based in Denver, CO, IQNavigtor is a leading provider of services procurement and spend management software. For more information please visit www.iqnavigator.com.