Business IT: Rent or Buy? - Page 4

Benefits of Outsourced Applications


The most obvious factor driving outsourcing is its potential for reducing costs. Infrastructure overcapacity is a big problem: Saugatucks research indicates that many businesses have 50 percent or more surplus IT capacity that remains unused most of the time. Economy of scale is another advantage that outsourcers offer: A data center serving 100 different customers is likely to cost less per customer than would 100 separate data centers, each serving a single customer. The economy of scale is further visible in outsourced environments that implement multitenant architectures, where multiple users are each sharing private instances of a single application.

And yes, fundamental cost structures are a factor as well: Labor rates, real estate expenses, and taxes may be substantially lower in out-of-the-way geographic locations. (Theres a reason that Silicon Valley companies locate call centers in places like Nebraska—or India—rather than in the hugely expensive local market.)

If youre using a Web-native application, theres an additional benefit: All you need is a Web browser to access the application, which means no specialized client software to install. Furthermore, updates to the application are automatic; theres no need to push a new client out to dozens or hundreds of machines. Although browser-based applications typically havent offered the rich user experience of native GUI applications, companies are getting better at using JavaScript and dynamic HTML to enhance the richness of Web applications with features such as drag-and-drop. Security across the wire is usually provided via SSL support already built into browsers.

A downside of Web-based applications is that you cant use them off-line. Many vendors therefore provide some kind of off-line client software as an alternative access mechanism. But in our experience, these dont usually offer the full range of features available in the online application.

Whereas traditional CRM applications often entail extensive customization—to the extent that some analysts recommend budgeting $3 in consulting and services for every $1 in licensing fees—on-demand applications typically work off a prebuilt foundation that can be configured more than customized. Yet companies like are beginning to reset the customizability goalposts with user-extensible data schemas, sophisticated multilanguage support, and full-blown APIs. In fact, CEO Marc Benioff claims, "We dont make a CRM app any more, we make a tool" that lets companies create whatever database-driven application they want.

Yet the fact that many outsourced applications do provide so many capabilities on top of multitenant architectures means that they offer the advantage of rapid provisioning of new services, so companies IT departments can become more nimble. The model also reduces risk. Companies purchasing outsourced services dont need to worry about the capacity of the infrastructure and what to do if demand varies dramatically. Nor do they need to devote resources to managing internal staff.

Application outsourcing may thus hold particular appeal for small and midmarket companies—those with a few dozen to a few hundred employees. Such companies often need complex, robust IT systems but dont have the deep enterprise IT resources and expertise that larger companies can apply to the problem.

But the appeal of application outsourcing undoubtedly extends to both much smaller and much larger businesses as well. Many vendors offer small-scale versions of their products with low monthly per-seat pricing, so you pay only for what you use. At the top end, in terms of the scope and the costs of outsourcing agreements, the skys the limit.