Helping small businesses choose between On-demand and On-premise software

Decisions on any technology closely tied to the financial health of a business should always be made carefully. This includes whether to select an on-demand or the on-premise model.

The following is a rundown on some of the merits and challenges of these two software delivery models, with a focus on the needs of small-to-midsize businesses.

On-Demand Software

This model offers several benefits for small businesses. It is considered a relatively low-risk investment because it has a lower cost of entry, there are no IT readiness issues, the time to productivity is shorter and users can access the software from either the workplace or a remote location.

  1.  Lower cost of entry: Many small companies are attracted by the "pay as you go" aspect of on-demand software, seeing on-demand as a way to avoid the large upfront investment required for software licenses and hardware. On-demand software providers typically charge on a subscription basis and do not require an investment in IT infrastructure. The software is managed at the vendor’s data center on the vendor’s hardware on behalf of the customer, reducing the hassles of ongoing IT maintenance.

  2.  No readiness issues: Generally speaking, the smaller the business, the less likely it possesses the time, money or expertise to purchase, manage and maintain an IT infrastructure. An on-demand application can eliminate many of these IT issues by outsourcing the setup and administration of the hardware and software to the software vendor. While on-demand software never completely obviates the need for on-site technical skill, it dramatically reduces the technical burden associated with the ongoing IT management of business software, enabling businesses to devote more of their time to higher-value activities.

  3. Shorter time to productivity: The competitive advantage for many small companies is their ability to be agile in responding to opportunities. A deployment that takes months can be a drag on companies. Because on-demand deployments are typically preconfigured and pre-installed by the vendor’s experienced IT staff, they are relatively speedy.

  4. Support for mobile users: Whether employees are in the office, at home or in a hotel room in another time zone, access to an on-demand application is identical. This means that there are no inherent compromises in functionality or difficulties in interacting with the application.

On-premise software

But the on-demand model isn’t necessarily right for every small business. The on-premise software option also has several benefits: It is considered a more cost-effective alternative over a three-to-five-year period of time, and it gives the user more local control, a deeper functionality set, faster speed and better ability to scale.

  1. Data accessibility and ownership: The biggest advantage of on-premise software is that businesses have complete control over their critical business data. This data is physically located on a business’s premises and does not require the transmission and storage of data off-site. Owning the hardware and supporting systems provides a business with maximum control.

  2. Transactional volumes: The architecture of on-demand software is not always designed to support high volumes of transactions, particularly in shared environments where users are at the mercy of Internet bandwidth and shared processing resources. Depending on time of day and seasonality factors, performance of shared-server, on-demand software can fluctuate significantly. Therefore, the on-premise model may be preferable for companies that process more than 50 to 100 transactions each day.

  3. Less downtime: On-demand software vendors often provide service-level agreements that set standards for the level of availability of the business application running on its servers at its data center. However, there is one aspect that the vendor can’t guarantee: the communications link between the user and the vendor’s data center. An on-premise approach removes all remote-connectivity issues, a critical consideration for a growing business.

  4. More seamless hardware/software integration: Typically, on-demand software applications do not support external hardware systems, though such systems may be critical to a company’s operations. One example of this type of limitation would be the failure of an on-demand application to offer point-of-sale hardware integration. With the software running on its premises, a business retains complete control over its entire hardware and software environment, including the flexibility to select the peripherals and third-party applications that best complement and support its processes.

  5. Lower ongoing costs: The benefits of a lower upfront investment associated with the on-demand model erodes over time because there is an obligation to pay ongoing subscription fees and, typically, there are no volume discounts or declining marginal costs for additional users. While an on-premise implementation requires a larger upfront investment, such an investment delivers a greater return on investment over a sufficient period of time.

Which model is right for your business?

Once you know the respective benefits of on-demand and on-premise software, the key is to understand which issues are most important for your business and weigh the pros and cons. There will always be trade-offs. When choosing between the two options, small companies should consider the following:

  1. Cost: Does your company have access to the funds necessary to invest in on-premise software?

  2. Availability: What level of uptime will the on-demand software provider guarantee and how quickly will it respond to a problem?

  3. Control issues and data security: Are you comfortable with your business data being housed off-site or potentially residing on the same data center server as your competitors’ business data?

  4. Feature-set and customization capabilities: Do your company’s changing business processes require more configuration and customization than an on-demand software provider can — or is willing to — handle? Or do you need (or plan) to integrate the capabilities of the software with in-house applications or other software to which you may subscribe?

  5. Scalability: How prepared are you to change your business management software as your company grows over time? Would you prefer to grow and replace your software, or let your software grow with your needs?

James E. McGowan is president and CEO of Everest Software Inc., a provider of both on-demand and on-premise business management software.

Copyright © 2006 IDG Communications, Inc.

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