Analysts say SMEs could be the biggest beneficiaries of the software-as-service trend, writes Geoffrey Nairn
Bilbao's stylish steel-clad Euskalduna convention centre is a bold bet on the future yet one that acknowledges the Spanish city's shipbuilding past. It makes a fitting stage for IBM to present its own big bet for the future, utility computing, which also has its roots in the past - the days of main-frame-based service bureaux.
An IBM road-show recently stopped in Bilbao to educate local small and medium-sized enterprises (SMEs) about IBM's new "on demand" strategy. The choice of audience might seem strange. To date, IBM, Hewlett-Packard and EDS - the three vendors making most noise about pay-as-you-go computing - have mostly targeted large enterprises.
Yet analysts say SMEs could be the biggest beneficiaries of this trend to offer computing as a service, as it lets them access IT resources they would otherwise be unable to afford. There are other reasons why vendors should not ignore SMEs.
"Although it seems aimed at large enterprises, on-demand computing is a high-volume, low-margin market. To make it work, vendors need to go down market to reach the SMEs," says Stratos Sarissamlis, vice-president at Meta Group, the IT consultancy. That means taking the "computing as a service" message beyond the North American market to places such as Bilbao where SMEs, not large businesses, dominate the economy.
There are more than 7m SMEs in Europe, according to Mr Sarissamlis, but most of the region's utility computing deals have involved big enterprises, such as Axa, Lego, Electrolux and Boots.
This echoes the way the market has developed in the US, where IBM's on-demand customer base is heavily tilted towards giants such as JP MorganChase and American Express.
"Vendors need to sell to the corporate world because its impact on the 'mind share' is significant," says Mr Sarissamlis.
But the large enterprise market is limited and by presenting utility computing as a technology for big multinationals, vendors run the risk of alienating the potentially much larger market of SMEs.
"Companies seeking long-term success in the utility computing market must look past the current market adoption model to what we believe will comprise the heart of the market - the SME," says David Tapper, programme manager for utility services research at IDC.
IBM's Spanish road show suggests that the US company has belatedly woken up to the potential of the SME market - and one of its biggest challenges, namely trying to explain to sceptical SMEs just what utility computing means for them.
"Utility computing has to be made compelling for SMEs," says Alastair McAulay, senior consultant at PA Consulting Group. "Utility computing will only make sense to SMEs when they understand what it is they are buying and when implementation costs are lower than the immediate savings."
The IT industry has long struggled to convince SMEs of the value of investing in IT. Five years ago, hosted solutions emerged as a possible solution to this problem.
A new breed of application service providers (ASPs) claimed their "software as a service" offerings would eliminate the capital investment and headaches that SMEs associate with running software in-house. But the market proved a tough one to crack and many ASPs succumbed in the dotcom fallout.
The software as a service idea has not lost its appeal, however and the latest generation of hosted customer relationship management (CRM) offerings appear to be having much success with SMEs.
Robert Messner is chief executive of ABP International, a small Dallas-based telecoms equipment distributor which uses Salesforce.com, the best-known hosted CRM offering. "It is one less IT server for ABP to worry about," he says.
Zach Nelson, chief executive of NetSuite, a US-based ASP specialised in enterprise software, clearly agrees. "Traditional software companies have had a hard time entering the SME market because their whole sales model is targeted at large enterprises," he says.
Oracle has come to the same conclusion. Instead of trying to sell them software licences, Oracle now points its smallest customers in the direction of NetSuite, whose entry-level hosted offering has been rebranded as Oracle Small Business Suite.
It combines customer management, inventory, ordering and financials in a single hosted service. NetSuite claims Oracle Small Business Suite can reduce the cost of business applications by up to 90 per cent as there is no hardware to buy, no up-front license fees, and no resources required to install and maintain system.
Mr Nelson blame the past failure of the ASP model on immature technology and the shaky finances of the dotcom-era ASPs. The lessons have been learned, he says, and SMEs are now showing growing interest in hosted applications. NetSuite has around 7,000 customers and recently expanded into the UK.
For the SME market, the tangible benefits of utility computing can still be difficult to understand. Perhaps for that reason, the real crowd-puller on IBM's Spanish road show was not its on-demand strategy but a seminar on Linux. IBM promised that Linux could deliver cost savings of between 20 per cent and 40 per cent - something even the most jaded small business owner could easily grasp.
