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This approach to defining a performance-based taxonomy will also allow for a more effective comparison within industries as well. All of these factors taken together will provide enterprise computing buyers with more effective foundations of arguing for more thorough measures of application performance. The net result will be much greater visibility into how cloud computing is actually changing the global economics of the enterprise computing industry.
III. Final Report:
The foundational aspects of cloud computing's economic advantage are predicated on how efficiently this approach to propagating enterprise-wide applications across entire organizations at a very reasonable cost. The technological factors of this technology platform, along with its accompanying infrastructure stability, fault redundancy, multitenancy, security and user experience advancements, have made it an area of continued research & development focus by many leading corporations and universities. As a result there is a wealth of both empirical and theoretical knowledge with regard to cloud computing as a technology platform alone. The myriad of those developments form the foundation of a disruptive shift in the economics of enterprise software, including a complete redefinition of how Total Cost of Ownership (TCO) is used today for evaluating and choosing SaaS-based applications over traditional, and more expensive on-premise applications (Bhutta, Huq, 2002). While the TCO advantages of cloud-based applications and platforms are very compelling, there is a lingering doubt in the minds of many Chief Information Officers (CIOs) with regard to their long-term viability and value. CIOs are given the responsibility of stabilizing the enterprise it infrastructure for the companies they work for; their ideal situation is having no risk and no strategic challenges to deal with during their tenure (Carr, 2011). They are in essence the keepers of the it infrastructure dial-tone.
Yet cloud computing, with its disruptive economic forces and as this study shows, significantly lower Total Cost of Ownership (TCO) indexed to SLA performance, can deliver significantly greater business gains over time. As has been often cited in Dr. Clayton Christensen's book the Innovator's Dilemma, the role of new market entrants is to often change the economics of a given industry by making more streamlined, cost-effective technologies more strategic over time. This is the identical paradigm that is reshaping the cloud computing industry today globally, and is especially evident in the area of Customer Relationship Management, which is experiencing the most rapid adoption rates of any category. For purposes of this study, a comparison of TCO performance between on-premise CRM applications and cloud-computing CRM applications has been made. These results are indexed by services revenue of each company, which is an indicator of how profitable Service Level Agreements (SLA) is for each vendor. From the cloud computing vendor's perspective, SLAs are often used as a means to gain trial and eventual adoption of enterprise-wide cloud computing applications. For the o-premise vendor, their maintenance revenue stream, as has been mentioned before, form the majority of their recurring revenue stream over time. To ensure complete coverage of the market, the top three market share leaders will be covered in this analysis. The following chart provides an analysis of the worldwide CRM market share leaders in 2012, which is the latest available data from it research advisory firm Gartner Inc. In their report Market Share Analysis: Customer Relationship Management Software, Worldwide, 2012 published April 18, 2013 this firm showed that Salesforce.com has the majority of worldwide CRM market share with 14%, followed by SAP at 12.9%, Oracle at 11.1% and Microsoft at 6.3%. Only Salesforce.com generates all of its revenues using a cloud-based architecture. Figure 1, Worldwide CRM Software Spending by Vendor, 2012 illustrates the distribution of worldwide CRM software sales by vendor.
Figure 1: Worldwide CRM Software Spending by Vendor, 2012
Source: (Gartner, 2013)
SAP, Oracle and Microsoft each rely on the traditional enterprise software model of having a series of relative high up-front costs, followed by a recurring maintenance fee over time. This is in contrast to the business model cloud-based application providers use including Salesforce.com, who relies on a subscription-based business model. Large-scale enterprise deployments that are on-premise often take several months to gain funding approval of, and in the case of 400 seat implementations or more, must also go through a rigorous budgeting process (Stanic, 2003). This is because the initial costs of enterprise-wide application support and platforms can be well over $1 million or more. For cloud-based applications however, enterprises pay subscription fees and consulting fees for business process reviews. An emerging best practice today by early adopters of cloud computing in the enterprise is to use the implementation of a cloud-based application to also completely redefine several business processes that the new cloud-based system will automate (Read, 2011). Of the many areas where early adopters of cloud-based applications are making process, the one with the most use cases and evidence of business process management (BPM), business process re-engineering (BPR) and significant gains in corporate performance is CRM as a result. Given the wealth of CRM use cases, this area of enterprise software is the basis of this TCO and SLA analysis. on-premise enterprise software companies have long relied on BPM and BPR-based projects to increase the size and profitability of sales for on-premise applications (Shackleton, Saffre, Tateson, et.al. 2004). This has especially been true in CRM, where process latency from isolated, often customer-centric workflows can be quickly determined, and the isolated effects of a new CRM system quickly quantified as a result. This is lucrative for traditional enterprise software vendors including SAP, Oracle, Microsoft, IBM, Infor and many others that it is common to see the costs of these BPM and BPR projects are at least ten times those of the actual costs of the software itself. This 10X multiple for services, the majority of the time driven by BPM and BPR-based work, is often managed b y the CIO and their staff. In contrast, BPM and BPR-based work on cloud computing application are typically at a much lower multiple, nearly 5X at most, given the highly iterative nature of cloud-based applications and the ease of modifying them in real-time (Denne, 2007).
The discussion of BPM and BPR strategies for on-premise enterprise applications vs. those that are cloud-based is especially relevant from the funding perspective of the enterprise adopting them. For on-premise applications with heavy requirements for BPM and BPR custom programming professional services, funding is treated as a capital expense (CAPEX). CAPEX-based spending on a project requires approval not just of the CEO but of the board of directors of a corporation as well (Katzan, 2010). If the corporation is public, the expenditure will also need to be mentioned in the financial reports, filed with the Securities and E. change Commission (SEC) as a material event if the company is publically-held in the U.S. To ensure compliance with the Sarbanes-Oxley Act of 2002. While lengthy, complex and very time-consuming, corporations often tolerated this purchasing process to gain the potential value of an enterprise software application in their company. CRM, with its strong focus on driving top-line revenue, have historically been the most efficient at navigating the CAPEX process as the Return on Investment (ROI).
SaaS-based applications including CRM are sold on a subscription basis, where payment is made only on the functionality and in some cases, measured value delivered. This has over time lead to Salesforce.com and a myriad of other software companies creating pricing that aligns with operations budgets of enterprises. This budgeting approach is called OPEX (operating expense) and is under control of the line-of-business manager or leader of a given department. Selling software using the OPEX model leads to sales cycles that average less than two months, have in-build value accelerators to provide customers with incentives for using the software across more of their companies while also streamlining the BPM and BPR-based process improvements that enterprises typically put in place as they also introduce a new enterprise software application.
This shift in enterprise software economics, from CAPEX to OPEX, has its foundational elements in the compelling financial advantages TCO shows cloud-based applications have. SLAs are the accelerators of TCO-based change throughout the enterprise. Quantifying just how much of an impact SLAs have in decision-making is outside the scope of this research, which centers on indexing TCO performance of cloud-based applications. These fundamental shifts in the economics of cloud computing are a threat to the status quo CIOs so religiously attempt to protect. Yet the economics of cloud computing, in this era of economic uncertainty, are so pervasive that the role of the CIO is also being changed.
Change management is often the most critical success factor of any enterprise software deployment. The economics of cloud computing in general and the continual influence of TCO-based decision making in enterprises, is accelerating the pace of change in enterprises. CIOs can no longer rely on the status quo and a risk mitigation strategy to resist change, even when cloud computing platforms offer such compelling financial benefits to their organizations. CEOs, board of directors and shareholders all realize…[continue]
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