"Pay-as-you-go" software: its time has come?

Is pay-as-you-go computing a feasible proposition? Ask Kyle Lambert, VP of information systems for John I. Haas, a global supplier of hops for the brewing industry. Three years ago, the business was facing a costly upgrade from Oracle 10.7 to Oracle 11i—involving not only a great deal of consulting resources, but hardware replacement as well. "We were looking at unknown expense after unknown expense, stretching out into the future," Lambert recalls.

Instead, he negotiated a flexible pay-as-you-go outsourcing deal with Oracle.

"In contrast to traditional outsourcing deals, which lock you in for years, we can get out in 30 days, and we pay quarterly in advance," says Lambert. "And if we get out before the end of the quarter, the unused portion is refunded. If we need it, Oracle is responsible for adding more disk space, CPU resources, and memory—all without affecting our cost. How much more pay-as-you-go can you get?"

While not every pay-as-you-go proposition offers this level of flexibility, the concept appears to be catching on. It's not confined to data centers either, where vendors have offered pay-as-you-go propositions for some time. Now software applications also are moving to a pay-as-you-go basis. For instance, IBM is offering more than a dozen applications as part of its "on-demand" computing model, according to Maia Lorence, director of industry solutions for e-business hosting. The strategy, she explains, has two parts: 1) partnering with niche application vendors to offer software focused on the needs of particular industries; and 2) partnering with major applications vendors to offer solutions with broad appeal in varied industries.

Price optimization software from DemandTec, for example, is offered to retailers. B&Q, Europe's leading do-it-yourself home improvement retailer, signed a pay-as-you-go deal in March. PLM software from PTC is offered to manufacturers and other industries with PLM requirements. And some 1,500 companies, collectively comprising tens of thousands of users, have signed up for Siebel CRM OnDemand, a hosted, Web-based version of Siebel's core CRM application.

"It's not so much a 'cut-down' enterprise application as it is a separate application designed from the ground up for a different market," says Ken Rudin, VP and general manager of Siebel CRM OnDemand. "It's focused on being fast, simple, and affordable—rather than on meeting the needs of a company like General Motors."

Pricing, Rudin adds, is $70 per user per month. The pitch is simple: "All the benefits of CRM, without the big up-front investment."

While pay-as-you-go is still relatively rare, Simon Bragg, an analyst with Dedham, Mass.-based ARC Advisory Group, believes the strategy can be appealing to a market segment unwilling, or unable, to afford large-scale investments in applications—especially given the still-uncertain economy. "It's the application service provider model, renamed and relaunched," he says. "It's designed to turn a potential capital expenditure into an expense item."