At least the benefits are clear

Although it's still in start-up mode, Ario Data Networkshas a mature process for managing product design changes.

"We established a centralized process from the beginning so our staff could learn and grow with it," says Bal Singh, VP of operations for the San Jose, Calif.-based company that makes equipment for storage networks. "We have prevented people from developing the habit of keeping data on individual spreadsheets, so we won't have to retrain them when we get too big to operate like that."

Singh also concedes that Ario could not have executed this strategy if it had to purchase the technology that supports it.

Ario pays a software vendor, Arena Solutions, an annual fee to host the product life-cycle management (PLM) applications that support Ario's product development processes. "We picked Arena," Singh says, "because it had the same functionality as any system we could have purchased, but for a much lower entry cost."

The cost was lower because Ario did not have to purchase servers or any other hardware for the Arena package. It simply issued passwords to users who access the system—which resides in Arena's data center—via Web browsers.

While Ario clearly has found a creative solution to a common business problem, it also has become part of a debate over what it means to operate an on-demand business model.

IBM generally is credited with coining the term on demand, or at least making it famous with its seemingly ubiquitous ads about on-demand business. But some people, including Arena Solutions CEO Michael Topolovac, quibble with IBM's definition of on demand, particularly as it relates to software deployment.

"True on demand is software as a service," Topolovac contends. "It is one instance of a system serving all customers. Having that common infrastructure allows our customers to add or subtract users at will."

While admitting it takes a certain amount of hubris for the CEO of a small software company to raise an argument with IBM, Topolovac has his own term for what he sees some vendors, including IBM, doing under the umbrella of on demand.

Topolovac says these vendors are offering "fake free hosting," which he likens to the banking industry practice of advertising free checking accounts with hidden fees.

In the software industry, Topolovac argues, the hidden fees are the cost of hardware that must be purchased to run an application, even if a vendor hosts the application. Topolovac cited an IBM on-demand deal in which he contends that IBM purchased hardware for the customer and now is leasing that hardware back to the customer.

"There's nothing wrong with that, but it's not a new business model, and it doesn't offer real cost savings," Topolovac says. "There are no economies of scale from having multiple companies share the same infrastructure. True on demand means zero IT purchases and zero IT work for the user."

John Lutz, VP of on-demand business with IBM, says Topolovac defines on demand too narrowly. "We're flattered that so many people think the on-demand concept has traction," Lutz says. "But we are always careful when we talk about on demand to look at it in the context of the overall business."

Ultimately, Lutz says, an on-demand business model integrates IT with business processes in a way that gives a company "the flexibility to quickly change the business whenever market conditions dictate.

"If someone wants to talk about on demand as making one application available on a pay-as-you-go basis, that's good," Lutz adds. "But it's not enough to help companies make the type of changes they need to be leaders in their industries." (See sidebar at right to learn how IBM tested its theories about the on-demand business model in its own supply chain.)

Lutz says IBM supports the on-demand business model in three ways:

• Identifying business processes that can be improved through the use of technology. This usually is done by IBM Global Services, IBM's consulting group.
• Offering products that can be used to develop an open IT infrastructure with self-healing capabilities and other characteristics that reduce maintenance costs. The technologies that can be deployed in such an infrastructure include the Linux operating system and autonomic computing.
• Delivering new methods for buying and managing technology. This includes the utility computing model, purchasing everything from hardware capacity to software applications on a pay-as-you-go basis.

The methods for buying and managing technology include a partnership with Siebel Systems, a CRM software vendor that created a new business unit to develop and market special versions of its CRM products that are hosted by IBM. Three of those Siebel on-demand packages are aimed at manufacturers in the high-tech, medical device, and automotive industries.

Keith Raffle, a Siebel group VP, says Siebel has worked closely with IBM to make these solutions both flexible and economical. The manufacturing solutions, which primarily support aftermarket service operations, are priced at $100 per user per month.

"There is no need for users to buy hardware, database software, or anything else," Raffle says. "All they need is an Internet connection and a Web browser. We're talking about a complete Web-based application and we have the infrastructure and IT people to run it and keep it running."

The infrastructure and IT people come from IBM, which manages the Siebel on-demand applications in a secure data center in Colorado. Raffle says such well-known manufacturers as Sony, Tokyo; Xerox, Stamford, Conn.; Ingersoll Rand, Woodcliff Lake, N.J., and Kodak, Rochester, N.Y., have adopted Siebel On Demand.

The Marking Products Division of Matthews International, Pittsburgh, uses an on-demand CRM system from salesforce.com, which was the first CRM vendor to offer this model. Matthews Marking Products makes ink-jet, indenting, contact printing, and direct thermal transfer equipment. It needed a CRM system because it had outgrown its previous one—the ACT package from Best Software.

"ACT is a great system for a single user, but we needed something more robust," says Brad Gross, network administrator at Matthews. Essentially, Matthews wanted a system that could take sales leads from any number of sources—its Web site, by telephone, or direct contact with a prospect—route them to the appropriate salesperson, and then establish a record of every contact Matthews has with each of its customers—before and after they purchase a Matthews product. "We keep track of how our customers are treated," Gross says.

Matthews looked at a number of traditional CRM systems, including some from ERP vendors, but Gross says none could match salesforce.com's cost of ownership. "Just to install one of those other systems would have cost three times what we spend on salesforce.com in a year," Gross says.

Gross handled all the tasks involved in converting Matthews' 54 users to salesforce.com himself. The primary IT-related tasks were customizing fields to match Matthews' business terminology, and uploading customer data from the previous system to the salesforce.com database. The data transfer involved converting the Matthews customer master file into multiple Excel spreadsheets, which were imported into salesforce.com.

"It was roughly 45 days from the time we decided to go with this system until we had all the data loaded and began training users," Gross says. "But loading data wasn't the hard part; the hard part was understanding our business process well enough to configure the system properly." In the end, Gross says, the conversion process helped Matthews streamline its sales process.

Working with salesforce.com also has reduced system maintenance tasks. "Let's say we need to make a change to the system," Gross says. "We send a P.O. to salesforce.com and we get the update right away. We have all the new features, and we don't have to send updates to everybody. I don't have to mess with new servers. I spend maybe a couple hours a month maintaining this system, and that involves recovering lost user passwords and clearing out older files."

Even system upgrades are automatic, Gross says. "Salesforce.com offers four major upgrades a year, and I don't have to do anything about it. That makes for a very happy network administrator."