Are You Being Served?

Imagine if you had to generate all the electricity your company used. A good chunk of your annual business expense would be paying for an on-site generator, trucking in fuel, and maintaining a staff of electricians and other technicians responsible for keeping the power on. All across the country, other companies large and small would have similar expenses.

Fortunately, businesses don’t have this distraction and can let experts deliver the juice. The power companies build, fuel, and maintain a huge infrastructure that allows them to transmit electricity for a monthly fee based on usage.

Experts seem certain that all but the most complex software will eventually be provided as a service, altering the IT landscape.

A similar system is gaining ground in the software world. More companies are electing to outsource software that they once bought or built, hosted, and maintained in-house, including customer service and sales-force recordkeeping, electronic data interchange (EDI), e-mail and messaging, and other applications.

This delivery method is called software as a service (SaaS), or on-demand or utility computing. In its purest form, SaaS involves one “instance” of a software package hosted on a central computer and served out to multiple customers who use a Web interface to access it. Anyone using Google’s Gmail or Microsoft’s Hotmail is using SaaS.

It is an appealing option for a relatively new business that needs to implement a technology for the first time, suggests Jim Frome, chief strategy officer for Minneapolis-based SPS Commerce, which provides EDI—the electronic transfer of purchase orders, shipping notices, invoices, and inventory-status updates—to 11,000 customers in the retail and manufacturing sectors. Under traditional circumstances, a company would purchase or build a software package, buy a big enough server to host it, and learn to run it and maintain it. “If given the option of outsourcing that for a monthly fee, that is very attractive,” Frome says. But it’s not just new companies that are adopting utility software. Many established businesses are opting to shut down internal software operations in favor of the service model, he adds.