EXECUTIVE SUMMARY

Market

CAN ON-DEMAND Pulse

TRANSFORM CIOS INTO
CHIEF INNOVATION OFFICERS?

Research conducted by

CXO MEDIA

Sponsored by
 Executive Summary
ON-DEMAND SOLUTIONS REDUCE COSTS, FREE CIOS TO FOCUS ON INNOVATION
Companies don’t want to invest in information technology merely to maintain the status quo. IT must fuel
innovation so that the business can respond to new opportunities and adapt to changing requirements.
Too often, however, IT departments are infrastructure mills, with most of their resources bound up in the
rote exercises of maintaining hardware, patching software, tuning databases and running backups.

Enter on-demand solutions. What started out a few years ago as a novel approach to buying and run-
ning enterprise applications is now a bona fide IT paradigm. With the best on-demand applications,
customers can offload the infrastructure headaches associated with maintaining, customizing, secur-
ing, integrating and upgrading software. IT organizations that want to be centers of innovation now
are looking for opportunities to extend the on-demand model as a platform for building the next
generation of business applications, as well as customizing existing applications that are delivered
as services.

That’s just what the CIO ordered. IT leaders no longer can tolerate the fact
55% FEEL THEIR COMPANY IS SPENDING that their departments’ efforts to innovate are stymied by the sheer weight
TOO LITTLE ON INNOVATION of everyday responsibilities. Ironically, each new business-critical applica-
Q: Is your company spending too much, too little or tion they build for deployment on-premise—a months-long process of pro-
the right amount of its IT budget on innovation? gramming, testing and provisioning using traditional methods—ultimately
Too much
becomes another resource-sucking infrastructure-maintenance burden.
IT’s ongoing efforts to monitor, troubleshoot, report on and support appli-
The right
7% cations often keep it from quickly addressing new requests from the busi-
amount 38%
55% Too little
ness. It’s a vicious cycle: Once those requests are finally filled, they add to
IT department overhead. Is it any wonder that the IT advisory firm Gartner
estimates that $8 out of every $10 spent on IT contributes to neither busi-
ness change nor growth?

Source: IDG Research Services Study, March 2007

“The on-demand approach to business applications enables us to leverage
a smaller IT department, which is charged with the deployment of new ini-
tiatives every day,” says Douglas Menefee, CIO of The Schumacher Group,
a physician staffing organization based in Louisiana. “Spending two-thirds of an IT department’s time on
infrastructure is an unsustainable model. On-demand helps CIOs and IT departments make measurable
contributions to business goals by enabling them to focus on developing innovative ideas.”

In March 2007, IDG Research Services queried 143 CIO magazine subscribers—senior IT and corporate
managers—about the issues that affect their IT groups’ ability to be nimble and innovative, and about the
role on-demand applications may play in helping to solve these problems. The research reveals that:

ß The top three benefits of the on-demand model are improving implementation times, reducing
costs and allowing IT to focus on strategic innovations. Other perks include greater automation,
reliability, productivity and improved returns on IT investments.

ß A whopping 80 percent of respondents agree that on-demand allows IT to focus more on innova-
tion and less on infrastructure.

ß Half the users surveyed say it is critical for on-demand software to serve as a platform for new ap-
plication development and deployment.


 EXECUTIVE
S U M MARY

THE STRUGGLE TO INNOVATE

Across the board, IT executives struggle with innovation issues. Just ask Mark Phil-
lips, application architecture manager for IT services at global investment manager IT must fuel innovation,
AMVESCAP. “My architecture team in particular is very directed to come up with new so business can respond
stuff,” Phillips says. “We’re like the R&D for application development for the whole to new opportunities.
organization worldwide, so we’re directed to provide a lot of innovation.”

AMVESCAP favors the buy-versus-build model, but time, money and resources are always in short sup-
ply. Just researching and testing innovative new systems means building servers, networks and databas-
es. “That may be one good argument for the proliferation of on-demand systems—because they are a lot
easier for proof-of-concept,” Phillips says. “You just log into the
Web and hit it like you would hit Google or Yahoo! instead of
building a server and creating security and databases, because
theoretically they are already there.”
In the IDG survey, more than half the respondents surveyed say
their companies spend too little on innovation. But IT manag-
ers have the potential to turn that around by investing more in
on-demand solutions. Nearly 60 percent of respondents say
they are using or planning to use on-demand software within
a year. Companies will commit a slightly smaller percentage of
their software budgets to licensed software and custom-built
applications in the coming year than they do today, but the
percentage of software spending allocated for on-demand ap-
plications will rise from 15 percent to 18 percent over the same
time frame.
On-demand providers must do more than simply offer software
as a service, however, because that addresses only part of the
innovation quandary. To be sure, by removing concerns about
hosting and maintaining the server infrastructure, on-demand
offers organizations speedier, more cost-effective deploy-
ments. In fact, six out of 10 IDG survey respondents say quick
deployment times and the need for cost-efficient solutions are
triggers for their current use of on-demand.
But in addition to offloading the infrastructure upkeep, compa-
nies need on-demand IT solutions that make it easy to create
robust new features and extend the functionality of existing
on-demand applications, such as customer relationship man-
agement (CRM), without coding. Those vendors that enable
companies to build entirely new and sophisticated on-demand
applications—concentrating coding on unique business pro-
cesses without worrying about programming low-level com-
modity requirements like security rules—will emerge as the
go-to business partners for companies that want to make inno-
vation, rather than infrastructure, the priority.
The idea piques the interest of Anne Winter, project manager
of human resource- and organizational development-related IT
projects at Milwaukee Electric Tool Corp. Winter says one of the
Balancing the Budget
Companies continually perform a budgetary balancing act
on their IT initiatives. Build or buy? Run on-premise or
choose on-demand? But their decisions don’t always ac-
curately account for the real costs.
It’s a problem for Milwaukee Electric Tool Corp. “We don’t
do a very good job of adequately defining internal costs,”
says Anne Winter, project manager of human resource-
and organizational development-related IT projects at the
power tool manufacturer. “The idea is that our internal IT
resources are there, so they are ‘free.’” But Winter knows
that just because an application was built in-house and
has little in the way of tangible out-of-pocket expenses,
there are still tremendous staff and resource costs spread
out over the life of the application, from development and
testing to deployment, maintenance and upgrades.
According to an IDG Research Services survey, IT budgets
are heavily skewed toward paying for all those things. In
fact, 67 percent of the survey respondents’ IT budgets is al-
located to nondiscretionary IT items, including hardware
and software infrastructure, maintenance, upgrades and
staff. That’s a deep bite out of already lean budgets just
to keep the lights on. Moreover, it leaves only about one-
third of the budget for new capabilities and innovation.
On-demand solutions can help companies reverse that
trend. Sixty percent of users surveyed say the need for
cost-efficient solutions was a trigger for their current use of
on-demand. Winter likes on-demand computing for appli-
cations such as learning management systems. “I just want
it hosted on demand. No internal servers,” she says. “If I
bring it in-house and put it on our servers, I need someone
to do all the IT functions that could be outsourced with a
hosted solution. I’d have to hire another person, but it’s
cheaper for me to pay a company to host it.”


 biggest problems with application development today is IT spending so much time on “the hard-coding
of certain basics.” “What you’re talking about is reinventing the wheel for every application. We do that
in many regards—reinventing the wheel and not advancing the innovation. I absolutely would like to
see that change,” she says. “If those solutions are emerging and out there and we wouldn’t have to be
reinventing the wheel but actually would be able to innovate on the applications we develop because
someone has taken care of the back-end, that’s great.”

WANTED: PLATFORMS FOR COLLABORATION AND COMPLIANCE

Salesforce.com, the leading on-demand IT provider with 29,800 customers and 646,000 subscribers
worldwide, often hears similar comments from its customers. CIOs are beginning to expect their on-de-
mand providers to remove repetitive, nonstrategic and low-level coding jobs, while extending their ap-
plication platforms to quickly build strategic applications. To meet those demands, providers need to
remove all of the infrastructure barriers to application development so that developers do not have to
spend huge amounts of time on low-level activities such as creating and tuning databases or coding data
security rules.

“When developers are freed from mundane tasks to focus on building new on-demand applications,
everyone wins,” says Ariel Kelman, senior director of platform product marketing at salesforce.com. “The
entire IT department gets a productivity boost, the whole company see the strategic value that IT can add
to the business, and the developers themselves are happier to be working on more interesting projects
rather than ‘keep-the-lights-on’ activities.”

Consider the massive acceleration in application development that

“When developers are freed from mundane can be achieved when programmers can take advantage of point-
and-click tools to build data models and create complex workflows
tasks to focus on building new on-demand and data input validation rules. Once the core application is devel-
applications, everyone wins.” oped, they can layer on custom code (running on the on-demand
—Ariel Kelman, senior director of provider’s servers) to effectively burn their unique business logic
platform product marketing at salesforce.com rules into their new on-demand application. These applications
can include a plethora of as-yet unautomated processes, as well
as those locked up within legacy applications, where they are un-
trackable and immune to the audit trails required by compliance mandates. “The big benefit is our cus-
tomers say, ‘I can run any application on demand, I don’t have to worry about server infrastructure, and I
can focus on innovation, not infrastructure,’” says Kelman.

Even with these capabilities, CIOs may not be able to change the total maintenance-to-innovation ratio,
which typically stands at about 30 percent to 70 percent. But they should recognize opportunities to get
the most out of their innovation budgets.

PERCEIVED HURDLES
As companies consider customizing, building and deploying applications using the on-demand model,
they want to be sure their providers are addressing concerns about upgrades and integration. The work
required to build more comprehensive functionality into client/server applications already has forced
many to abandon heavy-duty customization.

“We try to discourage customization,” says AMVESCAP’s Phillips, who calls any required customization
efforts “a necessary evil.” The problem, he says, is that companies get burned when a vendor comes out
with a new release and users have to go back and recode the custom application. Thus it’s important
that on-demand providers distinguish themselves with platforms that preserve customizations across
releases. Salesforce.com’s multitenant architecture, for example, is designed to enable all customizations
and integrations—whether they’re configured or coded—to upgrade automatically without any effort
on the part of the customer.


 EXECUTIVE
S U M MARY

The integration issue has also been a

concern to Phillips. “How do we get [an OVER 80% AGREE THAT ON-DEMAND ENABLES IT
on-demand application] to smoothly TO FOCUS MORE ON INNOVATION
and consistently be able to talk to Q: Please rate your level of agreement with the following statements.
Oracle Financials? To talk to ADP?”
he ponders. Application programming On-demand enables IT to focus more on 80% 18% 1%
innovation and less on infrastructure 1%
interfaces in open Web services play
On-demand solutions reduce the time 65% 33% 1%
a critical role in ensuring that on-de- required to roll out a given application
mand platforms can easily integrate 0 20 40 60 80 100
with both on-premise applications
such as enterprise resource plan- 1=Strongly Agree 1 2 3 4 5 5=Strongly Disagree
ning (ERP) systems and business Web
Source: IDG Research Services Study, March 2007
services such as ADP and Hoover’s,
says Kelman. Salesforce.com custom-
ers have been able to benefit from this powerful model for integration success. In fact, more than half of
the traffic on salesforce.com’s service is driven by integration transactions versus end-user application
use, he says.

“Our global sales teams needed access to product data stored in our SAP ERP system. With the Salesforce
platform, integration between Salesforce and SAP was seamless,” says Cheryl O’Connor, worldwide CRM
strategy manager for Analog Devices. “Now our sales teams have a unified view across customer activity
and product information.”

ON-DEMAND’S NEXT LEVEL

Organizations already know that on-demand applications work. In the IDG survey, 55 percent of IT man-
agers and 64 percent of business managers who are using on-demand CRM say they are extremely or very
satisfied with it. In comparison, just 25 percent and 28 percent of IT and business managers, respectively,
whose organizations use commercial or homegrown on-premise CRM software consider themselves ex-
tremely or very satisfied with it.

It makes sense that companies want to extend the value they’re getting from on-demand applications like
CRM to other parts of their IT environments. They are poised to take on-demand to the next level, build-
ing a complete application environment for innovation. In line with that, the pace of on-demand adop-
tion is accelerating. McKinsey & Company has reported 61 percent growth in enterprise
adoption between 2005 and 2006, while Gartner says that on-demand applications
now represent between 25 percent and 40 percent of the $220 billion software indus- IT organizations want to
try. IDC predicts a 31 percent compound annual growth rate for on-demand CRM. extend the on-demand model
as a platform for building
As the industry evolves to enable companies to efficiently roll their own on-demand
applications while running them off-site as services, customers are poised to leapfrog next-generation applications.
over the incremental percentage-point benefits they’ve long experienced with pack-
aged and custom-built in-house software. They’ll be able to create sophisticated applications much fast-
er, change them on the fly and drastically cut the time it takes to get things done.

In short, rather than being mastered by their infrastructures, IT will at last have an opportunity to
master innovation.

CALL TO ACTION:
This white paper and the research survey behind it are sponsored by salesforce.com, a pioneer in on-demand
solutions that has helped to make hundreds of thousands of subscribers wildly successful and is fundamentally
changing the industry. Find out how salesforce.com can help you reduce costs, save on implementation times and
free up your IT resources. Visit www.salesforce.com/cio for more information.