View Point. Oracle Applications and the economics of Cloud Computing. Abstract

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1 View Point Oracle Applications and the economics of Cloud Computing Mandar Bhale Abstract Cloud computing is making waves in the Enterprise package space as the latest trend in Information Technology. Companies are forecasting unprecedented growth in the Small and Medium Enterprise (SME) segment. This paper analyzes the economics of having Oracle Applications on the Cloud and its suitability to its customers. Infosys View Sep Point

2 Content Renting in economics is generically considered more expensive over time rather than buying an asset. This financial principal is based on the concept that the rent service provider will charge a premium for his service over and above the cost of acquiring the asset and recovering the asset value over a period of time. Joe Weimenn Sr. AVP AT&T explains this phenomenon in his blog Cloud Computing Laws +. An on-demand service provider typically charges a utility premium a higher cost per unit time for a resource than if it were owned, financed or leased. Then how is it possible for a large telecom company say Verizon / British Telecom to rent an ERP infrastructure on a per month basis from a vendor like Oracle corporation rather than owning the same, installing it with its numerous other servers and network equipment and depreciate the asset over 3-5 years. It is not expected to make financial sense especially given that cost of capital borrowing, opportunity to depreciate the asset & opportunity cost of turning this capital in to revenue are nearly identical to both organizations. A vendor like oracle will still buy the hardware outright, will bear the cost of capital for the life time of an asset and potentially has the same depreciation rates. Radical ideas are just that. Radical. The economic analysis goes behind the obvious and gives an insight in to how to make sense of your SaaS investment opportunity. To cite an example all home PC users currently buy Microsoft Office license for home usage. This is an annual one time fixed cost and allows the user unrestricted access to any application irrespective of usage. However the actual usage of Power point, Word, Excel etc may be negligible over the year. If you exclude vacations, days when you only use Internet browser or other multimedia applications, there is sufficient scope for rationalization if you could pay only when you use it. And this is the addressable chunk of saving that pay per use leverages. We will review the cloud in the packaged application space along the following concepts: Utility services cost less even though they cost more + Consolidation delivers tremendous value Scalable, State of the art Architecture Gold mine for SME Secure & Flexible SaaS is not for you if Let s begin our review Utility services cost less even though they cost more + Though the service provide will charge a premium for the service, the charge is applicable based on the usage of the system. Hence the term Pay per Use. And there lies the catch, if you use the application you pay for it; however it costs nothing if you don t use it. In the ERP space, ERP implementations begin with Hardware and Software sizing exercise which is aimed at taking care of the organizations current and future needs. Implementers try to ensure that peak system demand is defined and catered for at the time of procurement of hardware and software. As a result organizations invest in the ERP infrastructure keeping in mind projected growth for the next 3-5 years, peak system demand (say at year end or seasonal variations) and expected growth in the user base. Hence the sizing exercise locks up the requisite funds of your organization to buy a given future capacity thus increasing the associated budget. These blocked funds result s in additional costs which can be channelized by flexible sourcing models provided by SaaS. Organizations can use these funds to invest in more relevant areas as the organization grows. This will result in unlocking your valuable cash for a year or more depending on requirement. As organization grows, business volume and revenue increases the equivalent growth in IT budget can be directed towards capacity expansion in a SaaS model on a per month basis. Organizations can routinely buy more capacity as they grow over time in a SaaS model. 2 Infosys View Point

3 Consolidation delivers tremendous value At the SaaS service provider s end, there is a consolidation of demand for Hardware, Network and Software licenses. The higher purchasing power drives down the cost of acquisition of these items. SaaS service providers are routinely able to generate discounts ranging anywhere from 30% to 70% on hardware or software licenses. Additionally the procurement cycle time is smaller because of continued relationship with their vendors. This enables them to procure and install additional capacity almost at will and at a much lower cost. SaaS vendor s also have consolidation opportunities in people space. A shared team of database administrators, network administrators, and performance experts are able to manage several application sets across customers. SaaS vendors are able to create and deploy tools and accelerators that enable mass management of systems. For example Oracle On- Demand s enterprise management suite allows the provider to analyze and resolve a defect and proactively identify and apply the solution to all eligible customer instances. Common Help desk enables SaaS vendors to consolidate level 1 ticket resolution activities and resolve common issues. Even Disaster recovery expenses benefit by the consolidation activity. This shared services infrastructure model lowers operational and administrative costs which ultimately benefit customers. For a software vendor (like Oracle) to provide software as a service is even more cost efficient. For all practical purposes, making available another copy of a given software license does not additionally cost a great deal of money, this is true even if you consider a apportionment of cost of ongoing development and support being passed to existing software license. While one might argue that potential revenue of a onetime license sale and the associated opportunity cost is not considered in the analysis, it is actually offset by the utility premium that the vendor charges to the customer. Scalable, State of the art Architecture Gold mine for SME: SaaS as a strategy explodes the market size by including the Small and Medium Enterprise (SME) market segment in to package applications space. SME s is the new niche market for SaaS service providers. These customers were not in a position to afford a large package ERP with the infrastructure support and were meeting their IT requirements from tier 3 vendors or home grown systems. SME s are suddenly able to realize the benefits of Secure, Compliant and State of the art applications with phenomenal high availability performance. They are able to model their work around industry standard business processes which are scalable as they grow, and all this at a low per month cost. SaaS also provides the ability of the SME to fix its annual cost and hence control the budget allocated to IT applications rather than risk the unknown cost associated to deploy and operate licensed software. The table below identifies the cost elements comparison Cost Structure: Before we analyze and compare the cost structure of the on demand (Hosted) and SaaS models it is important to note that Hosted Application Management is not the same as Software as a Service (SaaS). The major difference is that hosted AM services are designed for the management of traditionally licensed packaged applications, whereas SaaS is a model of Web-delivered, shared instance software via subscription instead of traditional licensing #. Infosys View Point 3

4 Cost Elements Traditional ERP SaaS On Demand (Hosted) Hardware cost License Fee Hardware sizing and monitoring Implementation Cost (including customization) Upgrade Cost Periodic Optional at additional cost Annual Maintenance Cost Subscription Fee Annual based on Users / Transaction volumes Annual based on Users / Transaction volumes Support Cost - Hardware Support Cost - Software Optional at additional cost Support Cost - Network Support cost - DBA Office space - Cost Personnel overheads ERP maintenance costs (sourced via internal IT resources): Maintenance cost often exceeds the cost of implementation especially if you consider hardware support, network support, data base administration and application support. SaaS or On demand solutions provide the biggest cost advantage in managing applications support thereby freeing Internal IT teams to focus on business strategies rather than managing applications. This is especially a boon for SME sector who simply cannot afford this IT infrastructure. If we compare the Software management aspect of a traditional ERP vs. SaaS; the differences are observed in all activities and the SaaS models score heavily on simplified processes, low time to market and lower costs. It dramatically changes the way software is delivered #: 4 Infosys View Point

5 Software Management Function Traditional ERP SaaS / On Demand Critical Patches Ad Hoc As soon as available Non Critical Patches / Upgrades User and data centre window dependent Periodic maintenance program Problem Management Submit technical support request, track resolution Seamless access to product, support, software management experts Upgrades Plan, implement, test upgrades Upgrades are pre-certified Integration Customized one off solution Standardize with CEMLI framework New Implementation Procure, setup, test infrastructure Proven configurations, ready to go serviceability Source: Oracle on demand website # Secure & Flexible Firewall protected systems, data security for sensitive information and protection from hackers and other unwarranted intrusion forms part of mandatory infrastructure for any SaaS service provider. SaaS vendor find it more complicated to differentiate security as an offering due to shared infrastructure. It is easier to offer the security bundled with the base package as a feature of the system and hence all customers large or small derive the same secure system as their larger paying counterparts. That s a huge new perspective size does not matter! Also with no Capex tie in period, Organizations become increasingly nimble in selecting and moving to the best suited software. Software selection mistakes can be ratified more easily. Though the market is new and a lot of customers are still with their first SaaS service provider, it is good to have an easy option to switch. Infosys View Point 5

6 The key security aspects under consideration are: Data security Regulatory compliance Availability Identity management and sign-on process Network security Data segregation Backup SaaS is not for you if SaaS is not the right model for several clients and for several reasons and hence one needs to be clear on suitability of the SaaS for your organization. If you are a large organization with well defined processes then you need to perform a fit gap between your requirements and the ERP product capabilities. Most large organizations are unwilling to modify their business processes to utilize industry standard packaged process. Hence if medium to heavy customizations is your idea of a packaged ERP solution then SaaS is clearly not for you. Many organizations for e.g. telecom / banking organizations have a large footprint of interconnected applications which integrate with each other sometimes in online mode. Technology architects require that they have complete control over the system landscapes and the integration pieces. Developing these complex integrated systems over a Service Oriented Architecture many a time require changes in the source and destination OLTP systems. Hence putting these key systems on a SaaS model may not be a sound approach. Such organizations have to identify standalone systems with limited and preferably batch interfaces with the key ERP systems. To take an example, the HR function for a large telecom organization is the most likely candidate for a SaaS model. Only periodic interfaces with the Finance system are expected and most of the functionality is contained within the box. On the other hand using SaaS for order capture, Sales, order fulfillment requirements in a heavily integrated telecom environment will only cause pain to the IT team of the organization. SaaS products have a strong dependency on highly reliable network and connectivity systems. You need close to 100% uptime if you are running your applications remotely and this interaction is happening over your local internet service provider or dedicated network service provider. If your organization faces challenges (either internal or external) in managing network capacity, availability and management then it is not advisable to go for SaaS solution. There are of course legal, statutory requirements which may also limit your choice of using the SaaS service provider. Oracle for instance does not have a data centre in India since it requires a high availability environment with excellent infrastructure (both physical infrastructure and Telecom). Hence oracle data centres are located in places like Singapore. If you are a Government or a semi government organization with requirements to host your systems within the geographical boundaries of India then it will limit your choices of the SaaS service providers. For e.g. such clients can implement the Infosys HRO platform solution available in India for Human Resource management requirements. 6 Infosys View Point

7 Conclusion The economics of Oracle Applications on the cloud bring a Win Win situation for both the package service provider and the Small and Medium Enterprise. On one hand it opens a completely new market segment for Oracle, on the other SME s benefit from using Secure, Compliant and State of the art applications leveraging Industry standard business processes which can scale as their business grows. REFERENCES + tc _ htm # - strategy paper on On demand sourcing Better Business Results with Oracle On Demand About the Author Mandar Bhale, Principal Consultant, Oracle Practice, Infosys Limited Mandar has over 12 years experience in leading IT and Business transformation programs and in implementing, analyzing and designing enterprise-wide information systems globally. He has been working closely with clients in realizing sustainable business value from their IT investments. Mandar s consulting career has spawned across Indian IT companies and Global product development and consulting companies. He is well conversant with offshore delivery models and onsite implementations and has worked on projects across Manufacturing, Hi-Tech, Retail and Telecom industries with focus on Supply Chain Management and Distribution flows. Infosys View Point 7

8 For more information, contact About Infosys Many of the world's most successful organizations rely on Infosys to deliver measurable business value. Infosys provides business consulting, technology, engineering and outsourcing services to help clients in over 30 countries build tomorrow's enterprise. For more information about Infosys (NASDAQ:INFY), visit Infosys Limited, Bangalore, India. Infosys believes the information in this publication is accurate as of its publication date; suchinformation is subject to change without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document. 8 Infosys View Point