Thanks to recent market events, the hype surrounding On Demand and its applicability in the supply management arena has reached Mission: Impossible III proportions. Sensing a change in enterprise software buying preferences, several traditional enterprise application providers have made desperate moves to hop the On Demand bandwagon. (I was half expecting the CEO of a certain German software company to show up at his company’s user conference last week on the back of a Ducati motorcycle and pronounce his love for Katie Holmes. Or, more likely, for Marc Benioff.)

These moves reinforce the arrival of On Demand or Software as a Service (SaaS) as an acceptable if not preferable model for software delivery. However, they also increase confusion over what On Demand truly is and what enterprises should expect from it.

Supply Excellence will begin an ongoing series to debunk On Demand myths, provide real-world examples of successful SaaS deployments, and investigate how this new business philosophy is changing the way enterprise applications are built, delivered, and used. Here’s some basics you need to know:

Will the real On Demand model please stand up?

At the most simplistic level, On Demand or SaaS is the delivery software functionality over the Internet from a single application instance that is shared across all clients. SaaS solutions require only a Web browser to access, eliminating the need to install or maintain software or hardware. They also replace the upfront licensing fees and lengthy implementation cycles associated with traditional installed applications with a “pay-as-you-go” or subscription-based service relationship.

Does On Demand Really Deliver?

Absolutely. In a compelling study, Triple Tree and the Software and Information Industry Association (SIAA) found that SaaS deployments are 50% to 90% faster with a total cost of ownership (TCO) five to ten times less expensive than traditional software. These factors limit risks typically associated with enterprise application deployments by reducing the need to secure scarce (and often rebellious) IT resources and by transitioning software investments from capital to operating budgets.

Is On Demand Only About TCO?

Not at all. The Triple Tree/SIAA report also finds that, while traditional enterprise application providers “charge for software upgrades, maintenance, and generally have new software release cycles every two to three years, software as a service firms provide free software upgrades, include maintenance and support more frequent [several times per year] and seamless software releases and upgrades.”These findings are , which rated frequent application enhancements and upgrades among the key benefits of the On Demand solutions it uses. (PepsiCo also reported that their On Demand service provider delivered better, more responsive report than its internal IT group.) Fellow blogger and supply management software market watcher that rapid innovation were emerge as the most critical benefit of On Demand and SaaS solutions.

On Demand is Not a Technology Issue

Architecting an application to support multiple customers from a shared application instance or transitioning subscription-based pricing model are comparatively easy fixes. There is no doubt that traditional enterprise application providers will eventually be able to deliver on these attributes.Instead, that must permeate every aspect of a solution provider’s operations – from application architecture and delivery to pricing and packaging to customer service. In this sense, On Demand should be viewed less as a technology and more as a utility service, such as telecommunications bandwidth or electricity. Easily accessible, highly reliable, and accessible whenever and in the exact amount required.As such, a more accurate definition of On Demand or SaaS is the delivery of software , , as flexible Web-based services. For supply managers this means accessing application functionality (sourcing, contract management, procurement, etc.), supply intelligence (category templates, supply market data, etc.), and support services (spend data cleansing, sourcing event management, etc.) all as an integrated Web-based service.

In a recent Aberdeen Group study (The On Demand Tipping Point in Supply Chain), my former colleague Beth Enslow reports that a supply chain as a service approach is emerging. Says Beth, “This management philosophy involves treating supply chain and its supporting components as flexible services to be assembled to serve the customer rather than as fixed assets, roles, and processes.” She cites On Demand applications as a key element of this strategy. 

Can a Software Provider Support Both Traditional and On Demand Models?

Unlikely. The On Demand model requires complete alignment of interests between customer and provider, with the provider having an active role and a vested stake in the success of the application beyond initial deployment. Success in this realm is measured not by initial license revenues but by user adoption, satisfaction, and customer renewals. Drivers for success include reliable system performance, top-notch service and support, and continual application innovation and enhancements.

Traditional enterprise application businesses are not built for such dynamic performance. Application development cycles at these firms are lenghty and complicated by the need to support antiquated application architectures and legacy application versions. Sales organizations at these firms are groomed as big game hunters, trained to move from one large deal to the next. And service organizations at these firms (and their systems integrator partners) are primed for large, complex, and costly implementation and integration projects — not rapid on boarding and flexible lifecycle support services.

Transforming this transaction-focused culture into a dynamic service-oriented organization focused on perpetual customer support won’t be easy. This transformation is made even more daunting for providers that refuse to give up their traditional installed enterprise application models.

Evidence of this dichotomy (and the inherent inability of any provider to straddle both camps) appears in the recent news. The “On Demand” offerings recently announced by traditional enterprise application confuse traditional application hosting with true SaaS delivery, lacking the economies of scale and instant upgrade capabilities of true On Demand offerings. More concerning is that these providers can’t seem to give up on their traditional licensed and installed application model, with some overtly promoting On Demand merely as a stepping stone to licensing and installing their traditional applications.

Check back here in the coming weeks for a fail-proof litmus test you can use to separate true On Demand offerings from hollywood imposters.