SME’s get savvier on IT spending

28th June 2010

The banking crisis has forced many businesses into a painful period of accelerated evolution, and Europe’s sovereign debt problems may force even more to choose between rapid change and rapid extinction. Nothing will ever be the same again, not least for small and medium-sized businesses. So Lesley Meall, FSN contributing editor asks how have recent economic developments affected the way that SMEs spend on information technology?

“The downturn has had a devastating impact on SMBs worldwide,” observes Ray Boggs, vice president, SMB and home office research with the analyst IDC, and this has affected their approach to information technology. “SMBs of all sizes will remain cautious with their IT spending over the next several years,” he predicts, but many of them are already moving away from their recent focus on cost cutting.

 A year ago this was the number one IT priority, now according to IDC research (in Europe), it is third on the list, after improving the quality and level of services, and enhancing IT security. Gartner is also reporting a shift to a revenue-growth mind set, away from the “keep the lights on” approach to IT of the past two years. But this transition is not without challenges. ‘The shift from a problem focussed organisation to one that is opportunity focussed requires more planning and execution,’ reports Jorge Lopez, vice president and Gartner analyst, plus a ‘dual focus on achieving ambitious growth while running the current business’ – and a readiness to embrace emerging technology trends and delivery mechanisms. 

While the business world has been struggling to survive a global downturn the IT industry has also been going through a period of accelerated evolution; the Internet’s development into an interactive computing platform has started a paradigm shift. So, rather than invest huge amounts of time and money in the hope of eventually reaping huge benefits, businesses are increasingly inclined towards ‘lightweight’ approaches that deliver more, for less, in a relatively short time frame. “Asymmetric technologies like virtualisation, the cloud and Web 2.0, enable companies to get out from under a heavily front-loaded model that limits IT agility and flexibility,” reports Mark McDonald, group VP and head of research for Gartner EXP. But before you can think about exploiting any of this, you need to get beyond the ‘tech-speak’. 

Behind the technology

If only the IT industry were less enamoured with its own abbreviations and acronyms. Virtualisation is a method of splitting a single physical server into logical partitions. These function as ‘virtual’ servers, each with the appearance and capabilities of a physical server, such as being independently rebooted – so they can be a great way of exploiting under-used boxes. The cloud is another potentially confusing concept, that is much less complicated than you might suppose. It is the catch-all term of reference for describing the way the Internet is used to access and provide ‘on-demand’ (as opposed to ‘on-premises’) software, services and other resources. Which brings us to Web 2.0 – a strong contender for the least enlightening term of reference ever. 

In a perfect world there would be one single and straightforward explanation for Web 2.0; but there is not – as you will discover if you are foolish enough (or optimistic enough) to Google it. Wikipedia, itself a Web 2.0 phenomenon, has come up with something reasonably simple: ‘the changing trends in the use of World Wide Web technology and web design that aim to enhance creativity, communications, secure information sharing, collaboration and the functionality of the web,’ but it is the manifestations of Web 2.0 that make it easiest to grasp. Think blogs (www.taxblagger.co.uk), social networking sites (MySpace and Facebook), wikis (TaxAlmanac.org and Wikipedia), on-demand software and systems (Netsuite.com and InstantIntelligence.com), sites for sharing video and PowerPoint presentations (YouTube.com and Slideshare.net). Web 2.0 is characterised by interactive, re-usable, open, user-created content and service-based applications. 

So, where are these ‘asymmetric technologies’ that McDonald refers to doing most to help companies to ‘get out from under a heavily front-loaded model’ (which means spending huge amounts of money on technology before you get to use it), and offering relatively low cost access to IT that can improve the agility flexibility of organisations? The most common manifestation is Software as a Service, which is noticeably delivering cost, capacity and capability gains. But here again, there is an issue with terminology – for an industry that survives by selling its technology-based products and services, the IT industry has habit of shooting itself in the foot with descriptions and labels that seem designed to confuse the lesser mortals that might otherwise be its customers. 

So what is Software as a Service, or SaaS (pronounced sass), as it is better known? It’s an evolution of something that’s been around for more than a decade, and previously went by the name of ASP (or Application Service Providers). The IT industry tends to be rather touchy about the difference between ASP and SaaS (semantic arguments abound). But all the rest of us really need to know is that SaaS provides a way of using the Internet to access software, on demand, as and whenever its needed, and pay (or not, some SaaS apps are free) on a per use basis – the software is ‘hosted’ and run on the secure servers of third-party service providers, who relieve the end user of the responsibility for all of the associated maintenance and upgrades, and reduce the need for IT expertise, equipment, and capital investment. 

As you can see, SaaS is a type of cloud computing, and you may well be using cloud services and those of a SaaS provider without even realising it. Email applications from companies such as Google, MSN and Yahoo! are among the most widely used SaaS offerings out there - though many finance professionals will also have encountered SaaS versions of systems such as budgeting, planning and financial reporting systems, and business intelligence tools. “It is clear from talking to our clients that economic pressures are driving interest in cloud computing and making it increasingly an option in their IT sourcing and delivery models,” reports Chris Weitz, director, Deloitte Consulting LLP, but not all variations on the cloud computing model are being embraced with equal enthusiasm.

 This brings us on to two more cloud based delivery models: IaaS and PaaS, which also require an explanation if you are ever to hope to exploit them. So, what are Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) all about? In common with SaaS, and other manifestations of ‘the cloud’ these internet based delivery models are a lot less complicated than these opaque terms of reference would lead you to suppose. The easiest way to understand IaaS is to think of it as a form of outsourcing. Rather than invest in your own IT infrastructure in the form of hardware, servers, networking components and so on, you can ‘rent’ access to them from a third party provider, that will then house, run and maintain it. 

But unlike the more traditional sort of IT outsourcing, IaaS provides businesses with shared access to these resources, and is capable of expanding or contracting (like elastic) in response to demand. One example of this type of service is Amazon Elastic Compute Cloud (EC2), and an example of an organisation using this is the provider of global financial market data, Xignite. Rather than add to its own computing infrastructure to meet the growing (but fluctuating) demand it faces during peak times, it opted for EC2. This means that it can expand its operations without needing to invest capital in the hardware, infrastructure, network bandwidth and personnel that would otherwise be needed to support increased (or even standby) capacity – which has made it easier for Xignite to roll out new services and meet fluctuations in demand.

 PaaS takes this approach a step further by offering on-demand access to the tools needed to create web-based applications, and because this includes pre-built business functionality, it puts development potential in the hands of individuals and organisations that would otherwise need their own programming expertise. One team of Indian accountants, for example, used the Woolf Frameworks PaaS to build an on-demand accounting system in 60 days, while the automotive auctioneer OpenLane has used Force.com to build various web-based applications and provide insight from its online auction software to its SAP accounting system. PaaS is also being used to help non-tech companies speed up the development of web-apps for e-commerce, recruitement, inventory management, and more.

 At the moment PaaS is less popular (and widespread) than IaaS, and they are both less popular (and widespread) than Saas, though this may change as organisations are becoming increasingly aware of the possibilities they represent. IDC sees cloud computing in general and in particular SaaS gaining traction (especially among mid-sized businesses); likewise Gartner. “SaaS applications are no longer seen as a new deployment model by our survey base,” says Sharon Mertz, research director at Gartner, and recent research across North America, Europe and Asia/Pacific, found existing adopters of SaaS planning to extend its use, with many other organisations hot on their heels: more than 95 per cent of organisations expect to maintain or grow their use of SaaS during 2010. 

Spoiled for choice?

In part, this is due to the increasing range and functionality of SaaS applications. The hosted email services that were once its most common manifestation (and remain among the most popular apps) have been joined by on demand applications ranging from budgeting, planning and financial reporting, through sales force automation and customer service, to expenses management, and more than 30 per cent of the Gartner sample is using these types of applications. (Use of Business Intelligence SaaS has also been increasing in popularity, and may be poised for rapid growth.)

 Perhaps unsurprisingly, in the current economic climate, users don’t stop trying to get more for less just because they have opted for SaaS, particularly once they have a little experience of what’s involved. “Organisations are becoming more savvy when it comes to renegotiating their SaaS contracts,” according to Mertz. “A key survey finding was that more enterprises are renegotiating contracts for greater functionality, additional users and improved financial terms,” she adds, and 30 per cent of respondents reported renegotiating their contract before the end of the initial term.

 However, not all SaaS users are enjoying the experience enough to bother. More than a third of respondents noted concerns on their recent SaaS deployments, and a sizeable minority (16 per cent) are fazing them out. There does not seem to be any single outstanding reason why these organisations are shifting from SaaS back to the on-premise approach, but customisation and integration challenges were among the primary “concerns” cited. Gartner found that many of the organisations in this 16 per cent were facing significant integration requirements, which made the total cost of ownership for SaaS way too high.

 A logical transition?

Although IDC reported that many small and medium sized enterprises are more concerned with improving the quality and level of services, and enhancing IT security, than they are with reducing costs, the latter is still a powerful motivator for change - particularly when it delivers the added bonus of increased agility, efficiency and flexibility. Which helps to explain why virtualisation now seems to be spreading from the large multinational enterprises where it has traditionally been most prevalent, to small and medium sized organisations.

 In late 2009, Gartner predicted that enterprises with less than 1,000 employees would have a higher penetration of virtual machines than the Global 500 by the end of 2010. “For years the entry point was simply too high for smaller enterprises,” says analyst Tom Bittman but “increased competition” among server vendors has changed this, by drastically reducing costs. It remains to be seen if the transition from physical to logical servers is this significant (or becomes as uniquitous as numerous analysts are repeatedly predicting), but if server sales patterns are any indication, there does seem to be a trend.

 According to the IDC EMEA Quarterly Server Virtualisation Tracker, 17.7 per cent of all new servers shipped in the fourth quarter of 2009 were virtualised, an increase from 16.3 per cent during Q4 08. The software required to create and manage virtual servers is called ‘hypervisor’ software, and free versions have been around for a couple of years, but when comparing sales in Q4 08 and 09, IDC found an increase in installation of paid hypervisor software to 71.7 per cent (up from 60.7 per cent) on all new server hardware shipments virtualised – despite the fact that virtualisation can make it more difficult for organisations to manage their server resources, and demand changes to tools for processes and automation management, capacity management, and more. 

“Server virtualisation has become the default build for new application deployments and server refreshes among many European organisations and this is having a profound impact on IT infrastructure directions,” comments Nathaniel Martinez, programme director, IDC EMEA systems and infrastructure solutions. “The next step in adoption will require a reinvention of IT policies and procedures, and continued deployments of automation tools will be key,” he adds, as server virtualisation will play a “pivotal” role in transforming medium organisations’ hardware infrastructures so that they “operate at a level of efficiency that is more in line with the demands of current economic environments”. But if it’s really going to take off it will also require some simplification when it comes to the associated terms of reference: so watch this space.

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