Wednesday, November 28, 2012

Does Dumping On-Premises Software Make Good Business Sense? - Part 2

by Jeff Cate

In my previous post, I listed some of the unique benefits of the Cloud that I particularly like. Now, here is my short list of unique benefits that on-premises software offers over Cloud software:

·        On-premises offers easier and faster application integration development. Since we moved CRM back on-premises with Microsoft Dynamics CRM 2011, it has been much easier, much faster and less costly to integrate different software applications in our company.  When we were in the Cloud with CRM, integrating SFDC with our on-premises ecommerce system was difficult and time consuming (and, SFDC did not offer ecommerce functionality).  When we wanted to integrate our Cloud-based training class registration application (Regonline) with SFDC, that too was difficult and time consuming.  There were several Cloud-based integration software providers available that promised to make integration easier, but their solutions were incredibly pricey, so we had to develop all of our integrations on our own. It turned out to be more difficult to do in the Cloud than on-premises.
·        On-premises offers a shorter timeline for making programming customizations to meet user needs. You might be thinking that I am crazy saying this given the long history of waiting forever for internal IT departments to customize applications.  And, maybe I am crazy on this one, but I am basing it primarily on something a customer told me a while back.  This customer was fairly large (45,000 users) and in multiple countries.  Their C-levels bought into the Cloud about five years ago and purchased Microsoft BPOS Dedicated for the entire company.  So, they moved all email, SharePoint collaboration and IM into the Cloud using Microsoft’s products and data center.  My client said overall performance had been good and that the solution had been reliable.  But, she also said the end users hated the fact that it took Microsoft such a long time to approve and deploy seemingly small customizations.  She said the reason was that there was a tremendous amount of overhead and bureaucracy involved in obtaining Microsoft’s approval to publish customizations to their Cloud environment.  She said that it could easily take eight weeks to document, review and approve a plan to make a small customization.  Before moving to the Cloud, this type of customization could get approved within a week and developed, tested and deployed within two to three weeks.
·        By nature, some software applications are valuable revenue-producing assets of the company that are critical for the company to protect and can best be protected using the on-premises model. Now I have my business decision-maker and accountant hat on.  If I look at certain mission-critical software applications from this standpoint, it is clear that they represent tangible, revenue-producing (or revenue-sustaining) assets to the business.  By accounting definition, business revenue is generated from business assets.  So, in order to generate\sustain revenue a business has to own at least one asset, and usually a lot more than one.
For instance, if you are a manufacturer of televisions, the asset category of “Plant and Equipment” is one of the asset categories that provides you with the ability to manufacture TVs and ultimately sell them for money.  Without “Plant and Equipment,” you can’t generate any revenue.
Likewise, if you are a service business or an Internet retailing company, a mission-critical software application can also be a major asset category that provides you with the ability to produce revenue.  For instance,’s website is quite clearly a software application that is an asset which allows them to produce revenue (and a lot of it in their case).  Therefore, their website software application is just as much of a revenue-producing asset to them as a TV manufacturing plant is to Sony.  
If I am a business leader or accountant at an type of company, how much would I care about the physical location, safeguarding and upkeep of a software application that is such a valuable revenue-producing business asset?  A lot, I think!  Would I want it to reside at and be maintained by a third-party Cloud provider?  Probably not, if I had a choice!  I would want to exercise as much protection and care over that asset as I possibly can, and it seems obvious that the best way to do that is to keep it on-premises if I have the financial and human resources available and the choice to host it on-premises.  The bottom line is that the business asset value of this type of software application trumps the benefits that running it in the Cloud offers. 
·        In the event of a prospective company sale, on-premises software applications are more likely to be valued accurately. When it comes time to sell a business or to merge with another business, a team of accountants and lawyers from the acquiring company will undertake a “Due Diligence” project.  The Due Diligence project is a fine-grained examination of the target company’s assets and books to make sure that the prospective buyer has a very clear picture of what he or she is buying and its true value. 
What is the impact going to be to the Due Diligence process and the follow-on price negotiation process if revenue-producing software applications and data are sitting in a third-party’s data center on the other side of the country and managed by non-employees?  My feeling is that this could hurt the negotiating position of the company that is being sold because it will be a lot more difficult for the accountants and lawyers to recognize an accurate value of the software application as a business asset since it isn’t hosted on-premises.

Wrapping it up
So, to those of you who are business decision makers and IT leaders out there, I say be careful before you jump on the bandwagon to dump your on-premises software applications in favor of the Cloud.  I think the Cloud has a lot of really nice benefits and a big role to play, but I don’t believe that it is the de facto best business decision for every application. 

My advice is to be careful to not be unduly swayed by all of the industry hype surrounding the Cloud.  I guess in the end, the vendors could force all computing applications into the Cloud by not giving us a choice, but I really hope wiser business minds and the free market will come into play before that happens and demand the choice to use on-premises software or the Cloud on an application-by-application basis, depending on what is best for each individual business.