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On-Demand Software is Not Just a Lease (Where’s My Upgraded Lexus…)

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Recently several analysts downgraded’s stock, citing high valuation:   Salesforce a A Harder Sell , Shares Seen As Pricy  .  Chris Selland had voiced his doubts regarding the hosted CRM model before (“ won’t cure cancer anytime soon “) , and sees the downgrades as signs that  “the media honeymoon appears to be mostly over”.
I beg to differ … a stock’s valuation is often not indicative of the business’s success, further growth potential, and certainly not of the underlying business model (hosted CRM) in general.  The stock can become an underdog, simply because it had previously ran ahead, was overvalued, while the (and On-Demand software) continues to grow.

AMR research reported 105% growth in on-demand CRM in 2004. Nevertheless, the debate continues as to how suitable the On-Demand model is, especially for larger Enterprises:  “Is it less expensive to lease or buy a car? If you don’t have a down payment, a lease looks pretty attractive,” says Bob Thompson, founder of But if the total overall cost is the main concern, the best strategy is to buy a car and “drive it into the dirt,”  (via The
I think the car analogy is seriously flawed: this is not a simple lease / buy decision.  In the On-Demand model  bug-fixes, even major upgrades are managed centrally in a painless manner, often not even transparent to the Customer.  The car analogy would only be fair if it referred to a lease where any time the car manufacturer had an upgrade (we’re not talking about the new models every 4 years or so, with today’s cars software upgrades, amongst others are almost continuous) my friendly dealer  drove up to my house, leave a new car with identical trim level, color, options (“customization”) at my doorstep and drove the old car away. Now, that’s a lease model not even Lexus came up with … but if anyone knows such a deal, sign me up! :-)

Of course the on-demand vs. on-premise decision is not simply a matter of TCO (Total Cost of Ownership) analyses.  Phil Wainewright discusses a few other criteria specific to large enterprises. 

Debate or not, I think both camps agree at least in these points:

  • On-Demand software is now a proven business, here to stay
  • It is no longer “only for small businesses”
  • For small businesses though, it is likely to be the best choice
  • There is no “best choice” for a large enterprise, they all have to perform their own analyses and pick the best option.

After more than a decade in the Enterprise Software business with the “biggies” like SAP, IBM, Deloitte  my attention is now focused on the SMB sector, their Enterprise Software and Infrastructure needs.  It’s a very refreshing change, and I’ve come to learn a whole new world. (Having switched from Service Provider to Customer  in a smaller business was a tremendously helpful eye-opener.)   In the next several posts I will look at  On-Demand, Open-Source and other new trends from an SMB point of view.  



  1. Anonymous says:

    All great points Zoli – and I fully agree it’s not as simple as ‘lease vs. buy’. Hosted solutions are a great idea – Salesforce’s valuation just (as you say) got a bit ahead of itself – my point was that much of this was driven by the tech and business media only looking at the positives and not the negatives (there are some) of hosted solutions.

    If you look at the AMR report you see that hosted solutions still make up a very small percentage of the market. That is and will continue to increase, but in any case it will be better for everyone if we can make decisions based on real pros and cons rather than media hype.

  2. Anonymous says:

    “make decisions based on real pros and cons rather than media hype.” Chris, I absolutely agree. Hype-based decisions are not particularly good ones:-)) Talk about hype: I’m in a position to hear startup pitches nowadays, and it’s amazing how often the entrepreneurs try to throw in “On-Demand” and “Open-Source” in the same sentence….

  3. Anonymous says:

    Well, this is funny, just as I wrote the pevious comment, I read a post from Jeff Nolan:

    … the simple fact of the matter is that open source and subscription licensing, two completely separate trends that often get lumped together, are not silver bullets for emerging companies “

    Great minds … :-)

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