Software On-Demand, Pricing by the Byte?

Mark Hanney, IBM’s vice president of independent software alliances, said partner companies such as JD Edwards are already moving forward in building on-demand functionality into their enterprise applications.

Their applications are increasingly infused with autonomic (or self-diagnostic) functions, as well as virtualization capabilities. “There are many ISVs offering this kind of capability,” Hanney said.

They would be foolish not to, given the interest in intelligent agents for enterprises, especially on the part of IBM. As part of its own three-pronged on-demand strategy that entails hardware, services and software, the company recently purchased Toronto’s Think Dynamics, which makes software that dynamically addresses peaks and system failures by allocating resources where a network’s system is bottlenecked.

Hanney said pricing by the seat is one example of how on-demand computing models bring in money. “A lot of the real benefits of on demand are about lowering total cost of ownership,” he said, which drives customers’ demand for integration capabilities among different applications.

For that reason among many, enterprise software providers are realizing that they to have to offer smaller software packages in bits and pieces in order to run on top of an architecture built for such kinds of provisioning, Blatt and other experts said.

Frank Gillett, infrastructure analyst for Forrester Research, said the pricing issue really hasn’t been settled yet for software makers moving to on-demand models, which Forrester calls Organic IT.

“Organic IT is an architecture, not a pricing scheme,” according to a recent research report by Forrester that focused on how to make sense of buying computing services on-demand.

The report cautioned CIOs and IT professionals mulling those decisions to think of the on-demand movement as an “evolutionary, not revolutionary investment,” which will unfold over a decade or more.

“Many buyers presume that organic technologies must be purchased on a pay-as-you-go basis, rather than on a more traditional CapEx basis,” the report said, referring to the shorthand term for capital expenditures. “Why? Vague advertising from IBM – among others – has confused the issue.”

Forrester analyst Charles Rutstein, who wrote the report, also noted that “organic infrastructures don’t require that firms buy their technology on a by-the-drink basis. But they do open up some innovative new possibilities for pricing. For example, IBM recently signed a deal with Canada Life Financial in which the insurer will pay IBM for software application services on a per-policy basis, firmly tying its IT costs to its level of business activity.”

But generally speaking, Forrester’s Rutstin and Gillett note, companies are still uncertain about how to purchase technology, including software, “by the drink” when, traditionally, IT budgets are set a year in advance.

Forrester’s recommendation for those making the decision to buy computing on-demand is to ask three questions: what’s the right architecture? whose datacenter? and what’s the pricing scheme?

CA’s Blatt said the shifting pricing model in software on demand is just as good for the software companies as they are increasingly becoming for customers.

Enterprise “management on demand is a journey,” Blatt said. “Our solutions need to match up to that journey.”