Services Or Software? For Some, Both

Companies including San Francisco-based Salesforce.com say software is dead and services are the future. The market for now seems to agree--the company's June IPO put Salesforce.com's market cap at more than $1.5 billion, raising hopes for a stock market comeback.

But application developers haven't recycled all their ostensibly useless installation CDs just yet. Most developers report increases in services revenue and expect the trend to continue for the next year or so. But they also expect growth to plateau after that. And while the Web-based services model is ideal for applications such as customer relationship management--indeed, Salesforce.com's ticker symbol is CRM--there are plenty of applications that some developers say will never work as hosted services.

The managed services model has made its biggest inroads in customer and sales management applications. Take Thor's International, for example. Thor's is a software developer, hosting company and solution provider in Rochester, Minn., that specializes in real estate, telecom and finance. Company President Nicholas Culp said Thor's services projects have been concentrated in "a lot of CRM- and BPM-type stuff," the crucial, if not quite mission-critical, applications many companies prefer to have managed for them.

"Our niche is the thorn in people's sides, the stuff that their IT departments just can't get to," Culp said. "We're finding a pretty good market right now for custom- hosted applications in these areas. It's an offshoot of outsourcing. If someone can get us to develop an application cheaper with services than they can in-house and get us to host it for them, especially if it's all done online, then it's a win-win situation for both companies."

Tom Shaw, president of Wide Area Management Services, Santa Clara, Calif., said the networking infrastructure provider currently gets approximately 40 percent of its revenue from services. "Services technology has become more secure and feature-rich, and it has become easier to use as networks have gotten more complex," he said. "The average user doesn't see it working, but the techniques and trade secrets developers use have become more important to creating transparent services, and a lot of companies are driving more revenue from it."

The value-add that application developers can provide can be particularly effective in the SMB space. SofTech, a support services, networking and custom software provider in Berlin Vermont, is beginning to host Web pages and virtual domains, particularly for insurance-related companies. "People want to use us because of their familiarity with us," said SofTech owner Steve Smith. "We can give them better support than they might get from a more generic hosting company."

Other companies, such as NewView Consulting, are expanding their services business by starting with the customer and working backward. The Porter, Ind.-based security consultant takes whatever technology clients have and develops services for them based on their needs. "They usually have systems in-house but need a way to enable their customers to do something specific," said President Tom Geairn. "We develop the services almost backward, based on what we read from the client. We get our foot in the door with a small utility application we host on our end, usually using pieces and parts we've used on other jobs."

And SpyderWeb, a five-person shop in Atlanta that started as a solution provider for SMBs, now relies on custom software development for roughly 70 percent of its business. The company already has abandoned hardware, and now its software practice is changing as well. "We are seeing that it makes no sense to be in hardware, so we're dropping that line, and we're seeing more activity around the ASP model as well as Web-access applications," said SpyderWeb President Kimberly West.

The mention of Microsoft begs the question of what role Redmond is playing in the proliferation of services. West said being a Microsoft partner is "beautiful news for us" because of how her company can enhance Microsoft's reach through .Net, but she said Microsoft itself has been surprisingly inactive in promoting services.

"Microsoft isn't thinking enough about services," she said. "They need to look at this because Microsoft CRM is cost-prohibitive to set up. I wouldn't even suggest looking at them if you have just a few people who need it; you can get [customers] up and running on Salesforce.com for $200."

Still, most application developers agree that services aren't posing a dire threat to Microsoft, and predict that managed services revenue will continue to climb for the next year or two before it plateaus at a 50-50 or 60-40 services-to-software mix.

"CRM software probably will go away, but software itself will never go away completely because people will always want to get their hands on desktop applications like Microsoft Office," West added.