Given the current economic situation, many Indian companies are spending a smaller percentage of their annual revenue on technology. While the cut in information budget (IT) budgets maybe be a foregone conclusion, a silent trend among companies to invest on a hosting model instead of the usual ownership model is beginning to take shape.

The reason: hosting their IT applications with a third party makes better business sense than managing all of them in-house.

According to a study conducted by Gartner last year, adoption of hosted applications is occurring in many areas such as procurement, compliance management, document management, ERP and e-commerce. The research firm also augurs that hosted applications can reduce cost of ownership up to 30 percent by lowering hardware, labor, and support costs.

A hosted model is one that enables organisations to host applications such as e-mail, office productivity suites, CRM suites, HR suites, SAP, etc on a server that are accessed through Internet instead of keeping them on the local server. The hosted software provider thus holds the responsibility for managing the software and hardware components of the application; network issues such as redundancy as well as data backup; and also periodically upgrading the software for customers. Other applications that can be hosted include project management, billing, accounting/financial, merchant services, inventory management, messaging and payroll, etc. 

Why opt for hosted model?

A hosted application setup does not suit every customer. But they offer considerable benefits such as reduced costs and easy maintenance over the locally installed applications to many individuals and enterprises.

Explaining some of the benefits of hosted applications, a CIO of a leading manufacturing organisation, Tamal Chakraborty, CIO, Ericsson India and Sri Lanka remarks, “The biggest advantage in a hosted model is that it eliminates the need to purchase the software licenses and also removes the cost and manpower associated with developing and operating in-house applications. In a hosted model, the capital investment, security as well as the backup and server maintenance cost are all responsibilities of the vendor.”

Tamal Chakraborty has hosted Ericsson’s entire SAP application under HP’s wings.  Elaborating on the same Chakraborty says, “SAP was a mammoth application in Ericsson India. I believe that SAP is a good tool for functional team, ie, HR or accounts. Thus, we decided make HP play the host for our entire SAP application, which in return brought in enormous space in my datacenter for other functions; helped me cut cost on database and middleware management, further reducing my application team headcount.”

Though the company may not have realised immediate benefits in terms of return on investment (RoI), there are other advantages such as saving rack space, management layer, local governance, etc that the hosted model of data storage brought in, points out Chakraborthy.

Another major benefit that organisations can get from hosting an application is faster implementation of applications. While on-premise implementations can take a lot of time, a hosted application vendor with its expertise can reduce the downtime of implementation drastically. Also, the vendor can provide upgrades more frequently and at less cost.

Elaborating his plans for hosting few services, Vikas Ganesh Gadre, "Opting for the right model" CIO, Tata Chemicals says, “A major benefit with the hosted model is that the issues related with upgradation, virus attack, intrusion detection, etc are well taken care by the way of stringent SLAs with the hosted party.”

Though Tata Chemicals has outsourced a lot of applications, but it has not yet opted for hosted model. Technology experts say that limited capital, rapid developments in technology, and the need for secure data management are also some of the reasons that manufacturing firms are today opting for a hosted model. Tata Chemicals is, meanwhile, planning to host our e-mail application.

Upgrade functionality, financial flexibility and reduced risk are other advantages of a hosted model. The service provider is expected to update the software much more frequently than it is done in an on-premise model. It can also reduce fixed costs and can lower overall expenditures for hardware, applications and management.

“The cost savings to incorporate these upgrades along with an adherence to changing business rules and regulatory compliance can be staggering. Also, with no capital expenditure on software, hardware, and IT personnel, organisations can test a new technology with minimal impact to their existing environment and bottomline,” adds Tata Chemical’s Gadre.

Opting for the right model

One of the most convenient models for hosting IT applicaions is the ‘pay-as-you-use’ model and as the hosted applications vendor charges a set fee, costs for hosting various applications are fixed and can be projected over the life of the contract.

Vijay Sethi, VP - Information Systems, Hero Honda Motors, who plan to host its entire Dealer Management System (DMS) explains, “hosting our DMS operation fits best as a strategy because there are nearly 700 users across ten locations who are constantly flooded with customer requests of all kinds.

The DMS is a dynamic management system because it manages everything - right from the time a customer comes in, to the inquiry stage up to when he or she takes a test drive, to raise invoice. And each of this activity is managed by the company’s dealers’ network where everyone logs into this central system and works.

He further added that the biggest advantage of hosting the entire DMS application is the reduction in deployment cost. “Cost of training also cost comes down drastically. As everyone today is well versed with Web, they do not require any special training to access the application over Web. Moreover, reduction in upgradation cost as well as costs incurred in regular maintenance is another benefit that we plan to realise from hosting our DMS application,” adds Vijay Sethi.     

Ready to stick your neck out?

Although hosted model can provide numerous benefits such as the one mentioned above, several factors need to be considered when evaluating the use of hosted applications. Security is the biggest concerns with a hosted model i.e. security risk while transmitting data over the Internet. But most vendor claims to protect the security and privacy of the data by using virtual private network, data encryption techniques, firewalls and much more.

“Access should be allowed only to users with a registered log-in or a password,” remarks Ericsson India’s Chakraborty.
Explaining some of the challenges that Ericsson India "Ready to stick your neck out?" faced post hosting its entire SAP application to a third party (HP), Chakraborty says, “management till date does not see a large benefit of hosting applications as it is a complete IT initiative. But when we decided to host our SAP application last year, the telecom sector was going through a really rough phase. Thus, it was not difficult for me to convince the management, promising them huge benefits.”

Also, hosted applications rely on the Internet connectivity to deliver applications, and low bandwidth can be a major cause of concern with the hosted model. This means that access to services depends on a fast and reliable Internet connection.

According to Vijay Sethi, “The cost involved in hosting a model is always more than hosting the same application internally. But though there are some limitations of a hosted model, but if used correctly and with few precautions, the limitations will not outweigh the benefits.” 
As the hosted model takes form of a great idea in making, it remains to be seen if the model cuts ice across other verticals and emerge as a foolproof solution in such adverse times.