The rise and rise of salesforce.com has triggered a shift in licensing amongst a number of companies, both startups like Rightnow and “me too” defensive offerings from the likes of Oracle and SAP. Siebel missed the boat entirely here, though its problems were by no means confined to its licensing model. The fact that it was massively over-marketed, with surprisingly limited core functionality given its price tag, requiring vast consulting resources to tailor every individual implementation, may have contributed also. A friend who had spent two years implementing Siebel at a bank described it as a “million dollar compiler”, since everything that he wanted to do with it required customized programming/consulting.

Leaving Siebel aside, what are the broader implications of hosting and renting software. There are issues both ways. Clearly from a customer viewpoint they don;t have the hassle of installing and doing technical upgrades in-house, so no complaints there. However it is not obvious that a hosted piece of software is any more likely to meet your needs, or to require less tailoring, that one that is installed on-site. There may be (perhaps justified) concerns about the security of your own data, and indeed on related intellectual property. From personal experience I recall needing to back out from a hosted service, and having great difficulty in getting the vendor to export my data into a form that I could easy load into a transportable form - er, hello, this was my data after all.

From the vendor viewpoint there are also pros and cons. If you start from scratch then things are easier. Hosting services are much cheaper to provide than many customers realize, so margins can be very attractive. Because you are in control of the implementation, you have less issues at particular customers, who have installed some wacko combination of middleware (usually the day before some critical business deadline) that means you can’t replicate their problems. On the other hand, it is hard to grow as fast. Recurring revenue is great, but there is a danger that it can become “the software maintenance without the license” unless you are one of the vendors who have managed massive momentum (like salesforce.com). This is also a big problem for existing vendors, whose business models and sales force are geared towards license revenue. Also, as a software vendor you may not want to be in the data centre business.

What is the scale of the hosted software market? In a Red Herring article the hosted software market is reckoned to be 1.5% of the total USD 72 billion global software market in 2004 (according to IDC). This may to be a big dent overall, but it is still a fair chunk of software, and one that is growing rapidly (doubling by 2009 is IDC’s estimate). Cynics would argue that the whole “ASP” model (remember that) was going to change the world in the 1990s, but the demise of Exodus and other high-profile companies domonstrated the limits of how prepared customers were prepared to go in shifting their data Centrex to a 3rd party.

My instinct is that this is a very real trend, and that the conservatism of corporate buyers may be the major inhibitor at present. Certainly the headaches that big companies have in installing new versions of software is huge - many companies have “standard desktops” that are unpopular with end users and result in an army of people ensuring that everything works (usually on some ancient version of MS Office), so removing this problem has undeniable, and large benefits. For this reason alone, I think many companies will get over their queasiness at having their data stored somewhere off-site, and so this is a trend with real legs.

Ironically this may also prove right those old mainframe die-hards in the 1980s who felt that client/server was lunacy, and that distributing applications around hundreds or thousands of desktops was going to cause far more trouble than it was worth. Certainly more trouble than it ever caused on the good old mainframe, where you knew exactly what version of the packages everyone was using. It is perhaps no accident that IBM is at the forefront of this “on demand” trend, as the desire to centralism is in IBM’s corporate bones.

For European companies considering outsourcing their IT, there is a nearby alternative to India: Eastern Europe. In 2005 This market was worth 149 million Euros in Hungary, 132 million in the Czech Republic and 201 million in Poland, according to a survey by PAC. In Hungary’s case this represents 16% growth, 11% for the Czech Republic and 9% for Poland. Recent high profile examples have been DHL’s move to Prague and Exxon’s setting up shop in Warsaw and Budapest.

There is much logic to this. The eastern European countries had a fine tradition of education e.g. in standardized tests, Hungary’s student maths scores are higher than the US and the UK. Budapest IT salaries are around one third of London, and although they are rising it can be seen that they will take many years to get anywhere near Western European levels. Nonetheless, this is still something of an area for pioneers. In terms of maturity, in my own experience the Czech Republic was comfortably the best established, followed by Hungary, with Poland lagging. In Prague and Budapest it is possible to find several companies who have successful operations, and at least a few recruitment agencies etc geared up to service them. This was much tougher in Poland, let alone the “wild east” of Russia or Romania, or even Belarus or Ukraine.

However it remains to be seen whether these countries will grab much market share from India, which has great advantages of scale, many years of success in this area, and a largely English-speaking workforce. Salaries in India are still a fraction of those in Hungary, even in Bangalore (never mind Chennai, Hyderabad etc) so their economic advantage looks secure for years, while the sheer number of large companies that have trodden the path to Bangalore means that, ironically, India may actually be of lower risk than Eastern Europe, at least in terms of being “proven”. The greater travel time and time-zone differences are the main drawback here, but if India can work for US companies with a 11.5 hour time difference, why not for UK companies with a 5.5 hour time difference? (yes, India’s time zones are measured on half-hours, a relic of the English civil service).

Some companies will worry that the economic benefits for the more advanced/”safer” places like Budapest and Prague may be transitory. Ireland used to be a popular cheap location, but years of EU-fuelled growth at rates of 8% have now brought Dublin close to the UK in terms of IT salaries. This might indicate that, given the setup costs and risks, it is better to go the whole way and go to India, where the wage differences are so vast that it will take decades to get to Western levels, even at the current high salary growth. One interesting recent step was the Indian firm Satyam opening an office in Hungary. The idea is that customers who want to try off-shoring but are nervous can start in Hungary, and then move to India as they grow more confident. Eastern Europe also has one advantage over India - continental language skills, which would be important for markets such as France and Germany.

Certainly the “India effect” is having a structural effect on IT consultancy prices. Even Accenture has been forced to cut daily rates, and indeed Accenture’s consulting revenues are actually in decline, but their overall figures are holding up to a rapid rise in outsourcing deals that is making up for the loss in consulting revenues.

Of course there have been some well-publicized problems, such as Dell’s abortive Indian help-desk, which I can testify from personal experience had big problems, but there seem to have been more successes than failures. After all, it is not as if IT projects in the US or UK all go swimmingly well.

Just as manufacturing has, to a large extent, moved to China, it may be inevitable that more and more IT jobs head off to India, and to a lesser extent Eastern Europe. The economics are compelling, and as more and more companies make it work, it feels less like a pioneering activity for the mainstream, which will fuel further growth.