View Point

Oracle Applications and the economics of

Cloud Computing
Mandar Bhale

Abstract
Cloud computing is making waves in the Enterprise package space as the latest
trend in Information Technology. Companies are forecasting unprecedented growth
in the Small and Medium Enterprise (SME) segment.

This paper analyzes the economics of having Oracle Applications on the Cloud
and its suitability to its customers.

Infosys ViewSep
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|1
2011

Content
Renting in economics is generically considered more expensive over time rather than buying an asset. This financial principal is
based on the concept that the rent service provider will charge a premium for his service over and above the cost of acquiring
the asset and recovering the asset value over a period of time. Joe Weimenn Sr. AVP AT&T explains this phenomenon in his
blog Cloud Computing Laws+. An on-demand service provider typically charges a utility premium a higher cost per unit
time for a resource than if it were owned, financed or leased.
Then how is it possible for a large telecom company say Verizon / British Telecom to rent an ERP infrastructure on a per month
basis from a vendor like Oracle corporation rather than owning the same, installing it with its numerous other servers and
network equipment and depreciate the asset over 3-5 years. It is not expected to make financial sense especially given that
cost of capital borrowing, opportunity to depreciate the asset & opportunity cost of turning this capital in to revenue are
nearly identical to both organizations. A vendor like oracle will still buy the hardware outright, will bear the cost of capital for
the life time of an asset and potentially has the same depreciation rates.
Radical ideas are just that. Radical. The economic analysis goes behind the obvious and gives an insight in to how to make
sense of your SaaS investment opportunity. To cite an example all home PC users currently buy Microsoft Office license for
home usage. This is an annual one time fixed cost and allows the user unrestricted access to any application irrespective of
usage. However the actual usage of Power point, Word, Excel etc may be negligible over the year. If you exclude vacations,
days when you only use Internet browser or other multimedia applications, there is sufficient scope for rationalization if you
could pay only when you use it. And this is the addressable chunk of saving that pay per use leverages. We will review the
cloud in the packaged application space along the following concepts:
Utility services cost less even though they cost more +
Consolidation delivers tremendous value
Scalable, State of the art Architecture Gold mine for SME
Secure & Flexible
SaaS is not for you if

Lets begin our review

Utility
services cost
less even
though they
cost more +

Though the service provide will charge a premium for the service, the charge is applicable
based on the usage of the system. Hence the term Pay per Use. And there lies the catch, if
you use the application you pay for it; however it costs nothing if you dont use it.
In the ERP space, ERP implementations begin with Hardware and Software sizing exercise
which is aimed at taking care of the organizations current and future needs. Implementers
try to ensure that peak system demand is defined and catered for at the time of procurement
of hardware and software. As a result organizations invest in the ERP infrastructure keeping
in mind projected growth for the next 3-5 years, peak system demand (say at year end or
seasonal variations) and expected growth in the user base. Hence the sizing exercise locks
up the requisite funds of your organization to buy a given future capacity thus increasing the
associated budget. These blocked funds results in additional costs which can be channelized
by flexible sourcing models provided by SaaS.
Organizations can use these funds to invest in more relevant areas as the organization grows.
This will result in unlocking your valuable cash for a year or more depending on requirement.
As organization grows, business volume and revenue increases the equivalent growth in IT
budget can be directed towards capacity expansion in a SaaS model on a per month basis.
Organizations can routinely buy more capacity as they grow over time in a SaaS model.

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Consolidation
delivers
tremendous
value

At the SaaS service providers end, there is a consolidation of demand for Hardware, Network
and Software licenses. The higher purchasing power drives down the cost of acquisition of
these items. SaaS service providers are routinely able to generate discounts ranging anywhere
from 30% to 70% on hardware or software licenses. Additionally the procurement cycle time
is smaller because of continued relationship with their vendors. This enables them to procure
and install additional capacity almost at will and at a much lower cost.
SaaS vendors also have consolidation opportunities in people space. A shared team of
database administrators, network administrators, and performance experts are able to
manage several application sets across customers. SaaS vendors are able to create and deploy
tools and accelerators that enable mass management of systems. For example Oracle OnDemands enterprise management suite allows the provider to analyze and resolve a defect
and proactively identify and apply the solution to all eligible customer instances. Common
Help desk enables SaaS vendors to consolidate level 1 ticket resolution activities and resolve
common issues. Even Disaster recovery expenses benefit by the consolidation activity. This
shared services infrastructure model lowers operational and administrative costs which
ultimately benefit customers.
For a software vendor (like Oracle) to provide software as a service is even more cost efficient.
For all practical purposes, making available another copy of a given software license does not
additionally cost a great deal of money, this is true even if you consider a apportionment of
cost of ongoing development and support being passed to existing software license. While one
might argue that potential revenue of a onetime license sale and the associated opportunity
cost is not considered in the analysis, it is actually offset by the utility premium that the
vendor charges to the customer.

Scalable, State
of the art
Architecture

Gold mine for SME: SaaS as a strategy explodes the market size by including the Small and
Medium Enterprise (SME) market segment in to package applications space. SMEs is the new
niche market for SaaS service providers. These customers were not in a position to afford a large
package ERP with the infrastructure support and were meeting their IT requirements from tier
3 vendors or home grown systems. SMEs are suddenly able to realize the benefits of Secure,
Compliant and State of the art applications with phenomenal high availability performance.
They are able to model their work around industry standard business processes which are
scalable as they grow, and all this at a low per month cost. SaaS also provides the ability of
the SME to fix its annual cost and hence control the budget allocated to IT applications rather
than risk the unknown cost associated to deploy and operate licensed software. The table
below identifies the cost elements comparison
Cost Structure: Before we analyze and compare the cost structure of the on demand (Hosted)
and SaaS models it is important to note that Hosted Application Management is not the same
as Software as a Service (SaaS). The major difference is that hosted AM services are designed
for the management of traditionally licensed packaged applications, whereas SaaS is a model
of Web-delivered, shared instance software via subscription instead of traditional licensing #.

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Cost Elements

Traditional ERP

SaaS

On Demand (Hosted)

Hardware cost

One Time

None

None

License Fee

One Time

None

One Time

Hardware sizing and

monitoring

Recurring

None

None

Implementation Cost
(including customization)

One Time

One Time

One Time

Upgrade Cost

Periodic

None

Optional at additional cost

Annual Maintenance Cost

Recurring

None

None

Subscription Fee

None

Annual based on Users /

Transaction volumes

Annual based on Users /

Transaction volumes

Support Cost - Hardware

Recurring

None

None

Support Cost - Software

Recurring

None

Optional at additional cost

Support Cost - Network

Recurring

None

None

Support cost - DBA

Recurring

None

None

Office space - Cost

Recurring

None

None

Personnel overheads

Recurring

None

None

ERP maintenance costs (sourced via internal IT resources): Maintenance cost often exceeds
the cost of implementation especially if you consider hardware support, network support,
data base administration and application support. SaaS or On demand solutions provide the
biggest cost advantage in managing applications support thereby freeing Internal IT teams
to focus on business strategies rather than managing applications. This is especially a boon
for SME sector who simply cannot afford this IT infrastructure. If we compare the Software
management aspect of a traditional ERP vs. SaaS; the differences are observed in all activities
and the SaaS models score heavily on simplified processes, low time to market and lower
costs. It dramatically changes the way software is delivered #:

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Software Management Function

Traditional ERP

SaaS / On Demand

Critical Patches

Ad Hoc

As soon as available

Non Critical Patches / Upgrades

User and data centre window

dependent

Periodic maintenance program

Problem Management

Submit technical support request,

track resolution

Seamless access to product, support,

software management experts

Upgrades

Plan, implement, test upgrades

Upgrades are pre-certified

Integration

Customized one off solution

Standardize with CEMLI framework

New Implementation

Procure, setup, test infrastructure

Proven configurations, ready to go

serviceability

Source: Oracle on demand website #

Secure & Flexible

Firewall protected systems, data security for sensitive information and protection from hackers and other unwarranted intrusion
forms part of mandatory infrastructure for any SaaS service provider. SaaS vendor find it more complicated to differentiate
security as an offering due to shared infrastructure. It is easier to offer the security bundled with the base package as a feature
of the system and hence all customers large or small derive the same secure system as their larger paying counterparts. Thats
a huge new perspective size does not matter! Also with no Capex tie in period, Organizations become increasingly nimble in
selecting and moving to the best suited software. Software selection mistakes can be ratified more easily. Though the market is
new and a lot of customers are still with their first SaaS service provider, it is good to have an easy option to switch.

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The key security aspects under consideration are:

Data security

Network security

Regulatory compliance

Data segregation

Availability

Backup

Identity management and sign-on process

SaaS is not for you if

SaaS is not the right model for several clients and for several reasons and hence one needs to be clear on suitability of the SaaS
for your organization. If you are a large organization with well defined processes then you need to perform a fit gap between
your requirements and the ERP product capabilities. Most large organizations are unwilling to modify their business processes
to utilize industry standard packaged process. Hence if medium to heavy customizations is your idea of a packaged ERP
solution then SaaS is clearly not for you. Many organizations for e.g. telecom / banking organizations have a large footprint of
interconnected applications which integrate with each other sometimes in online mode. Technology architects require that they
have complete control over the system landscapes and the integration pieces. Developing these complex integrated systems
over a Service Oriented Architecture many a time require changes in the source and destination OLTP systems. Hence putting
these key systems on a SaaS model may not be a sound approach. Such organizations have to identify standalone systems with
limited and preferably batch interfaces with the key ERP systems. To take an example, the HR function for a large telecom
organization is the most likely candidate for a SaaS model. Only periodic interfaces with the Finance system are expected and
most of the functionality is contained within the box. On the other hand using SaaS for order capture, Sales, order fulfillment
requirements in a heavily integrated telecom environment will only cause pain to the IT team of the organization.
SaaS products have a strong dependency on highly reliable network and connectivity systems. You need close to 100% uptime
if you are running your applications remotely and this interaction is happening over your local internet service provider or
dedicated network service provider. If your organization faces challenges (either internal or external) in managing network
capacity, availability and management then it is not advisable to go for SaaS solution.
There are of course legal, statutory requirements which may also limit your choice of using the SaaS service provider. Oracle for
instance does not have a data centre in India since it requires a high availability environment with excellent infrastructure (both
physical infrastructure and Telecom). Hence oracle data centres are located in places like Singapore. If you are a Government
or a semi government organization with requirements to host your systems within the geographical boundaries of India then
it will limit your choices of the SaaS service providers. For e.g. such clients can implement the Infosys HRO platform solution
available in India for Human Resource management requirements.

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Conclusion

The economics of Oracle Applications on the cloud bring a Win Win situation
for both the package service provider and the Small and Medium Enterprise. On
one hand it opens a completely new market segment for Oracle, on the other SMEs
benefit from using Secure, Compliant and State of the art applications leveraging
Industry standard business processes which can scale as their business grows.

REFERENCES
+ http://www.businessweek.com/technology/content/sep2008/
tc2008095_942690.htm
# http://www.oracle.com/us/products/ondemand/index.html - strategy paper
on On demand sourcing Better Business Results with Oracle On Demand

About the Author

Mandar Bhale, Principal Consultant, Oracle Practice, Infosys Limited
Mandar has over 12 years experience in leading IT and Business transformation programs
and in implementing, analyzing and designing enterprise-wide information systems globally.
He has been working closely with clients in realizing sustainable business value from
their IT investments. Mandars consulting career has spawned across Indian IT companies
and Global product development and consulting companies. He is well conversant with
offshore delivery models and onsite implementations and has worked on projects across
Manufacturing, Hi-Tech, Retail and Telecom industries with focus on Supply Chain
Management and Distribution flows.

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2011 Infosys Limited, Bangalore, India. Infosys believes the information in this publication is accurate as of its publication date; suchinformation is subject to change without notice. Infosys acknowledges the proprietary rights of the
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