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The Anatomy of Hosted vs. In-House Model for Application Delivery
Recent Advances in Application Delivery

You’d think an application is an application -- whether it is hosted by the software vendor or deployed on your premises, Who Cares! right? If your body of evidence constitutes pointing to the application service providers who rose and fell with fellow dot-com’ers, we suggest that you revisit the issue. In this inning of Internet, new domain-specific business services are building on the successes of online icons such as Yahoo!, Amazon, and Google. These business services do not merely promise like their extinct counterparts but they can also help you cut time-to-market, capital expenditures, and total costs of ownership and are well-positioned to deliver on their promise supported by sound business models and fundamentals. Advances in security, falling cost of IT infrastructure, adoption in broadband, and consumer experiences are key drivers that have led to stronger adoption of next generation business services. These domain-centric business services are delivered in hosted models.

What is the Hosted Model?

In a hosted model, the application vendor hosts, manages, upgrades the application throughout its lifecycle and provides it to you out of its datacenters. In this arrangement, the vendor is responsible for installation, integration, and maintenance of the application and any supporting hardware and software. You are only responsible for the price of service, typically per user or per transaction.

Note* – Application Service Providers (ASP’s) are not the same as Hosted Application Provider. Typically, ASP is the intermediary who is hosting the application for the customer for a fee but did not produce the application.

What is the In-house model?

In a deployed model, you buy the software license from the application vendor and deploy it on your premises. In doing so, you will need to pay for the supporting hardware, software, databases and installation activities.

The key Cost and Risks Implications

Cost Driver Items

Responsible Party?

Hosted Model

Responsible Party?

In-House Model

 

Customer

Vendor

Customer

Vendor

Application

No

Yes

No

Yes

Installation

No

Yes

Yes

No

Integration

No

Yes

Yes

No

Database Servers

No

Yes

Yes

No

Hardware

No

Yes

Yes

No

Bandwidth

No

Yes

Yes

No

Table 1 - key Cost Implications --  Hosted vs. In-House model

The cost implications are outlined in the table above. In addition, one must consider the following factors:

  • Project risk – If the initiative is cancelled, the capital and resources commitment and their implications on the organization.
  • Cost of capital – Additional cost of capital from paying the vendor upfront versus paying periodically: monthly, quarterly, or annually.
  • Accounting considerations – Large capital expense vs. an incremental operational expense
  • Shelf-ware Protection – Software applications that are never installed instead just sit on customer’s shelf are called “shelf-ware.” Your protection against the shelf-ware risk is another consideration
  • Time-to-market: How quickly can you launch the functionality to support the primary audience: Customers, Supplier, Employee.

 

Type of Risk

Hosted Model

In-House Model

Project Risk

Pay-as-you-go model removes risks

Customer owns the risk

Cost of Capital

Low

High

Accounting Considerations

Favors Customer by reducing upfront Capital Expenditures

Requires upfront Capital Expenditures

Protection against Shelf-ware

Yes

No

Time to Market

Immediate

Delayed

Table 2 - Key  Risk implications -- Hosted vs. In-House model

 

Key Observations

  • For product organizations relying on outsourced design partners for engineering services and custom manufactured part, Hosted Model represents an excellent low-risk approach for design collaboration with their suppliers

  • Hosted model helps mitigate financial and accounting exposure and offers protection against the possibility of application becoming “shelf-ware.”

 

Sample Scenario

The scenario illustrated below shows the differences in the annual cost of application to a customer. The number of users ranges from 10-75 in the first chart and 10-400 in the second.  The assets are depreciated over a period of 3 years for the In-House model. 

 

 

If you have any questions or would like to request further information on PDMOffice hosted model, please contact us at: info@pdmoffice.com

 

 

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