I D C T E C H N O L O G Y S P O T L I G H T
C u s t o m A p p l i c a t i o n s P o w e r e d a n d E n a b l e d b y
C l o u d C o m p u t i n g
December 2014
Adapted from Cloud-Based Application Services: 2014 U.S. Customer Strategies by Pete Marston, IDC #251856
Sponsored by SAP
Overview
Demand for custom application development services continues to grow. While some organizations are electing to simplify their IT environments by standardizing their packaged application
deployments, the notion remains that focused customization on top of packaged applications can play an important part in supporting businesses and raising levels of business process automation. This Technology Spotlight examines the use of cloud-based custom application services and also looks at the role SAP plays in the custom development of cloud applications.
Introduction
Corporate imperatives to drive business results in IT operations are causing many organizations to revisit their IT strategies. Organizations are looking to trim costs, improve operating margins, and improve customer satisfaction levels; however, they face steep hurdles in achieving their goals because they lack the ability to focus resources on strategic objectives, and they also face disconnected alignment between the business and IT.
As a result, many organizations are turning to the cloud to help circumvent those challenges and are leveraging third-party services to build custom applications via the cloud. Offloading custom
application development work involves risks, but it also helps organizations avert ongoing custom application management costs internally, aids with fostering higher levels of end-to-end process automation, and allows organizations to repurpose and focus resources on more strategic initiatives within the enterprise.
Corporate Objectives Steer Custom Application Development Ta ctics
An IDC outsourcing services survey found that organizations are focusing on a variety of corporate mandates to gain a competitive edge over their peers (see Figure 1). To best competitors and win more in the market, organizations are planning to:
Increase profit margins. Increasing profit margins helps build operational cash and funding to reinvest into the organization. Through profit margin improvement, organizations can create capital that can be used to fund new application development initiatives to enhance business
Increase customer satisfaction. Improving customer satisfaction fosters customer loyalty, prevents customer attrition, and can lead to recurring business and increased sales. Building new applications that help customer-facing personnel better understand customer needs enhances customer relationships, increases customer interaction levels, and fosters higher customer satisfaction.
Increase revenue. Building top-line growth fuels an organization's operational cash flow. Without sales, the organization cannot function as a going concern. Moreover, as organizations look to boost profit margins, cost-cutting measures can go only so far before excessive cost cutting begins to inhibit an organization's ability to generate cash. To offset the detriments of too much cost cutting, organizations are focusing on ways to build the top line to stimulate operational cash. Building applications that help sales resources understand customer needs better and meet customer needs more quickly can boost an organization's top line.
Achieve cost reduction goals. Organizations are in a constant battle against rising IT operations costs. Legacy software development tools and packages that organizations have committed to support their custom applications can be a financial burden to maintain, especially when vendors have either decommissioned support of older legacy tools or gone out of business. Moreover, continuing to utilize traditional technologies and methods to build custom applications can drain budgets more quickly because older tools aren't as efficient, flexible, or resilient as modern cloud tools and traditional development methodologies are more labor intensive and costly. Lessening reliability on older tools and methodologies and utilizing cloud tools can free up cash and help organizations reduce costs.
Improve performance of IT operations. Higher performance from IT operations contributes directly to improved business performance. By streamlining how IT operates, organizations can direct the efficiency and cash generated from improved IT operations to other ailing business areas, accelerate innovation, or enhance customer relationships.
FIGURE 1
Top Corporate Imperatives, 2014
Q. Please select the top 5 company imperatives over the next 12 months.
n = 402 Notes:
0 5 10 15 20 25 30 35 40 45 50 Align sales and marketing operations
Increase adherence to regulations Increase employee satisf action and productivity Drive product innovation and market thought
leadership
Improve supply chain perf ormance of suppliers and distributors
Shorten product development cycles Attract and hire top-perf orming employees Strengthen and expand customer relationships Accelerate speed to market Reduce time to compliance Improve market penetration Improve f inancial management Improve innovation across the organization Improve perf ormance of IT operations Achieve cost reduction goals Increase revenue Increase customer satisf action
Increase prof it margins
Two Challenges Stand in the Way
While organizations plan to reduce costs, improve customer relationships, and streamline financial management, focusing the right people and resources on corporate objectives and creating alignment between IT and the business are key impediments (see Figure 2).
Organizations lack the ability to focus the right people and resources on strategic initiatives.
To build custom applications, as well as maintain and augment them, organizations need people with the appropriate skills, resource capacity, and capital to fund projects. But unfortunately, daily
initiatives often siphon off those resources. As a result, strategic imperatives can take a back seat to daily operations and be left unattended until resource capacity replenishes.
Business needs and IT capabilities are out of synch. Traditional custom-built applications have long been the enabler of business processes and resource productivity. However, keeping older custom applications up to date with the pace at which business processes change creates new challenges for IT. The pressures to deliver enhanced application functionality in highly time-sensitive situations often hamstrings IT's ability to deliver custom applications and enhancements at the speed at which the business needs them, as well as within the budget that's acceptable to the overall organization.
FIGURE 2
Top Challenges for Executing Corporate Strategy
Q. Please select the two greatest challenges to execute your corporate strategy.
n = 402 Notes:
Base = respondents who are already outsourcing datacenter/network/client technologies/help desk or IaaS/SaaS services
The survey was managed by IDC's Quantitative Research Group. Data is not weighted.
Use caution when interpreting small sample sizes. Source: IDC's Infrastructure Outsourcing Survey, November 2013
0 5 10 15 20 25 30 35 40 45 Other
Available investment of f unds and resources Corporate sponsorship f or key initiatives Build consensus and cooperation f rom
stakeholders across the company Identif y your company's strategic
dif f erentiators in the marketplace Financial visibility and integration Alignment between business and IT Focus the right people and resources on
strategic initiatives
Benefits: Organizations Turn to Cloud to Address Goals and Challenges
Adoption of cloud-based application services is rising. In fact, nearly 50% of organizations have adopted software as a service (SaaS) as a means to make their organizations more nimble and cost efficient in procuring application services. Organizations that have highly standard business
processes have found value in SaaS because SaaS applications support highly common, repeatable business processes and scale across an organization's distributed divisions.
However, while SaaS adoption has penetrated deeply within enterprises, so too has platform as a service (PaaS). More than a third of organizations have adopted PaaS, and nearly another 20% plan to adopt PaaS in the next 12 months (see Cloud-Based Application Services: 2014 U.S. Customer Strategies, IDC #251856). However, although SaaS products fill many combined technology and business gaps for organizations, sometimes standardized SaaS products aren't enough to support unique, highly complex and convoluted business process needs. As a result, organizations may be better supported through a custom-developed, cloud-based solution that can mirror and support proprietary business process cycle needs more effectively.
Tailored application solutions support end-to-end processes through high levels of automation. While packaged cloud applications have their advantages — such as speed to deploy, standardized processes, and consumption-based pricing — they can be limited not only in supporting highly unique and differentiated processes but also in application customization flexibility. Limited customization capability can mean fragmented business process execution and higher levels of inefficiency as organizations can automate only some portions of their end-to-end business process and be forced to execute other aspects of the process manually. By contrast, leveraging cloud-based custom application development services can help organizations better differentiate against the competition through:
Faster end-to-end process execution. Custom-crafted applications built in the cloud help organizations fulfill higher levels of process automation. Tailor-made applications tend to map directly to an organization's business process and limit the need for manual intervention along process execution.
More effective utilization of resources. Using cloud-based application development services relieves an organization of having to invest its resources' time in application development. Instead, organizations can focus their internal resources on accelerating innovation within their core business processes and allow a third-party vendor to build, operate, and maintain a custom solution and application extension for them.
Reduced custom application maintenance costs. Custom applications are built not for one-time usage but as a long-term asset to help the organization be more productive. And as a long-term asset, custom applications require ongoing maintenance and upkeep. Over time, as custom applications grow older, costs to service them can rise. As a result, organizations can find themselves spending sizable portions of IT resources' time and budget servicing custom
applications through ongoing maintenance, enhancements, and upkeep. Handing over such maintenance activities to a third party helps organizations avoid tying up their internal resources' time with maintenance and allows them to focus resource energy elsewhere.
Market Challenges
While benefits of cloud-based application development services are attractive, the approach also raises risks and challenges that organizations must address:
Data security. Utilizing cloud-based custom application development services introduces data security quandaries that an organization must wrestle with. With custom-built applications being housed outside of the organization's traditional, on-premise datacenter locations, how can risks of data access and assurance of data security be mitigated when control lies outside the
organization? Changing the security paradigm of what an organization is familiar with and has worked to build over the past requires an impact analysis, a contingency plan, and testing and validation, as well as time and resources.
Change management and vendor governance. Using cloud-based custom application development services introduces the need for a new management and vendor relationship governance model, especially if an organization has traditionally built its own custom applications. Offloading application development (and more importantly maintenance activities) means that organizations must consider the impact of an application outage. Service levels for the application must be defined and set, and the vendor relationship needs to be actively managed to ensure the organization is achieving the value it expects from the managed application service.
Organizational cash flow and firm valuation. Using cloud-based application development services transforms an organization's financial structure and cash flow. Eliminating capital assets, such as software and hardware, reduces the depreciation charges that an organization can pass through its income statement — which helps reduce the organization's taxable income and overall tax liability. When an organization opts to use cloud-based application development services, it forgoes the ability to charge depreciation back against its income statement because there are no capital charges to depreciate. Additionally, in cases where hardware and software may be financed to free up capital reserves, interest financing charges on the assets can be written down against the income statement to generate tax shields and raise the organization's overall free cash flow. Using a third-party service provider to build custom applications in the cloud not only affects the organization's IT P&L but also impacts the organization's financial strategy, tax liability status, and shareholder value. As a result, the tactic of using cloud-based application development services to build custom applications requires a comprehensive financial impact analysis to understand measurable financial implications and consequences.
Considering SAP Custom Development Services for Cloud
The SAP custom application development services for cloud are designed to help organizations wring more value out of their existing SAP application installations by extending existing cloud applications or building brand-new cloud applications on the SAP HANA Cloud Platform to address unique, mission-critical business needs. A few examples of where clients have used SAP's cloud-based application development services are custom-built application extensions for time and expense reporting, travel claims processing, and service parts management processes.
These services are offered on a subscription basis and are designed to augment SAP application installs through custom-made extensions providing the same level of end-to-end mission-critical functionality and individualization on the cloud as their on-premise solutions. Agile development methods are leveraged to ensure customer collaboration at each stage of development, resulting in a smooth and quick process.
Unlike traditional application development services, which tend to consist of separate fees for an initial application development initiative and then additional, separate fees for ongoing application management, the SAP cloud-based custom application development services are packaged into a single monthly service fee that includes development, deployment, operation, maintenance, and ongoing upgrades of the custom extension. Customers pay for functionality within the cloud-based service for as long as they need it, thereby limiting the financial commitment and lowering initial cost. Key value-differentiating aspects of this service are the global network of the team's cloud
development expertise as well as the core SAP application knowledge and the synchronization of the cloud extensions with the standard product strategy. In addition, there is constant interaction between the developers who are focused on the on-premise solutions to ensure solid integration in hybrid landscape scenarios. This global network consists of regional hubs spanning Europe, North America, South America, and Asia and is growing.
Challenges
While SAP provides custom development services to address individual needs, the service offering faces a few headwinds that have arisen within worldwide application services markets. IDC research has found that services buyers are showing increased interest in consolidating their vendor
management. Buyers have indicated that while they do not want to consolidate their services vendors down to just one provider, they do want to condense the number of vendors they utilize to streamline vendor management activities (see 2014 U.S. Infrastructure Outsourcing and Cloud Services Buyer Study, IDC #246992) and drive down vendor management costs.
Analysis suggests that 90% of customers prefer to have 10 or fewer service providers. The desire to consolidate providers means that competition for discrete CAD services deals will likely grow more intense as specialty CAD vendors will need to demonstrate significant value to remain in the
preferred vendor pool. Additionally, IDC analysis of worldwide application management deals shows an increasing amount of service bundling activity across multiple aspects of the application service life cycle. Bundling application development services along with other services (such as testing, application management, and infrastructure services) is an approach that many service providers are utilizing to keep their services pipelines full. SAP's specialization in custom application development services, woven around core SAP offerings, could constrain overall application services opportunities and invite unwanted competition.
Conclusion
Further momentum in using development partners and the cloud for application development will fundamentally transform traditional characteristics and buyer expectations of custom application development services. More specifically, IDC expects that:
Application development project durations will shrink and releases will speed up. Use of cloud-based application development services fosters a more iterative environment to build application prototypes, test the prototypes, make refinements based on user feedback, and then release the applications for use. In IDC MarketScape: Worldwide Mobile Application
Development, Testing, Management, and Infrastructure Services 2014 Vendor Assessment (see IDC #247480), IDC interviewed more than 28 buyer organizations that built custom mobile
their use of service providers for custom-built applications as the applications could be put into users' hands more quickly to test. Although initial application releases lacked full functionality at the outset, organizations were able to create initial application functionality quickly, prove application value to business stakeholders, and refine and build additional application functionality incrementally to foster increased application usage as well as stimulate ongoing return on investment as newer releases were built.
Application iteration cycles will increase and so could costs. While project durations shrink and application releases speed up, the nature of continuous refinement in agile application development means that organizations will need to develop alternative management structures and techniques to accommodate the new norm of project delivery. While an iterative project management approach can help offset project risks, buyer organizations will face challenges in containing costs over the long term as continuous development and application iteration cycles could result in higher long-term costs and longer-term projects before an application is deemed "complete."
Customization will ratchet lower, and componentization will rise. Increased usage of cloud-based custom application development services will result in higher levels of standardization. Levels of true customization will ratchet lower, and componentization will dominate the custom-built applications of the future. Services buyers should be aware that their applications will be built using IT assets and code libraries and inventories that service providers amass over time. While true customization from the ground will be used less, buyers can benefit from third-party providers' operational efficiencies in development. Buyers will have access to previously built modules and components that will shorten application development cycles and raise application quality standards.
SAP is aware of these trends as it continues to develop and optimize its custom development services. To the extent that the company can address the challenges described in this paper, IDC believes that the SAP offerings in this market space are well positioned for success.
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