I Love On-Demand

I love on-demand software. Yes, this is kind of a strange thing to love, but software delivered via the Internet instead of old-fashioned ways is turning out to be the next-big-thing in Corporate America. Let's take a look.

Until the late 1990s, business software was based on the client-server approach. This meant that a company installed software on its own systems. Unfortunately, this was usually complex and required an internal information technology staff, as well as high-paid consultants.

As a result, while the software license may cost, say, $100,000 to $200,000, the real costs were much higher. Interesting enough, companies started to ask software companies a key question: What's the total cost of ownership of the application?

Upstart software companies like Salesforce.com (NYSE: CRM  ) thought there was a better way -- hosted or on-demand software. With this method, a software company builds its own server infrastructure and then allows its customers to access the software from a Web browser.

The upshot for customers: no installation, no hardware investments, no high-paid consultant.

But that wasn't the end of the story: Instead of charging up-front licensing fees, on-demand software companies thought it was better to charge ongoing fees. True, it would take time to build a revenue base, but ultimately, it would result in a steady, recurring revenue stream (as long as the churn was low).

Takeaway
In light of all this, it should be no surprise then that the growth prospects for on-demand software look promising. Take a look at BlueFolder, which develops software to manage services businesses. The company had difficulties growing business until it made the move to on-demand. "The power of an on-demand solution," COO Marc Fey told me, "is derived from customers being able to build their business around what they need."

Research firms like Gartner Group and TripleTree also see significant growth in the sector. Over the next three years, forecasts show that 25% to 40% of new business applications will be on-demand.

The good news is that there are strong on-demand players that are publicly traded. Some of my favorites include Concur Technologies (Nasdaq: CNQR  ) , which focuses on corporate travel and expense management; RightNow Technologies (Nasdaq: RNOW  ) , which has a comprehensive suite of customer-support applications; and Taleo (Nasdaq: TLEO  ) , which helps with employee management.

And, yes, the premier company in this space is Salesforce.com, which is still one of the fastest-growing software companies in the world. With a valuation of 12 times revenues, it's also an indication that Wall Street really likes the space. Hey, what's not to love?

Further Foolishness:

Fool contributor Tom Taulli does not own shares mentioned in this article. He is currently ranked 1,623 out of 19,864 in Motley Fool CAPS.


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