It would be a stretch to argue that a business’s operations are defined by the applications it uses. What is true is that the functionality supported by those applications has a direct influence on what its employees are able to do.

But in 2010, as has been the case for a number of years now, the most significant technology trend in business applications had more to do with the way that those applications are delivered than what they are capable of doing. That trend was the continued rise of software as a service (SaaS).

Just over a third of respondents to this year’s Effective IT Survey have deployed SaaS (34.7%), a healthy increase from 26.8% last year. That finding echoed a report from analyst company Gartner which found that the global market for SaaS grew by 15.7% in 2010 to reach $9.2 billion. Garter predicted that the SaaS market will grow even faster in 2011, by 16.2% to $10.7 billion.

The kinds of application that are most often consumed as a web-based service are still those at the periphery of the organisation. Gartner found that the largest segment of the SaaS market is content, communications and collaboration, dominated primarily by web-conferencing. That was followed by customer relationship management (CRM), where SaaS pioneer Salesforce.com continues to dominate the market. Applications that relate to internal operations, such as enterprise resource planning (ERP), remain less popular in SaaS form.

According to Bryan Cruickshank, a partner at KPMG’s IT advisory division, the applications that are suitable for SaaS are those to which a one-size-fits-all approach is appropriate. “CRM is a good example,” he says. “Companies used to spend a lot of money on very poor CRM solutions. But as long as you can live with a commoditised CRM application, that’s what you should be doing. How many businesses really use CRM differently?”

This also explains, Cruickshank argues, why SaaS is typically more popular with smaller and medium-sized organisations than global corporations with unique business processes. “I don’t think SaaS will become a critical application enabler for global organisations,” he says. “It’s the mid market, where companies can commoditise their business processes and use volume products, where it really makes a difference.”

For the foreseeable future, therefore, large global organisations are stuck with their on-premise applications. Cruickshank reports that the application projects that are most likely to occupy enterprise IT departments are consolidation and upgrades.

Many global businesses have found themselves divided by the number of ERP instances used across their divisions. Cruickshank gives the example of pharmaceuticals giant GlaxoSmithKline, which found that it was unable to assess how much flu medicine it possessed because local divisions had configured their SAP implementations differently.

“If you allow different territories to allocate their own stock reference numbers, then it’s not surprising that you can’t pull all the information together globally,” he explains. For GSK, the realisation spawned a transformational programme to unify its SAP instances.

Upgrades, meanwhile, present CIOs with a particularly thorny problem in the wake of the recession. Many businesses will find themselves forced along the upgrade path by their suppliers, who will eventually discontinue support for older versions of their products. But the obligation to build a business case for the cost of upgrading nevertheless falls on the IT department’s shoulders. “As a CIO, you can’t go to the board and say, ‘Can you write me a cheque, I need to upgrade,’” explains Cruickshank. “The challenge is how you turn a technology cost into a business benefit value.”

Whither innovation?

An application consolidation project may well deliver functional improvements, as may a version upgrade or indeed a move to SaaS. But none of these represent a bold new direction in application functionality; none of them present businesses with an opportunity to apply innovative technology to gain competitive advantage.

So has innovation in the enterprise applications space stalled? Besides the addition of social media functionality, when the likes of SAP and Oracle, the two gorillas of the market, talk about ERP innovation, they talk about the integration of business intelligence and the move to SaaS or the cloud. These may well be valuable improvements, but they are not new things that business applications – and therefore the businesses that use them – can do.

According to Bruce Richardson, formerly a senior analyst for AMR Research and now chief strategy officer for applications vendor Infor, there are plenty of business processes that have yet to be automated. “There’s labour supply chain automation; there’s marketing automation; there’s a lot we could still do in pipeline management,” he says. “And the process of launching a new product: currently, businesses use a combination of project management software and email, but there’s no reason why it can’t be standardised. “There’s still a lot of white space for us to fill,” he says.

But Richardson concedes that none of this represents a great leap forward. “There’s nothing on the horizon that’s going to revolutionise the enterprise applications space; there’s no equivalent of the iPod or the organic LED.”

Conditions may improve in 2011, for private organisations at least, but they are not going to resemble the pre-2008 economy. Businesses, it follows, will want to try new products and services and explore new operating models.
If their applications providers can no longer deliver meaningfully better functionality, those businesses might be justified in asking whether their substantial licence fees are paying dividends.