HP wants to extend the service plan on my year-old Compaq Presario, a computer that cost me a whopping $500—without monitor or printer. HP's "best value" offer for my extended service plan is a three-year deal for $355.95. Meanwhile, an improved version of the same PC is currently selling new for $350, with printer and monitor. Is it any wonder that I tore up HP's generous offer? At those prices, it's simply easier, and probably faster, to just run down to the store and buy another PC—and get a better machine in the process.

The idea that the desktop PC is now disposable has its analog in the software world. For many companies, the basic functionality they receive from key elements of their enterprise software stack can increasingly be delivered by products that make traditional cost structures look very disposable. Basic sales force automation, human resources management, and accounts payable and receivable applications —to name just a few—are now as generic as a high-end $350 PC. And it's no wonder that companies are looking at their current software agreements and wondering if they'll ever do that again.

A major reason for rejecting the status quo is that, as in the PC world, the replacement cost for the processes performed by older enterprise software products is significantly lower than the original cost of the enterprise software license—and in some cases, even lower than the annual maintenance cost of older systems. In other words, that $20 million CRM system can be replaced by a hosted CRM service for one tenth the cost.

The lower replacement value of these basic processes isn't the only reason the old enterprise software model is under attack. The 20 percent service-and-maintenance cost of most enterprise software is generally used to fund research-and-development costs and cover the vendor's cost of providing free upgrades to customers. Although upgrades that cover regulatory and legal changes are necessary for all, upgrades that add new functionality are useful only to companies that need to continually upgrade their business processes. And if the processes are already relatively stable—as in the examples above—then paying for functional upgrades that aren't needed makes no sense.

For CIOs it's important to take a closer look at how their company uses enterprise software and figure out whether the changing economics of the industry might signal a radical shift in what it costs to continue to do business the old-fashioned way. Hosting is one option; finding a lower-cost service-and-maintenance model is another. Whatever the model you eventually choose, just make sure you're not being tempted to pay $355.95 to maintain a computer worth $350. There's definitely a better way.

Josh Greenbaum, principal of Enterprise Applications Consulting, has 20 years of experience in the industry as a computer programmer, systems analyst, author, and consultant. His column appears monthly.

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