The OnDemand Server job needs to be running when you run ONDDSM. The only time OnDemand Server needs to be down is when you want to do an IFS Save. When you save the IFS you need to have the OnDemand File System UnMounted.

If it helps here is a copy/paste from the OnDemand v.7.2 Admin Guide:

To perform the save:
1. End the instance server ENDTCPSVR SERVER(*ONDMD) INSTANCE(QUSROND)
2. Unmount the file system CALL QRDARS/QRLCASMUFS PARM(’QUSROND’)
3. Save the directory structure /dev/QASP01/ONDEMAND_QUSROND*
4. Save the directory structure /QIBM/UserData/OnDemand/QUSROND
5. Restart the instance server STRTCPSVR SERVER(*ONDMD) INSTANCE(QUSROND)
To perform the restore, if necessary:
1. End the instance server ENDTCPSVR SERVER(*ONDMD) INSTANCE(QUSROND)
2. Unmount the file system CALL QRDARS/QRLCASMUFS PARM(’QUSROND’)
3. Restore the directory structure /dev/QASP01/ONDEMAND_QUSROND*
4. Restore the directory structure /QIBM/UserData/OnDemand/QUSROND
5. Restart the instance server STRTCPSVR SERVER(*ONDMD) INSTANCE(QUSROND)