SaaS: Growing Up

As familiarity and confidence in the Web grows within the enterprise some are looking back to the technology and business models of earlier times on the Web. This reinvestigation is leading to new growth for the Software-as-a-Service (SaaS) model. A SaaS model is defined by Business Communications Review as follows: “Customers access SaaS applications and data via the Web and essentially rent the application from the SaaS provider on a per-user or per-month basis. The SaaS provider is responsible for delivering, securing and managing the application, data and underlying infrastructure.” The idea, which has been cited for saving companies time and money, as well as allowing them to focus on more strategic initiatives, while gaining traction is not accepted as a best practice by all. Objections to the SaaS model include allowing third parties to handle sensitive data, and the inability to fully customize applications. However, there is still a huge market and providers are lining up to meet the needs, real or only perceived, of all those they can.

IDC predicts that worldwide spending on SaaS, which reached $4.2 billion in 2004, will increase to $10.7 billion in 2009. IDC’s projections are on par with other analysts’. Saugatuck predicts that the growth rate of SaaS will be 25 percent per year through 2010. Bill McNee, Saugatuck’s founder and CEO says, “By 2012, we expect that 35 percent of all new business software will be deployed and delivered as SaaS.”

“When first introduced in the late 1990s through ASPs, many in the software industry thought that SaaS would be primarily used by small and midsized businesses that didn’t have a lot of internal-processing resources,” according to Amy Wohl, a technology blogger and president of Wohl Associates. Now, that the view of SaaS is changing, “as SaaS got out into the world, what we found was that while there were small and medium-sized businesses that used the software, you might also get very large companies using it. This kind of arrangement can be attractive to a company of any size.” Research indicates that both large and small companies are hopping on board.

There are some simple reasons for both providers and customers to like the SaaS model. For those on the application provider side, there is essentially one code set to work on, and as updates and upgrades can be rolled out simultaneously all clients are running the same version. This scenario helps providers save both time and money and more importantly to put both to more strategic use. Likewise, customers are using SaaS implementations for very similar reasons. Early adopters of SaaS implementations were often focused on the direct savings incurred by fewer IT hours needed for routine tasks and maintenance as well as hardware and other costs. Treb Ryan, chief executive of OpSource, a software-as-a-service delivery provider explains the rationale, “You don’t have to buy a server. You don’t have to get a database to run it on. You don’t need to get back-up and disaster recovery. You don’t need to hire a system administrator to run all of that for you. You just go buy it from the SaaS provider and all of that is included in the price. That’s very valuable for small and midsized businesses.” Ziff Davis notes this as well, “Leading IT departments are leveraging the convergence of services and software to redeploy key IT people and outsource key IT operations to expert providers of those services. This helps shrink IT expenses, increase efficiencies and improve the reliability, scalability and security of IT systems.” However, Ziff Davis also points out that there is another important element to SaaS which customers are realizing, “Most importantly, it helps IT departments focus their efforts and resources on technology initiatives that deliver strategic value.”

A Ziff Davis white paper looked closely at three SaaS implementations and found that, “While no two companies decide to use a service for exactly the same reasons, there is surprising agreement among the three companies interviewed for this white paper for both their selection and benefits obtained.” The paper notes that, business expectations of software as a service are indeed changing, “with a much higher emphasis today placed on value-added services. The use of such a service to save cost, while a factor in each company’s decision, was cited less frequently than other benefits more likely to give them a strategic edge.” Among the three companies that the white paper interviewed there were three notable themes behind their decisions to go with the SaaS model. First there is the desire to gain a strategic focus, “each company reported that their IT department was spending too much time on daily system maintenance, often at the expense of strategic applications development or customer support.” By turning this work over to the SaaS vendor companies were able to focus on strategic initiatives. Companies also expressed a need to consolidate and reduce; “a universal desire to consolidate and standardize disparate legacy systems and reduce process duplication were named as key challenges by all three companies interviewed.” Finally, all three companies felt that by making the move to SaaS they were in fact adding a business partner. The companies said the SaaS model fostered a deeper relationship with the provider, which, considering they are the experts. There is a common element to all three of these themes which is summed up well by Treb Ryan, “I think the best SaaS applications aren’t just a straight-up replacement for what you were doing prior, but they actually allow you to do things you couldn’t do before.”

However, not everyone is on board with the model. Since the early ASP days the major concern has been the turning over of data, its management, and access to it, to a SaaS provider. These concerns are real; in many cases they represent the core of an enterprise’s value. There have also been real-life examples, in which the SaaS technology failed and resulted in service disruptions, which add weight to this concern. (Salesforce.com experienced these in late 2005 and early 2006.) However, just as Salesforce.com recovered and re-gained the market’s trust, the entire market is starting to lean in the same direction. Ultimately providers want their customers to feel safe letting any and all data outside the enterprise, but while they wait for the comfort level to rise they may need to take small steps and work with less sensitive data. To this end, some are suggesting that the outsourcing of email may pave the way.

Jim Nauen, vice president of sales and marketing for Centage Corp. points out “E-mail seems to be something that people are okay with the level of security that outsourcing providers are providing . . . It’s kind of the crown jewels, the accounting information, [that] people tend to have more problems with.” “Amy Wohl agrees with this, “I think in many cases it’s being used for applications which are not the mission-critical application of the business.” Asked if that idea will change, “Well, yes, when people get more accustomed to it and realize it’s completely safe to use. I think that it will happen, too, but it hasn’t happened yet.”

While it may not have happened yet, analysts are expecting growth: “There is no doubt that software as a service has become a driving force within the software industry,” says Erin Traudt, research analyst at IDC. “The software industry must adopt a new frame of reference for value creation, and software as a service delivery is at the forefront of this trend.”

A more complete version of this post, including links to market research, can be found at the website of Analyst Views Weekly.

More information on this topic can be found in the Software section of Northern Light’s Software, Computers, & Services Market Intelligence Center.

And in the following articles:

More on SaaS and Virtualization
Intelligent Enterprise, July, 9, 2007
According to Baimetov, “virtualization brings very significant benefits to the SaaS world. Virtualization gives ISVs an easy migration path to SaaS without having to give up the flexibility of ‘dedicated’ design. At the same time, virtualization allows service providers to make their hosting infrastructure very flexible yet very efficient.” He concludes that the benefits of virtualization and SaaS are so significant, that, in his opinion, no SaaS provider will be able to be competitive without using virtualization.

Getting SaaSy with iPhones
Red Herring, July 6, 2007
“It would certainly seem that SaaS would get at least a short-term boost from the iPhone, if only because Apple has shipped hundreds of thousands of them in its first weekend, and the only way to add additional capabilities to the device right now is via web-based applications,” said Current Analysis analyst Avi Greengart.

SaaS in East Asia, Part 1: Breaking Ground
eCommerce Times, June 28 2007
Salesforce.com CEO Marc Benioff in April announced the company’s largest sale in Japan to date: a partnership with NTT Data, the country’s largest software developer and systems integrator, to develop CRM applications for Japan Post, Japan’s public postal and delivery service, banker and insurer. The deal is seen as one that can spur the adoption of on-demand applications across corporate Japan.

Is the SaaS Model a Friend or Foe?
CIO Today, June 27, 2007
Software-as-a-service offerings are expanding, and gaining more acceptance. How would you like to just stop deploying enterprise software, stop monitoring application performance, and stop participating in the finger-pointing and second-guessing which occurs when there are performance problems? That’s the basic attraction of software-as-a-service (SaaS). Customers access SaaS applications and data via the Web and essentially rent the application from the SaaS provider on a per-user or per-month basis.

Red Hat Simplifies Pricing on SaaS-Based System Monitoring
InfoWorld, June 13, 2007
Red Hat has changed the pricing model for its SaaS-based system monitoring and added support for more software packages, the company said on Wednesday. The Red Hat Command Center service provides remote system monitoring for systems running operating systems including Solaris, Windows and, of course, Red Hat Enterprise Linux.

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