Software as a Service

Software-as-a-Service (SaaS), has become the ‘next big thing’ in IT. Reducing costs for vendor and customer alike, SaaS represents a superior business model that will drive out other delivery methods where a utility approach is appropriate. For highly customized environments or systems that represent a competitive edge for the customer (e.g. proprietary trading systems), SaaS will make limited inroads, as the SaaS success model is strongly tied with cost sharing over a multi-tenant base. It’s important to realize that while SaaS will be a major part of the future, it will not be the only future.

Reduced cost

The application's design, development, maintenance and support costs are spread over multiple organizations.

Reduced risk

Unlike in enterprise software SaaS applications are operational 24x7 and accessible from any Internet connection. Since it is working already, the customer should be able to evaluate the working application that can easily be evaluated against the organization's requirements.

Increased operational leverage

IT departments are under increased resource pressure to do more with less. Instead of using resource to develop functionality that is essentially the same throughout the industry, IT departments can now concentrate all their efforts on those applications that directly encapsulate the organization's competitive edge.

Increased operational flexibility

Organizations often prefer to lease space rather than buy it. They avoid tying up capital that could be more profitably employed elsewhere. They are also able to scale expenditure with the business - which is key if profitability is to be maintained.

Faster Deployment

No ROI can start before the application is installed, and here SaaS scores a huge advantage in being immediately available. This cuts implementation times of six to eighteen months to a few weeks.

Increased Quality

Any successful SaaS business depends on a steady flow of renewal business with well-established vendors typically quoting a retention rate of 95% or more., which places a premium on providing a quality service. SaaS vendors have only one environment to manage and this can be used to guarantee the success of problem isolation, fixing, and regression testing.

Vendor Benefits

Reduction in Support Costs

Setting up an environment to replicate the bug on a particular environment is expensive and time-consuming, and SaaS removes this class of problem entirely.

Lower Cost of Sales

For SaaS vendors, there is no need for proof-of-concepts, since the actual application is readily available. Any trials can be fully automated without the need for extensive pre-sales support.  Since the product was designed for Web access and can be demonstrated over the web, the need for face-to-face meetings diminishes and it makes sense to adapt marketing and sales processes accordingly.

Predictable Revenue Stream

Traditional Enterprise software vendors book the majority of the quarter's revenue in the last 2 weeks of the quarter.  Such a business is almost impossible to accurately predict and leads to panic measures at the end of quarter to meet targets. In a SaaS model, there is no one time license fee, but instead a regular and predictable monthly fee.

Competitive Advantage

Finally, perhaps the most compelling benefit for vendors is the somewhat circular observation that it is of benefit to their customers, and so helps them compete in the market.

Concerns for Customers

New Skill Sets

Both IT and Business departments need to adopt new approaches when purchasing Software-as-a-service rather than installed software.

Competitive Edge

SaaS used to be referred to as utility computing, and this still best describes the most appropriate applications for a SaaS approach. Unique systems, so often critical to a company's competitive edge, cannot have their costs shared over multiple tenants and in these cases, SaaS may not be best.

Customization

While customization is an increasingly available capability for SaaS, the basic economics remain the same and any cost of customization, no matter low, must still be borne by that single customer, and this may negate the SaaS advantage.

Integration

Traditionally the Achilles heel of all packaged applications, today most SaaS vendors provide a form of programmatic web based API to enable read/write access for content, and is seldom a serious concern.

Security and Accountability

From a security standpoint, the customer needs to perform due diligence on their vendor as they would any other third party with access to their data. The SaaS vendor should have independent certifications such as SAS70 and third party security audits available for review.

Likewise, accountability needs to be viewed in the same light as any other contractor or service provider for what they are - an extension of your business. This includes a clear understanding of such issues as business continuity, service levels, and liability.

Impact on IT

IT is responsible for many things - hardware, networks, software, installations, projects, service levels and applications. Suddenly business professionals can get all of these with little more than an Internet connection and a credit card. This legitimately might give IT pause about the impact of the model on its own profession.  Articles such as 'Does IT Matter?' by Nicholas Carr (HBS) reinforce these concerns. The outcome of large technology shifts, such as these, is notoriously difficult to predict. Certainly IT has a critical role to play in the evaluation of SaaS applications.

Concerns for Vendors

New Skill Sets Required

In addition to the requirements for relevant systems management and general IT expertise, a SaaS business mandates a great emphasis on disciplined process (especially as regards to security and business continuity). Applications suitable for multi-tenancy have fundamentally different constraints than one meant for a single customer.

Customer Acceptance

Not all industries and customers are moving to SaaS at the same rate, andnot every application is best served by SaaS. Clearly a vendor needs to understand their own target market to know whether SaaS delivery would be of net benefit or loss to their customers.

Financial Market Acceptance

The financial markets have relatively little experience of SaaS vendors. As a consequence, it can be argued that SaaS vendors' greater predictability and the lower risk of a subscription based revenue stream are undervalued.

The Future of SaaS

Installed software is not going away. But SaaS, although not the one-and-only future in software, will be increasingly important, and before long dominant, powered by ever greater investment and more compelling innovation.

SaaS brings tangible benefits to vendors and customers alike, but only if the right SaaS product is applied to the right problem. For some problems, an on-premise mainframe is still the best.

SaaS will also make deeper inroads where it already enjoys success and branch out to pervade more and more functional areas. As this happens we will see an increased emphasis on acceptable standards (some through government regulations) of information security and data privacy, as well as an increased emphasis on open, portable data.

Finally, just as the emergence of the PC and personal applications led to the creation of a whole class of independent knowledge workers and contractors, it's likely that SaaS itself will alter business patterns by easing the collaboration between companies, facilitate partnerships, and move the focus from internal to external.