Many industry pundits and incumbent software vendors (ISVs) predicted that Software-as-a-Service (SaaS) was just a passing fad and would fade away like its predecessor of the dot.com era, the application service provider (ASP).
Instead, the SaaS market is flourishing because of a combination of macro-trends and the ability of the leading SaaS vendors to overcome a series of common concerns among IT/business decision-makers.
SaaS has garnered plenty of attention over the past two years as a series of upstarts, led by Salesforce.com and Google, have challenged established players such as SAP and Microsoft. These SaaS vendors have responded to escalating demand from companies of all sizes that are fed up with the costs and complexities of deploying and managing legacy enterprise applications. These companies are seeking a lower cost and more reliable alternative to support their day-to-day operations and achieve their business objectives.
As a result, survey research conducted by THINKstrategies and Cutter Consortiumover the past three years has found rising interest and adoption of SaaS by corporate users. In our most recent survey, we found a third of the respondents were using a SaaS application and another 37% were considering SaaS alternatives. Of those already using SaaS, over 90% were satisfied and planned to adopt additional SaaS solutions, and would encourage their peers to adopt SaaS solutions. Of those considering SaaS, 80% planned to adopt a SaaS solution in 2008.
The growth of SaaS has not only been fueled by customer frustration with legacy applications, but also by the ability of SaaS vendors to convince customers that their on-demand solutions are a viable alternative.
Not long ago, many IT/business decision-makers harbored concerns about the reliability and security of SaaS. They were also apprehensive about the ability to customize SaaS solutions to meet their individual needs. Publicly-traded companies, as well as those in highly regulated industries, questioned whether SaaS solutions could satisfy escalating governmental and industry-specific compliance requirements.
Many companies have been concerned about application performance problems, such as lack of availability or slow response times. These concerns were understandable given the dependence of SaaS solutions on Internet access. However, as broadband networks have become more prevalent, SaaS has become more viable. High-speed networks permit rich-featured, highly interactive applications to perform in a real-time fashion nearly anywhere at anytime. This ubiquitous access exceeds the availability of most legacy applications that are dependent on highly-centralized data centers or servers hidden behind a firewall and only accessible via a virtual private network (VPN).
The ubiquity of the Web doesn’t guarantee universal availability because there is always the threat that there could be a disruption in Internet traffic or within the SaaS vendor’s own hosting facility. However, a growing number of companies are recognizing that these risks are still relatively rare and a minor inconvenience compared with the ongoing challenges and more common problems many in-house IT staffs face keeping their operations up and running, as well as optimizing the performance of their legacy applications.
Many companies are also recognizing that SaaS vendors may be better equipped to secure their on-demand applications than inhouse IT organizations who struggle to safeguard their corporate data. The most infamous security infractions continue to be found within traditional enterprise application environments, or as the result of lost or stolen laptops. The hosting of critical data in centralized and password secured SaaS hosting facilities has proven to be an effective counter-measure to the security vulnerabilities of the past. Today’s leading SaaS solutions include activity tracking and log capabilities that can identify illicit behavior and user violations.
In the past, the off-site hosting of SaaS solutions and related corporate data was also seen as a shortcoming in terms of meeting escalating compliance requirements. Today, a growing number of companies view this aspect of the SaaS delivery model as a solution to their data archival, disaster recovery and business continuity needs. The activity tracking and log capabilities also satisfy corporate audit and discovery requirements.
The SaaS model has been built on the supposition that on-demand software can satisfy a majority of customers’ most common business requirements. Based on this ‘80/20’ rule, SaaS vendors are delivering on-demand solutions based on a ‘multi-tenant’ architecture which enables SaaS vendors to support a broad installed base of customers with a single software platform, just like an apartment building landlord supports its tenants with a single set of utilities. This makes the SaaS model more economical and operationally efficient. But, it also reduces the freedom and flexibility that each software user is given to customize the application to meet their specific needs.
Many companies, and especially enlightened CIOs, see this limitation as a welcome constraint on the unrealistic and unproductive customization efforts of the past. Most industry studies have found that software customization projects have generally been unsuccessful, often taking longer and costing more than expected while producing far less functionality than hoped.
Rather than withstand continued frustration, many companies are willing to accept the more standardized SaaS solutions because their limitations are outweighed by their ease of deployment, lower total cost of ownership and quicker time to value as a result of higher utilization rates and lower subscription fees.
At the sametime, a growing number of SaaS vendors are offering a wider array of reconfiguration, or ‘meta-customization’ capabilities which permit users to modify the ‘look and feel’ of their on-demand applications to cater to their specific needs. Some companies, such as Salesforce.com, are even permitting users to manipulate their software code and build their own applications on their platforms.
With concerns about reliability, security and customization fading, today’s greatest concerns center on software and data integration. These concerns are rising because there has been a proliferation of SaaS offerings aimed at addressing nearly every functional and industry need. Many companies want their SaaS solutions to link to their existing legacy applications or to other SaaS solutions so they can fully leverage corporate data and even create new software capabilities. In response, many SaaS vendors are leveraging Web services or offering application program interfaces (APIs) which enable third-parties to link to their applications. Web services and APIs permit SaaS vendors to link their on-demand applications together.
There are also a growing number of integration tools and consulting companies targeting the SaaS market. The tools vendors include companies such as Boomi, Cast Iron, Hubspan, Informatica and Pervasive Software. The integrators include Appirio, Astadia, Bluewolf and SaaSpoint.
Leading SaaS vendors are also creating partner ‘ecosystems’ which encourage tighter integration between multiple on-demand applications. The most prominent of these ecosystems is Salesforce.com’s AppExchange. While these ecosystems don’t eliminate every integration need, they significantly reduce them and enable customers to gain greater utilization more quickly from their business applications.
Customers have also expressed concerned about the ‘hidden costs’ of SaaS. They’ve feared that they will pay more than originally intended for their SaaS solutions as their usage levels rise or subscription prices go up. In reality the cost of today’s SaaS offerings is far easier to control than traditional on-premise software. Unlike the uncertain costs of deploying and managing legacy applications, the fees for using SaaS solutions are clearly stated. And, legacy application maintenance costs can continue to escalate even as utilization declines.
The SaaS ‘pay-as-you-go’ subscription pricing model permits companies to calibrate their fees in response to actual utilization levels. They are also in a better position to terminate or downgrade their use of a SaaS solution if they aren’t satisfied or have less need for the on-demand application.
Given the short-term subscription commitments of customers, there are very low barriers to customer defection if a SaaS solution isn’t meeting their needs. Therefore, successful SaaS vendors must continuously enhance their solutions, carefully control their fee structures and deliver quality support to their customers.
A growing number of companies of all sizes are discovering the virtues of SaaS. The model shifts the burden for deploying and maintaining applications from the customer to the vendor. It removes many of the risks associated with legacy applications and is proving to be better suited to meet the challenges of a rapidly changing workplace in which enterprises have to be accessible by increasingly dispersed employees – and operated in a more economical fashion.
Jeff Kaplan is Managing Director of THINKstrategies (www.thinkstrategies.com), an independent consulting firm focused on the business implications of the on-demand services movement. He is also the founder of the SaaS Showplace (www.saas-showplace.com). He can be reached at [email protected]