SaaS Creates Cloud Computing Alternatives

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The more things change, the more they stay the same. Just as independent software vendors (ISVs) of the past sought to gain a stronger position in the market by expanding their software portfolios from single products to integrated suites, today’s Software-as-a-Service (SaaS) vendors are embarking on the same strategy with a new set of SaaS platforms.

As a growing proportion of organizations are willing to adopt SaaS alternatives to traditional, on-premise software products—including small- and mid-size businesses (SMBs) as well as large-scale enterprises—they also seek to leverage the underlying functionality of these on-demand applications to develop their own solutions or more easily integrate multiple SaaS solutions together.

Although most people associate SaaS with stand-alone on-demand applications such as Google’s collaboration and productivity oriented applications and Salesforce.com’s customer relationship management (CRM) and sales automation solutions, the truth is that SaaS alternatives now exist for nearly every software application category.

In fact, THINKstrategies’ SaaS Showplace includes over 700 SaaS vendors offering over 3000 SaaS solutions across 75 different horizontal and vertical application areas. A November 2007 survey conducted by THINKstrategies and Cutter Consortium found that the majority (53.8%) of our survey respondents are utilizing horizontal SaaS applications, over a fifth (21.5%) are employing industry-specific SaaS solutions and another quarter of the respondents are using both. We also found nearly three-quarters (72.3%) of the people who responded are using SaaS solutions to fill unmet needs and the remainder are swapping out their legacy applications for new SaaS solutions.

As customers become more receptive to SaaS alternatives, the number of SaaS players is exploding. This ‘gold-rush’ effect is creating greater competition and confusion in the market as customers try to weed through a proliferation of SaaS solutions.

And, as customers become more knowledgeable about SaaS alternatives, their expectations are also rising as they attempt to make more strategic sourcing decisions to control the number of vendors they must manage and ensure that their SaaS solutions can easily integrate together.

In response, the SaaS market is also undergoing a maturation process that resembles the shift which occurred in the traditional software industry.

Today’s SaaS platforms are built on a combination of multi-tenant architectures, third-party integration technologies and cooperative business partnerships, or ‘ecosystems’.

Just as the legacy application leaders of the past—such as Microsoft, Oracle and SAP— used software suites to address a greater share of their customers’ application requirements, so are SaaS companies today seeking to win a greater share of the rapidly growing market via their platform strategies.

These platforms are aimed at aspiring SaaS vendors and user organizations. The aspiring SaaS vendors can leverage a SaaS platform to accelerate their development processes, and reduce their costs and time to market. By aligning themselves with an established platform provider, SaaS companies can also overcome customer concerns regarding integration issues.

User organizations can utilize these platforms to develop their inhouse applications so they can interoperate with pre-existing applications. A quarter (24.6%) of the respondents to Cutter’s SaaS survey reported that they are selecting SaaS providers that offer platform capabilities. Nearly a third of the respondents (35.4%) said they are selecting SaaS companies that offer platform and point solutions.

Percent of Companies Using or Considering On-Demand Platforms

Source: THINKstrategies/Cutter Consortium 2007.

SaaS Platform Players and Strategies

Salesforce.com pioneered this shift with its AppExchange partner ‘ecosystem’ and force.com development toolkit. The AppExchange is Salesforce.com’s third-party integration and marketing clearinghouse. The Force.com development toolkit enables software developers and independent software vendors (ISVs) to build SaaS solutions on the development code and framework which Salesforce.com has used to build its own on-demand applications. The platform also permits these developers and ISVs to integrate their applications to Salesforce.com’s applications.

Force.com leverages Salesforce.com’s Apex code. Salesforce.com’s integration platform capabilities are based on a set of application protocol interfaces (APIs), design specifications, service provisioning and support requirements. Force.com enables ISVs to build their applications more quickly by allowing them to focus on the features and functions. Force.com provides ISVs and developers the ingredients they need to build and deliver SaaS business applications.

Force.com also supports an ISV’s service delivery requirements. By encouraging a wide array of ISVs to build their applications on Force.com and link their applications to the AppExchange, Salesforce.com is also expanding its reach into additional application markets.

Salesforce.com recently teamed with Google, which has its own development platform, to enable their platforms to interoperate with each other and extending their reach into additional market segments.
Other SaaS companies have also initiated platform strategies. NetSuite has created a NetFlex platform that enables ISVs and channel partners to cater NetSuite’s applications to specific industry requirements. In conjunction with its technological foundation, NetSuite’s platform is enhanced by its growing ecosystem of third-party relationships.

Amazon has also helped to expand the parameters of the platform market with its Simple Storage Service (Amazon S3) which provides a low-cost development toolkit and test-bed environment for ISVs and user organizations. Amazon’s S3 offering gives these developers access to the same data storage infrastructure that Amazon uses to run its own global network of web sites. This offering, and other web-based development environments, have resurrected the idea of ‘utility computing’ which is now more popularly referred to as ‘cloud computing’.

Sourcing Implications

In the same way that organizations evaluated legacy application vendors based on the strengthen of their technical capabilities and the breadth of their portfolios and partner network, user organizations should now judge SaaS vendors based on their web-based functionality, ease of use, strength of their integration and development capabilities, and partner ecosystems.

This will become particularly important as user organizations seek to acquire SaaS solutions to satisfy a multitude of business requirements. Rather than subscribe to stand-alone point solutions from a wide array of SaaS vendors, centering on a smaller set of strategic SaaS sources will reduce the amount of time, effort and expense required to pull the various solutions together. It will also permit the user to reduce their time to value and leverage the platforms to develop their own customized solutions to meet their unique business needs.

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.