Value-added SaaS: Is this SaaS 2.0?

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As the software-as-a-service (SaaS) market matures, I’m starting to see an important demarcation line between future success and future failure.

The demarcation is stark enough that it will eventually divide the winners from the losers, and in the process define what customers come to expect from their SaaS vendors. And those expectations, in turn, will fuel a next generation set of SaaS vendors the likes of which we’re only just starting to see today.

Here’s the line I’m seeing that divides the current SaaS market into two essential components: SaaS as a pure-play alternative to on-premise, and SaaS as a value-added set of services that could never be replicated on-premise for love nor money.

It’s this latter designation that defines where innovation lies, and therefore where customers, not to mention investors, who are interested in spending on innovation should place their bets.

The basic calculus for value-added SaaS looks like this: take some services that are already being performed in the enterprise, albeit in a non-automated or poorly automated way. Put them in the cloud, sign up a bunch of users, partners, and service providers. Then start accumulating data and services via the network effect of having all these stakeholders linked up, online and in real-time, and sharing data and processes.

Now figure out the value-added processes – mostly on the analytics side – that you can start offering due to your position as a data/process aggregator. And then take it all to the bank, in terms of new services for your customers that are slated to become must-haves relative to what competitors are doing in the on-premise and non-value-added SaaS world.

I’ve got a couple of favorite examples, one in global trade services, the other in supply chain risk management.

The former, GT Nexus, offers tracking and analytics for shipments from the manufacturer’s loading dock in China to the store shelf in Pittsburgh. The company’s value-add comes from its ability to aggregate information from logistics providers, manufacturers, retailers, customs brokers, and other stakeholders in the global trade business.

With all these participants connected to the GT Nexus network, a new customer is instantly in line to figure out different shipping strategies and costs, as well as track shipments, based on an information stream that stretches across a worldwide logistics chain.

The value-add should be obvious: No individual company could afford to amass the quantity and quality of information that GT Nexus can provide about the complex global logistics chain to each and every subscribing SaaS customer.

A second example comes from early stage supply chain risk vendor New Momentum. This is a company that is accumulating a tremendous amount of market data – from well-known and not-so-well know public and private sources – on the price, availability, and lead time of strategic and not-so-strategic electronic parts.

This data can then be used by customers to design new products, redesign existing ones, and otherwise keep track of potential parts shortages and other issues that could disrupt their manufacturing production plans.

Again, the value-add is obvious: many companies use a palette of similar parts, and need information on these parts as well as the vendors who supply them. A new customer can tap into this existing information base the moment they log onto the New Momentum SaaS system, and leverage a window into the parts market that is greatly enhanced by the cumulative value of all the other member companies’ information needs.

These are just two examples of value-added SaaS among a growing list, a list that will get bigger and bigger as the value of enhancing pure-play SaaS becomes better understood.

Of course, the concept of value-added SaaS doesn’t invalidate the existing non-value-added SaaS vendors, no more than commoditization invalidates any vendor. What value-added SaaS does invalidate are vendor business models, supported by premium pricing schemas, that are predicated on a non-value-added offering.

In other words, pure-play SaaS will succumb to commodity pricing models as value-added offerings soak up more of the innovation spend.

We’re seeing some beginnings to this commoditization threat in the relative cost structures of vendors like Zoho and Microsoft CRM versus high-priced Salesforce.com, even before the value-added effect takes hold. Interestingly, I’ve yet to see a pure play CRM SaaS offering that has this value-added component, though if anyone out there knows of one I’d be very interested in hearing about it.

So is this SaaS 2.0? I think so, in the true sense that value-added SaaS represents a next-generation refinement on what is becoming a tried and true commodity play. The notion of adding value based on a network effect isn’t new, but doing so in a low TCO play like SaaS makes it doubly attractive.

The next five years or so will solidify this shift, and put some valuable perspective on the idea that all a vendor needs to do to succeed at SaaS is do on-premise with a lower TCO.

Innovation above and beyond on-premise will define the next generation of SaaS offerings, and their presence will add tremendous value to the market, and to the customers and partners who help make the network effect possible. Value-added SaaS is going to benefit everyone, except maybe the poor pure-play SaaS – and on-premise – vendors stuck trying to compete against it.