Five Myths the Software Industry Would Like You to Believe about Software As A Service SaaS
By Jay Noble, President, North American Operations, Saaspoint

1. Software as a Service (SaaS)is not core to the business
The reality is that organizations implement technology for one of two reasons. To increase revenues or reduce costs. The traditional nine to twelve month framework for implementing on-premise software is no longer credible. We live in a competitive world where business units can’t afford to wait around for that length time to go to market with a new service or product. In 12 months’ time the original business case will have been radically altered due to new competition, change in the market place, new CEO, acquisition or other events.

On the other hand, a SaaS implementation can be implemented in 30-90 days with rapid return. Why ? It is because SaaS is becoming invaluable new revenue streams for service oriented businesses because of its flexibility and speed of adoption to keep up with the changing demands of the organization and its business units.

Ben Pring, research VP for Gartner, identifies the change in the market. “The dysfunction of the client/server era is driving alternative approaches to IT development, delivery and management, of which SaaS is the most apparent version.”

SaaS is now viewed as a quick method of solving business issues with a rapid turnaround and ROI combined with lower total costs of ownership. According to Aberdeen Group’s Software-as-a-Service Buyer’s Guide, ” Aberdeen surveyed 631 companies using SaaS and found that CRM applications were implemented in less than three months with ROI in less than six months. Supply Chain Management was implemented in less than three months with ROI in under a year. Sourcing and Procurement was implemented in less than two months with ROI in less than a year. Financial management applications were reported having an implementation in less than three months and ROI in fewer than six.

So, contrary to what the software industry would have you believe, SaaS has offered a new approach to doing business. Traditional software applications are having a hard time keeping up to date with SaaS applications in terms of customers being able to get their hands on the prevailing, cutting edge applications for the reality of today’s rapidly changing business environment.

2. SaaS is only a small part of the total software market
Many of the traditional enterprise software dinosaurs like SAP and Peoplesoft have been trying to reassure themselves that SaaS is only a small part of the overall software market.

In one sense, traditional software companies have Gartner’s backing SaaS has no legs a Gartner estimates that SaaS was just 5% of total business software sales in 2005. However, Gartner also forecasts that SaaS will constitute 25% of the market by 2011and grew 26% in 2006 to $6.3 billion. It expects the SaaS market to grow at 25% compound rate over the next five years.

Most experts agree that these figures are conservative in regard to the true size and penetration of SaaS in the software market overall. We believe this is for two reasons.

Firstly, the revenue recognition model is totally different. On-demand revenues are calculated as a monthly subscription. Traditional CRM software is calculated on the value of its licences over a year and/or on the sale of additional new licenses (sounds strange to say Net new license sales), which has been flat or declining for the past 12 to 18 months.

SaaS provides a more accurate analysis of income because of the predictability of its revenue stream. What was originally thought to be an easy in, easy out scenario for SaaS has turned into an easy in, easy expand and don’t even think about taking it away from the users scenario.

Secondly, the bane of traditional enterprise software is shelfware. It has been estimated that well over a third of on-premise software revenues turn out to be shelfware and not implemented or used. SaaS easy configurability and user friendly interface has consistently outscored traditional software applications for high usability.

Because of the way that revenues are calculated, on-premise revenues have been exaggerated and SaaS underestimated. The real market share is further distorted by the fact that much of on-premise software is shelfware.

3. SaaS is only for SMBs – not the enterprise
Tell that to Merrill Lynch, Cisco or Dell all of whom have implemented software as a service using Salesforce. Today major organizations are implementing SaaS across multiple functions. In many cases it is replacing or being implemented as an alternative to the traditional Oracle, Siebel or SAP systems – not just some add on in the corner of the enterprise.

Ben Pring of Gartner comments, “There is now a widespread consensus among the movers and shakers of the IT industry that SaaS is an important and meaningful issue which can no longer be regarded as the ‘lunatic fringe’.”

Aberdeen Group has found that 69% of larger enterprises are using or considering an on-demand CRM solution.

The two major drivers of this accelerated adoption are cost advantages and increased proof of data security. Corporations always undertake detailed cost benefit analysis and are recognizing that they can no longer wait for traditional in house software to deliver expected returns. Nor can they justify the costs in licences, implementation and maintenance – especially as so much of it has ended up as shelfware.

Once the dollars are added up showing favor of SaaS applications, the next hurdle to overcome is the concern over data security. Salesforce.com has delivered flawlessly in this regard. It is fair to say that SaaS providers can generally protect your data better than you can.

Beth Enslow, senior VP for enterprise research at Aberdeen Group, was quoted in internetnews.com* as stating that CIOs at large enterprises have changed their thinking about SaaS. While previously they may have viewed it as a threat to their power over IT, it is now seen as a way of fulfilling business mandates without stretching their thin IT budgets. The thought process is being encouraged by a shortage of skilled IT workers to manage and maintain traditional systems.

4. SaaS is suspected by CIOs
It is estimated that some 80% of an organization’s IT budget is spent on maintaining the current IT infrastructure. Despite the great promise of the advent of the CIO who was to get more involved in business strategy and add value to the growth and development of the business, many are still tasked with the IT equivalent of ‘keeping the lights on’.

It is hard to think strategically and creatively when you are fire fighting because the email has gone down.

CIOs have changed their attitude to SaaS for a number of reasons. Firstly, it removes the maintenance/support headache, an issue on which the bulk of his or her time and budget has been devoted. There is no support issue because hosting, servers, software and security are managed and maintained by the SaaS provider.

Secondly, in an environment where the average life span of a CIO in an organization is 14-18 months, today’s CIO needs to have some SaaS experience on his CV. Today’s CIO needs to be able to partner with the business to provide enabling technologies for implementing corporate strategy cost-effectively. The modern CIO is transitioning from a pure technologist to a key strategy or business process enabler. And SaaS is one of the enablers for him or her.

Through adopting SaaS, the CIO can become an enabler, not a roadblock to advancing business strategy, because he can deliver quickly what the business units want. And the CFO loves him because of the ability to turn on and off licenses quickly and easily so you are only using what you need.

In the past it is true that in many cases SaaS was implemented despite the CIO. It was bought by a hard pressed VP Sales who could not afford to wait while traditional enterprise software CRM was rolled out to users who could not understand it and would not use it.

The SaaS world is full of installations which began in a small sales department somewhere and, like an ink blot in a shirt pocket, spread globally through the organization. The SaaS world is full of stories where it was installed as a ‘stop gap’ until the ‘real’ software was installed but is still there being used while the on-premise software is going through its next rollout or sitting ignored by users.

5. SaaS is only for CRM
SaaS is extending from CRM into HR, procurement and compliance management. SaaS is suitable for any data intensive application which requires a central view by multiple users.

This move will be accelerated by salesforce.com’s Apex which is the first on- demand programming language and platform. With Apex, a whole new breed of on-demand applications is possible, featuring sophisticated processes and business logic, entirely on-demand and without software.

Likewise, Apex will enable unprecedented levels of customization, allowing modification of existing features, or creation of entirely new functions and capabilities. And, like other customizations built on the platform, Apex apps can be packaged and shared through the AppExchange directory. Aleady on AppExchange, salesforce.com’s equivalent of an iTunes for business applications, there are more than 575 applications.

Aberdeen Group finds that financial management, product lifecycle management (PLM) procurement and sourcing, and supply chain management are adopting SaaS. And 64% of large and midsize companies would consider using SaaS as a financial management method.

There are still some applications that will be better suited to on-premise software. However, SaaS has come of age and developments like Apex will accelerate its maturity. Many of the traditional software vendors are still in denial despite starting to talk about (pay lip service to?) their on-demand strategy. Examine carefully the myths they would have you believe.

Software as a Service (SaaS) is also known as Software on Demand is the new concept to deliver the software products and its usages to the customer. Traditionally, the software products were delivered to the customer in CDs and the customer used to install them in his desktop or server. There were many disadvantages with this system for both the customer as well as software vendor.

The main drawback in the old system is that the customer needs to pay the full price for the product even if he uses only certain functionalities of that software. Secondly, he needs to constantly update the products whenever a patch or new version is released. This imposes additional financial burden as well as technical issues such as backward compatibility. The other drawback is once he purchased software from a particular vendor, he is struck with the same vendor. Even if the product does not meet his expectations, he does not have any alteration. He is fully dependent on the same vendor for all supports.

The vendor also has lot of problems with the old system. Whenever a patch or new version is released, he needs to provide support for various platforms. This ultimately increases his production and distribution cost. Since differential pricing is not possible in this model, vendor charges the same price for every user irrespective his usage level. Due to this user who uses very little features also ends paying more. Another problem is as most of the users are technically navies the vendor needs to provide support at customer places for installation and breakdowns, which increase his operational cost.

SaaS model enables the vendors to release the product as a service. The vendor has complete control over the product as it is hosted by him at his server and used by the customers through their computers remotely. User can use the software as a service, either by paying a periodical subscription or by paying as per usage. A Vendor provides various service standards such as Gold, Silver, Bronze, etc according to the requirements and capacity of the customer. User can also select the features which he needs and pay only for the features he uses.

The vendor has complete control over the product; he installs upgrades and sets the features at customer desktop through remote controlled procedures. This reduces the distribution cost and also saves a tremendous amount of time. Another advantage is as the customer uses the software on real time he can immediately log the errors, bugs and drawback instantly and this helps the company fix them quickly. Although SaaS appears to be similar with its predecessor ASP, both are not the same. ASP model provided the organization to move their application to a third party server, where as SaaS provides shared applications which can be accessed by different users from their desktops. The ever increasing demand for SasS among the users is due to its simplicity and the cost effectiveness drives more and more vendors in to this domain with better products. This heralds a paradigm shift in the software delivery and changes the game completely.