Software as a Service

Introduction

The accelerated growth of Software as a Service (SaaS) applications for business exceeds even the growth rate of Web 2.0 developments for individuals and groups. With SaaS, a customer does not purchase or license ERP or CRM software by contract, but uses applications hosted on the Web by a third party for a leasing fee. As any individual can check email or use mapping programs with a Web browser, so business customers can access applications over the Internet.

Thus far, the SaaS phenomenon has made its greatest inroads into the area of applications formerly purchased by small to medium sized enterprises (SMEs), to the point where there is now one-source, Web-accessible software available to replace nearly all current on-premises solutions. The rate of customer migration to such applications has led to estimates that SaaS will control 25% of the IT market by 2010, a phenomenal anticipated growth.

Although SaaS offerings have been more readily taken up by SMEs than by large corporations, this is changing. Some of the largest corporations, notably banks and insurance companies, are already switching over to SaaS for some business applications.

Pros

Cost

Startup costs are extremely low, requiring a small initial cash outlay. In general there is also a lower cost overall, mainly because many costs associated with on-premises software are absent altogether: testing, customisation, facilities rental, operations, security, compliance, downtime, unused licenses. One estimate states that a SaaS application costs about 70% of equivalent on-premises software. In addition, payments are made from the operating rather than the capital budget and there are no maintenance contracts.

Ease of entry

The vendor installs, implements and maintains the system. Training is minimal so startup is rapid.

Flexible contracts

SaaS vendors frequently offer short term, even monthly, contracts. A potential tenant (new buzz word for SaaS customer) can therefore try before commitment, and can also get out from under a poor performing vendor with little or no liability.

Low level of expertise needed

There is little or no requirement for IT expertise in-house as the software is designed for intuitive ease of use, and the vendor is responsible for maintenance and for keeping the software up to date. As with Web 2.0, upgrades and improvements are continuous, so in-house personnel are required simply to comply with the changes, having no responsibility for engineering any transition.

Ease of scaling

The software automatically copes with any upwards or downwards scaling required by the tenant company.

Freeing up IT talent

Because virtually all the operational aspects of a company's performance – CRM, ERP, ERM, etc – can be managed via Saas applications, this allows IT staff to focus their creative attention on software aimed at advancing the core business.

Cons

Long term contracts

Hosted software can, over three or four years, cost more than an equivalent on-premises solution, though not having to pay for upgrades can soften the blow.

One app fits all

The downside to having one application available for potentially an infinite number of users is that such applications are rarely as functionally rich as are comparable premises-based offerings. The latter can be tailored to the client's specific requirements. Prospective tenants must therefore spend much time on research in order to find the application which best fits their needs.

Security and privacy

Although security with SaaS operations is rapidly improving, many companies will be strongly reluctant to commit their most treasured secrets to the ether. The final decision on whether to trust the vendor is a leap in the dark.

Slow assistance

The provider may not respond as quickly as would a skilled in-house team if things go wrong. Reputations should be investigated before commitment.

Integration

It is also vital to ensure, before commitment, that the hosted software will integrate smoothly into the existing operating environment.

Is SaaS a giant killer?

How are the larger providers – Oracle, SAP, Microsoft and the like – responding to the SaaS phenomenon? They have made their squillions from useful and expensive software sales which bind clients into module and seat licenses, payments for upgrades and maintenance contracts. Are these giant operators showing interest in SaaS, or are they blanching and trying to shrug off the trend as a lightweight irritation?

They are climbing on board. Oracle now boasts its own SaaS platform, designed to be attractive to independent software vendors who wish to aim their services towards specific vertical markets (Wikipedia). SAP has announced it is entering the SaaS market with a hosted option of its mySAP CRM offering. Microsoft has launched its Office 2007 productivity suite as a subscription package in South Africa. And IBM has acquired web conferencing WebDialogs, which sells online meeting services.

As one commentator concludes: "SaaS provides a way to share expertise among multiple customers while still providing high quality business services. Combined with predictable cost, this combination will be difficult to ignore. The bottom line is that SaaS is here to stay, and the industry's first glimpse of IT as a utility is very tantalizing indeed".

Oct 2008