The SaaS Steamroller

By Julie Craig

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Last month's article, the first in this series, discussed the evolution of software as a service (SaaS) from the application service provider (ASP) model to today's SaaS poster child, Salesforce.com.

It discussed the forces making some companies re-think their approach to delivering IT services to the business, and move toward a service-provider, rather than an in-house, delivery model. Finally, it discussed, some of the advances making SaaS a viable business model where ASP was not.

This article details the reasons why SaaS is different, and why it will likely begin to impact enterprise software vendors over the next two to three years. It also discusses some reasons why enterprise IT has to pay attention to this trend, and not dismiss it as "ASP revisited."

Traditional ERP and CRM

SaaS is starting to enjoy considerable success in the marketplace. Since 2001, Salesforce.com has picked up more than 30,000 customers, and the subscriber base is growing by 50 percent to 75 percent per year. And Workday.com, Dave Duffield's SaaS-based replacement for ERP applications such as those delivered by his first-born company, Peoplesoft, is only partially deployed but already has its first subscribers.

Many in the industry are starting to scratch their heads and wonder, "What is different? Is this just ASP re-packaged?" The good news is, the answer is no. SaaS is an entirely new model engineered specifically for multi-tenant delivery and economies of scale.

Although the idea behind ASP was likely ahead of its time, it had multiple disadvantages from the start. ASP deployments attempted to repurpose software designed for a single enterprise to a hosted, multi-customer paradigm. The tiered, multi-server architectures characteristic of ERP and CRM vendors required servers for databases, applications, and Web connections to interact in a way that delivered a business application to a single company. Such architecture didn't lend itself to the replication required to support multiple companies.

Adapting such applications to multiple customers proved costly. Duplicating tiered applications added hardware and power costs. And multiple software versions added expense, as well. Supporting such deployments became complex, and therefore expensive. The result was an expensive delivery model where customers benefited primarily from predictable cost, not necessarily from cost savings.

If traditional software vendors want a piece of the action, then they will have to overcome these same problems. Multi-tenant deployment requires significant modifications to software architecture and code. ERP and CRM vendors, for example, already spend an estimated one-third of their research and development (R & D) budgets on supporting multiple product versions and another third on supporting multiple platforms. This leaves a relatively small percentage for innovation and for re-architecting for SaaS.

Seriously pursuing the SaaS market would also require significant changes in both revenue models and corporate culture. Oracle and SAP have built enormous sales organizations around selling licenses and support. Refocusing sales executives on selling subscriptions would be a "hard sell". Refocusing corporate culture from selling software to providing a service is another aspect of the SaaS model that would be problematic as well.

What makes SaaS different? Today's SaaS vendors have capitalized on the lessons learned by their predecessors and are addressing them with innovations that yield big advantages. They include:

One version, one platform: While legacy vendors still focus the majority of their resources on supporting multiple versions and platforms, Salesforce.com supports only one version running on one platform. One hundred percent of Salesforce's resources can be devoted to innovation, resulting in a product evolution that is very agile and much more in touch with "real-life" IT requirements.

Next page: An area of savings...Customers always have the most recent version of the software and they never have to worry about upgrading or migrating data, both of which are high-risk activities. The vendor does this automatically, with no added cost, little or no risk, and with minimal disruption to service.

Multi-tenancy: While ASP vendors had to add hardware or virtual servers to add customers, both Salesforce and Workday are engineered for "vertical," rather than "horizontal," scaling. This means that multiple customers can be stacked across a single delivery platform, with each customer protected from other tenants by the inherent product design

Cost-effectiveness: Multi-tenancy enables SaaS vendors to deliver services very cost effectively. RightNow Technologies, a SaaS vendor whose products include a hosting platform and a CRM product, has stated their hosting costs are only 6 percent of their overall service delivery expenditure. This enables them to deliver service to consumers at a very reasonable cost, especially when compared to the average 60 percent to 80 percent of budget that goes toward IT administration and support in the average enterprise.

Open source: When SaaS vendors write and host their own applications, they can choose their technologies. RightNow uses no Microsoft or Oracle products and, instead, relies heavily on open source in its product delivery. This is another area of savings that helps keep costs down.

With SaaS evolving and maturing every year, it is becoming an increasingly attractive alternative for IT organizations struggling to deliver business services at a reasonable price. SaaS vendors are reporting they can host an entire application for less than in-house IT organizations pay for product technical support.

Obviously, such cost advantages are difficult to overlook in an industry that is being pressured to deliver an ever-increasing laundry list of business services with minimal budget increases.

Both IT organizations and some traditional vendors, including Symantec and IBM, are viewing SaaS as an opportunity. The final article in this series will discuss this in more detail.

Our take is those vendors who are actively planning SaaS platforms, reengineering for SaaS delivery, and strategizing on ways to capitalize on the SaaS wave will become the clear leaders in their markets during the next few years. Those counting on SaaS going the way of ASPs will likely be disappointed.

Julie Craig is a senior analyst with Boulder, Colo.-based Enterprise Management Associates, an industry research firm focused on IT management. Julie can reached at jcraig@enterprisemanagement.com.