Why You Need to Weigh the SaaS Option

By Julie Craig

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This is the final installment of a three part series on Software as a Service (SaaS). The first article, SaaS: An Idea Whose Time Has Finally Come , explored the evolution of SaaS as a viable alternative to in-house application hosting.

A follow-up article, titled The SaaS Steamroller and Enterprise Software Vendors details the reasons why SaaS is competing effectively against traditional application software vendors. This article will take a look at the state of SaaS in the marketplace today, its pros and cons, and the reasons why companies should consider SaaS as an option for delivering business services.

SaaS Business Drivers

It is no secret that IT executives are reevaluating their application delivery options. Outsourcing is a trend that has yielded mixed results. Amidst complaints of language roadblocks, security questions, and cultural differences, the bloom has largely faded from the outsourcing rose. However, CIOs are still seeking a magic bullet that will help them provide quality business services with minimal downside. While the bad news is that there is no magic bullet, the good news is that the SaaS option is coming of age.

The drivers for SaaS include cost, risk, staffing concerns and complexity. Most CIOs are re-evaluating delivery models in an effort to reduce the 60-to-80 percent of budget typically spent on IT administration and support. Risk mitigation is another, with new reports of security breaches and data theft surfacing in specific business sectors almost weekly.

Staffing is a growing concern as well, with salaries rising and hot skills such as security analysts and enterprise architects in short supply. Information Week recently reported that IT professionals are earning higher salaries than at any time in the ten years. And IT complexity continues to mount, impacting all of these areas.

In this climate, SaaS becomes increasingly attractive, particularly for small-to-medium businesses (SMBs). In addition to providing a high quality of service at an often reasonable price, SaaS gives these companies an opportunity to benefit from expertise that might otherwise be beyond their reach.

SaaS companies are hiring some of the industry's best and brightest experts, whose salaries are then shared across multiple companies. Such expertise is beyond the reach of smaller IT shops whose limited budgets dictate that they hire IT generalists capable of wearing multiple hats. For such companies, SaaS mitigates the security and performance risks inherent in in-house hosting while offloading complex activities such as installing, configuring and maintaining applications. And while protection of intellectual property and personal data are proving to be significant concerns in the offshore world, SaaS has so far presented few such problems.

In short, SaaS is turning into a cost effective option that can be a lower-risk alternative to outsourcing and offshoring. It's no wonder that companies such as Salesforce.com report growth in the neighborhood of 50-to-75 percent per year.

SaaS in the Marketplace

What kinds of applications are being delivered as services these days? Nearly any application imaginable. A short list includes:

Concur: Online travel management and expense reporting.

Salesforce.com: Best known for Customer Relationship Management (CRM) applications, Salesforce.com also offers a hosting platform for third party vendors to develop and deliver their own online applications.

Symantec: Although Symantec is best known for its Norton and Veritas lines, it began offering online backup in the spring of 2007 and plans to host additional services in the future.

Jamcracker: Aggregation platform that allows service providers to integrate multiple web-based services for resale.

Klir: IT monitoring and analytics.

RightNow: Online CRM services.

Akamai: Hosted acceleration for web-based applications. Akamai operates an "Internet within the Internet" that accelerates the performance of widely distributed online applications.

Workday: Hosted Enterprise Resource Planning (ERP) services. Pros and Cons

While this series of articles discusses many of the benefits of SaaS, like any technology option it has both pros and cons. It is unrealistic to turn to SaaS for the full spectrum of services provided by the average IT organization, just as it is unrealistic to outsource all IT services.

Companies considering SaaS should carefully evaluate the capabilities of specific providers against a detailed list of requirements, goals and objectives.


  • Cost: Economy of scale gives SaaS providers the ability to deliver services very cost-effectively. Companies should weigh the cost of SaaS- provided services against the cost of delivering comparable services in-house.
  • Risk mitigation: SaaS vendors theoretically assume the risks of developing, maintaining, and delivering an application. That being said, CIO's are still accountable to their companies for the quality of the services actually provided and SaaS vendors should be approached and managed accordingly.
  • Flexible contracts: This is one of the big advantages of SaaS versus outsourcing, with SaaS vendors offering short-term, and even month-to-month, contracts. This gives companies the flexibility to pursue a "try-before-you-buy" strategy and to replace a poorly-performing vendor with little or no liability.
  • Predictability: Another big benefit is that cost, staffing requirements, and levels of service all become more predictable.
  • Business focused IT services: While traditional IT organizations have been responsible for delivering technology, today's businesses look to IT for thought leadership and business-enablement as well. Offloading aspects of technology delivery can free up IT executives and technicians alike to pursue high-impact projects that add value to the business.
  • Cons

  • Standard product for all customers: A high percentage of the deployment cost of traditional ERP and CRM products has been in customizing software to fit the business. Since SaaS offers limited customization options, companies may instead be required to change their internal operations to fit the application.
  • Scale: Today, most SaaS vendors are aiming for the SMB market, and SaaS applications may not scale to tens of thousands of concurrent users. However, this will likely change as SaaS evolves.
  • Product maturity: While ERP vendors such as Oracle and SAP have spent years building and acquiring functionality, Workday is projecting that its functionality will be on a par with SAP (excluding a manufacturing module) in approximately 18 months. That being said, specific modules are available today for companies that don't require a total ERP suite.
  • Although SaaS is not a magic wand it certainly bears consideration, especially for small to medium sized companies. By adding predictability to both costs and risks it can be one alternative to keeping IT afloat with in-house talent alone.

    For enterprises, some SaaS products just aren't there yet. Workday, for example, will continue to build out functionality over the next 18 months. On the other hand, Akamai's Web application acceleration technology seems very well-suited to WAN-intensive enterprise applications. Companies of all sizes should carefully evaluate potential SaaS vendors for functionality and performance before abandoning in-house application hosting.

    The bottom line is the SaaS train has left the station and is building steam. It doesn't replace in-house IT however research indicates that it could well represent 25% of the software market by 2010. This growth will likely impact software vendors as well as IT organizations, and CIOs would do well to keep SaaS on the radar.

    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.