Why SaaS is Making a Comeback

Mar 22, 2005

K.B. Chandrasekhar

Software-as-a-service (SaaS) is back. Only a few years ago the "ASP" (application service provider) model was being hyped as a revolutionary transition for the software industry -- hype that was quickly deflated with the bursting of the dot-com bubble.

Now that the hype is over, an evolutionary market shift is truly underway. The Gartner Group declared SaaS as one of the top five technologies for 2005 and IDC predicts that by 2008 subscription license revenues will hit $43 billion.

Why is the demand of SaaS on the rise? A major factor is the shift in the attitude of companies since the late '90s.

The attitude then was one of skepticism based on both the classic fear of being an early-adopter and on internal IT organizations thinking they could build and run it all.

Today, those attitudes have changed from skepticism to acceptance of SaaS. There is a significant increase in the consumption of software in an on-demand model and vendors scrambling to provide it.

Why Now

We are all aware of the economic and business challenges driving the current adoption of SaaS: the huge expenditures on past implementations that were under-utilized or didn't work at all, tough economic times, and the pressure on CIOs to provide "value."

As for the initial barriers to SaaS, it is worthwhile for CIOs to take a deeper look at them and how they have been overcome.

These barriers included a mismatched economic model (from both the supply side and demand side), security concerns, the simplistic nature of the early offerings, and the "build-and-own" philosophies of IT organizations that were much better funded than they are today.

Economic Models In Sync

When SaaS was introduced in earnest in the late '90s the SaaS providers were working on such thin margins that there were no significant cost savings compared to traditional software implementations.

On the demand side, the company's consuming the software were flush with money.

Today, with improved on-demand delivery and management solutions, software providers have gained significant efficiencies-of-scale delivering SaaS and this makes price points very attractive.

On the demand side, companies have faced severe economic challenges over the last five years, forcing CIOs to do more with less, and to focus on bringing more discernable value to their companies.

SaaS pricing coupled with the experience of CIOs burned by massive implementations that didn't deliver promised value, means the SaaS supply and demand sides have both moved 180 degrees to where they are now in sync.

Improved Security

"Where is my data stored and how is it secured?" These were often the first comments from anyone considering SaaS in the '90s. As the founder of Exodus Communications, I talked with countless prospects visiting our facilities to see first-hand the answers to these questions.

While SaaS has always been a secure delivery method, two things have changed to create greater acceptance of the security of SaaS:

  • many companies have successfully used SaaS for five or more years now thus establishing a track record SaaS providers can build on; and
  • SaaS providers are better at aligning security with the CIO's in-house process and procedure requirements.
  • Greater Breadth and Depth

    In the early days, the perception of SaaS was that the offerings had limited functionality, were limited to CRM, and/or were targeted at the SMB market.

    Today, while CRM dominates the on-demand market, there isn't a segment of the software spectrum from ERP to supply chain that isn't represented by a SaaS provider.

    Generic functionality of the offerings is sufficient to meet the needs of most organizations, and specialized vertical offerings go even further. If customization is needed, on-demand technology has progressed to a point that it can be done much easier and more cost effectively than before.

    SaaS providers are also using technology such as Web services to make it easier for their offerings to integrate with their customers' infrastructure.

    All of these factors combine to make the on-demand model more attractive for the larger enterprise, and, therefore, we are seeing increasing adoption in this market segment.

    Delivering Value

    But the real driving force for acceptance of SaaS today is the increased focus of CIOs to deliver value. This means expending resources on projects mission-critical to the company.

    CIOs do not want to spend time and resources installing and maintaining transactional applications that do not differentiate the business, or provide a competitive edge for the company. They want to provide the functionality required to run the company with the least amount of resources expended.

    Improved technology, converging economic models, greater security (real and perceived), offerings that meet the functional needs of the enterprise, and CIOs working with leaner resources and a greater need to deliver real value have all impacted the attitude of companies considering SaaS and breathed new life into a once left-for-dead industry.

    K.B. Chandrasekhar ("Chandra") is co-founder, CEO, and chairman of Jamcracker, a provider of on-demand delivery and management software. He is also the co-founder and chairman of e4e Inc., a global technology holding company and chairman of Aztec Software and Technology Services Ltd., a publicly traded company on the Bombay Stock Exchange.


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