SaaS Coming of Age

By Zvi Grauer, PEER 1 Contributor

Software as a Service (SaaS) is finally ready to explode onto the IT scene.

SaaS products for the Small and Medium Businesses (SMB) market have been joined by initiatives from Oracle, SAP, Business Objects, and others, directed at large enterprises. For example, Business Objects launched CrystalReports.com, a SaaS version of its ubiquitous Crystal Reports enterprise reporting tool; Informatica Corp. is offering ‘Data Integration and Data Replication on Demand’; SAP is ‘SaaSifying’ its Enterprise Resource Planning suite, aiming to capture clients smaller than those using their inhouse product; NetSuite, a SaaS pioneer, claims to be ‘the first and only web-based application to offer everything (customer relationship management (CRM), enterprise resource planning (ERP) and Web capabilities) in a single, integrated, and powerful solution. IBM, HP, and Microsoft are all investing heavily in SaaS consulting and platform tools. Google is offering a whole suite of applications (writer, spreadsheet, calendar, email, RSS feeders, and more) to individuals and small businesses. And pioneer Salesforce.com has made inroad into large enterprises, following its SMB success.

International Data Corp. (IDC) lists SaaS growth and adoption as one of its big trends to watch in 2007. Gartner says SaaS is primed for enormous expansion: growing from just 5 percent of software revenues in 2005 to fully one-quarter of software revenues in 2011. The blogosphere seems to agree.


What is Software as a Service (SaaS)?
The concept of "software as a service" started to circulate in 2000/2001, and the acronym SaaS was coined in 2005. SaaS has become more popular in recent years as an economical alternative to expensive, on-premise software solutions. This is fueled by the advent of broadband connectivity, which is becoming more accessible not only in the office, but also at home, at airports, and even in restaurants.

SaaS generally refers to a web based software used through a browser. Gartner defines SaaS as “hosted software based on a single set of common code and data definitions that are consumed in a one-to-many model by all contracted customers, at any time, on a pay-for-use basis, or as a subscription based on usage metrics.”

Let us deconstruct the definition:

• SaaS is owned, hosted, delivered, and managed remotely by one or more providers (NOT the customer or end users).
• The hosting is at a third party, not the customer’s premises.
• Payment is by a usage or a subscription model, as opposed to upfront payment.
• SaaS is multitenant – a single instance of the software is shared by all the customers, as opposed to traditional software, which is often highly customized for each individual client.

SaaS is an "on-demand" model for delivering software over the Internet. Ideally, the software architecture is designed from the ground up for the on-demand model. Technology companies provide the hosted application, daily operation, maintenance, and support to their clients, usually for a monthly fee.


The History and Philosophy of SaaS
SaaS is an outgrowth of the application service provider (ASP) business model from the late 90's. However, SaaS is more web-native and less client-server oriented (see below). SaaS is generally associated with business software, while technically similar, consumer oriented, software is known as web 2.0. Often, the two overlap (for example, Google Apps hosted office and collaboration suite is available for both individual users and business domains.

SaaS vendors often market their product as an alternative to standard boxed software, without the upfront price and the technical infrastructure and expertise required to install, configure, and manage traditional software.


SaaS Architecture
SaaS is multi-tenant software, with tenants (that is, customers) sharing resources for more efficient management and cost effectiveness. The level of sharing depends on the situation. Isolation makes for better data separation and allows a different SLA for each tenant. Sharing takes advantage of economy of scale and is easier to manage.

SaaS has matured over the years. The ASP model, where each tenant had a customized application instance, was replaced by identical software with multiple instances, each configured for an individual tenant. Next came a single configurable instance used by many tenants, and currently SaaS uses scalable multi-tenant infrastructure, with a load balancing layer providing the ability to add capacity to servers, database engines, and business workflow engines.

Modern SaaS is customizable through configuration, and not through code changes. Customization ranges from user interface and branding, through individualized workflows, data model extensions and access control for each tenant. Customization can be accomplished through metadata tables, which identify the tenants and track their unique configurations. It is also possible to create, as a mean of customization, a shared database with a predefined set of custom fields and give each tenants access to the subset of fields it needs.

To maximize the economy of scale, tenants share single web server, database, and workflow engine. SaaS platforms generally take on monitoring & metering of usage by tenants and users, as well as monitoring for system events, for scaling and monetization models.


Comparing SaaS and ASP
ASPs (application service providers) offered a variation on traditional software in the late 1990s. Users purchased software from a company, which provided hosting of the software and managed the servers, load balancing, security, user definitions, etc. The ASP model, though still on the market, has not been a great success, for several reasons (in addition to the collapse of the ‘Internet Bubble’ and the ensuing recession). The main differences between SaaS and ASP are:

• In SaaS, many customers share a single version of the application. In the ASP model, software was unique to each customer, who owned a customized version of the software and database. SaaS vendors typically utilize a multi-tenant architecture, meaning that multiple customers are running the same software, but with a virtually separate data. Multi-tenant architecture simplifies application management. ASPs by comparison, merely deployed one application instance on a server for each customer, just as a customer would deploy internally. This inefficiency and inability to scale this kind of business model may be one of the reasons for the failure of the ASP model.
• SaaS applications are net-native, and, using technologies such as AJAX, provide a dynamic user experience through the browser. The ASP generation was often traditional client-server applications with HTML front ends added as an afterthought.
• Current net-native SaaS applications are updated regularly, often daily, and are nearly as responsive and high performance as in-house applications. In comparison, ASP applications were not net-native, used more bandwidth, resulting in lower performance and poorer user experience. ASP application updates were no better than those of on-premises, self managed applications. By comparison, SaaS updates are as fast as using the ‘Refresh’ button on the browser.
• The application developer and vendor ‘own’ the SaaS operation and focus on features customers need most. ASPs generally did not build the application themselves; rather, they took an off-the-shelf application (such as a messaging platform, an enterprise resource-planning tool, or a sales-force automation package) and ran it for customers. Often, the hosting provider, which was only managing servers, had little application development expertise. The difference means SaaS has much better service and customer satisfaction.

The Impact of SaaS
SaaS changes many of the software world's paradigms. Areas of impact include:

• Software Consumption: SaaS has transformed the entire software consumption cycle. Customers who used to evaluate the software in-house prior to purchase can now go to the vendor’s web site and try the software before they buy. In application deployment, configuration is replacing custom code. At the enterprise, SLA monitoring and enforcement reduces the reliance on internal IT for software management (configuration, maintenance, and updates/upgrades).
• Monetization: SaaS has multiple monetization schemes, all radically different from the traditional upfront purchase-price complimented by yearly maintenance and support contracts. The most prevalent is a subscription model (per seat monthly fee or pricing based on the number of unique daily users). Transaction based pricing (profit sharing) and ad based revenues exist as well, as are ‘hybrid’ models. For example, Business Objects offers report sharing in two tiers – 10 users and up to 60 documents, and unlimited number of users and reports. Flashline (now part of BEA) offered a subscription ‘bucket’ plan, enabling a number of monthly transactions for a fixed fee, and a per-transaction charge beyond the limit, not unlike a cellular phone plan.
• Simplicity: SaaS providers add new features and fixes incrementally, to all customers at once, keeping the user interface as consistent as possible. That eliminates the burden on each customer to test and implement software updates and changes in its own environment.
• Purchase Dynamics: During the past few years, business leaders, such as vice presidents of sales or heads of human resources, have been the primary acquirers of SaaS products, without much involvement of central IT. Traditional software is usually evaluated and recommended by the IT departments.

SaaS Benefits
Some IT managers see SaaS as a godsend, eliminating the need to 'deal with servers, staging, version maintenance, security, performance, etc.' SaaS is enabling companies to more quickly deploy business software, more easily administer these applications, obtain best-in-class capabilities and redirect their scarce IT resources to strategic initiatives, such as business process improvement.

Key benefits of SaaS include:

• Rapid application deployment, sometimes immediate after sign-up.
• Reduced complexity - there is no software and hardware to buy and install, no IT resources are required to deploy, and the provider handles updates, upgrades and patch management.
• Reduced initial costs - and more predictable, usage-based recurring costs.
• Freedom to focus on core business.
• Reliability and scalability.
• Global accessibility (wherever a browser and internet access are available).

Factors Mitigating SaaS Adoption
The main attraction for SMB customers -- letting a service provider shoulder the burden of software deployment, maintenance, and availability -- can be a showstopper for large enterprises accustomed to maintaining full control and using multi-component applications.

Factors slowing SaaS adoption include:

• Complexity: SaaS is ideal for functions that are repetitive and not overly complex. Examples are human resource, customer relations management, document sharing and so on. More complex applications, where each customer requires a specialized and complex extensions (e.g., control of manufacturing and power plants) are less well suited for SaaS, and more suitable for on-premises (custom) software.
• Lack of Standards: Standards for communication and data transfer between applications are still in flux, with each vendor using a unique scheme. Until all vendors adopt common standards, multifaceted (multi-vendor) applications will have integration problems, limiting the scope of SaaS adoption to simpler tasks managed by single vendors.
• Concerns with Down Time: Complex tasks, such as workflow management or business process design, depend on multiple software components from different vendors. In such situations, down time becomes an issue, as a failure of any single component may lock up the entire system.
• Evolving Vendor Support: Until the ‘Big Three’ (SAP, Oracle, Microsoft) move substantial parts of their software packages from licensed, on-premise to a SaaS model, SaaS adoption will be limited. However, it seems that such a move has already begun, opening the door to SaaS ubiquity in a few years.

SaaS Markets and Trends
The majority of SaaS deployments continue to focus on individual departmental initiatives, such as sales force automation. Other application areas, such as customer relations management, video conferencing, human resources, accounting and email, are markets showing SaaS success. Business integration and other large projects are beginning to sprout, but none offers yet the functionality capability or process management capabilities of on-premise software to support end-to-end cross-departmental business flows. SaaS adoption varies significantly by market segment. According to Gartner, SaaS accounted for approximately 8 percent of CRM total software revenue in 2005 (2006 estimate is 10-12%), and integration as a service had 10 percent adoption in its market. Other market segments, such as the ERP and supply chain management, had less than 4 percent adoption.

The Software as a Service sector is among the fastest growing segments in the software industry. SaaS growth rate in enterprise applications, which have been growing at an overall tepid rate of 3-5%, is 25-30%. SaaS is expected to grow to 30% of the global software market in 8-10 years. IDC suggests that SaaS is growing at over 20% and is projected to reach over $10B by 2009.

Another IDC estimate is that SaaS sales will grow by at least 26 percent annually to $8.1 billion in 2008. According to Gartner, Inc. the worldwide SaaS market reached $6.3 billion in 2006 and is forecast to grow to $19.3 billion by year-end 2011.


The Future
To a large extent, the future is already here. Short term predictions for the next year or two include:

• A substantial proportion (some estimates go as high as 90 percent) of the new software companies funded by venture capitalists will go to SaaS startups, suggesting new products in corporate software markets will be arriving at a faster clip. SaaS will continue to grow its share of existing markets and applications, expand into large enterprises and into new application areas as well.
• SaaS providers will continue to constantly enhance their software functionality. They will improve the ease with which companies can customize and configure SaaS software to meet unique business requirements. These will improve market penetration.
• With SaaS growth, the limited central IT involvement will change as the IT organizations realizes that SaaS solutions are here to stay.
• Client server and SaaS will coexist for a while. There will be no wholesale replacement for the next few years, but over time competition in sales force automation, customer service applications (CRM), ERP applications will put a lot of pressure on Oracle, SAP and MS. The shift will start with small and midsize businesses (SMB).
• Highly net aware players with no investment in traditional software approaches (think Google/Yahoo) will continue to offer linear and straightforward applications - bill presentment, email, feed readers, contact and account management, calendars, calculators - for the low end of the market, which might be a large number of people. But these companies will stay away from process intensive real-time, dynamic business processes and leave thesea areas to established brands.
• SaaS will displace office products at businesses with 25 or less employees, to the detriment of traditional software vendors. SaaS growth in large enterprise markets will primarily come from known brands moving applications to the SaaS model. Traditional vendors (Microsoft, Adobe, Oracle, SAP, and their ilk) will move into the web services arena to stem their losses in traditional software sales.
• Open source products will discover SaaS as an ideal environment for growth and profit, and the resulting competition will benefit consumers.
• Traditional software will adapt a subscription payment model even for on-premises software, and provide remote management services of leased software.