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Issue Date: November 2006

SaaS set to grow rapidly

November 2006

25% of new business software will be delivered as software as a service by 2011.

Software as a service (SaaS) represented approximately 5% of business software revenue in 2005 and, by 2011, 25% of new business software will be delivered as SaaS, according to Gartner. SaaS is 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.
Richard Firth, CEO and chairperson of local software house MIP agrees, noting: "Worldwide we are finally seeing rapid take-up and commercial adoption of software as a service. When the market leaders such as Microsoft, SAP and Oracle follow the example of and move to a SaaS rather than the traditional model of software delivery, then we know we are truly in a dynamically changed market."
Richard Firth, CEO and chairman of MIP
Richard Firth, CEO and chairman of MIP
"As SaaS became a viable delivery model from 2000 to 2003, most providers supplied 'good enough' functionality with core configuration capabilities.
SaaS and solving business complexity were two phrases not associated with each other," Robert DeSisto, research vice president for Gartner. "The trend has clearly begun to change. For example, SaaS providers are enhancing their software functionality and improving the ease with which companies can customise and more uniquely configure SaaS software to meet business requirements."
Rick Parry, MD of Progress Software South Africa, says SaaS is based on the premise that users should regard software not as a product, but as a service.
"Almost all companies at some point or another pay for software that just gathers dust on a shelf, and many are not even aware they are doing it," Parry explains. "According to a recent survey by IDC, most customers are not taking full advantage of the software they have purchased. The survey showed that only 14% of executives of large companies said they were maximising the software they had licensed."
Rick Parry, MD of Progress Software South Africa
Rick Parry, MD of Progress Software South Africa
Asset and service management software company Peregrine estimates that 25% of all software is bought but never used, remaining in the shrink-wrap it came in. Morgan Stanley has recently found that 20% of ERP licences were not implemented, while the figure rises to 40% when it comes to CRM applications.
The adoption of the SaaS software delivery model has varied significantly by market segment. SaaS accounted for approximately 8% of CRM total software revenue in 2005 (Gartner estimates 2006 SaaS revenue to reach 12% of total CRM software revenue) and integration as a service had 10% adoption in its market. But, other markets, such as the ERP and supply chain management segments, had less than 4% adoption.
When looking at the broad range of companies addressing the SaaS model, Firth believes the old market dominators may not have it all their own way. "Here is my bet: companies such as these [Microsoft, SAP and Oracle] will not easily be able to make the transition to SaaS. The reason is simple: these mega companies make so much money from the sale of software licences, and the subsequent annual revenues, that they have no good or logical reason to change this model. In essence, the traditional software sales paradigm has seen vendors charge twice: once for the software licence (100% payment up-front and typically 18% per year maintenance for five years). This means that the client assumes all the risk up-front, and the vendor none."
In other words, the vendor is being paid all of its cash up-front - whether or not the software works. "How could we ever have got to such a point? No one would accept such a situation when it comes to any other purchase: be it a car, an electrical appliance, a movie, or an overseas trip. In essence, we expect what we buy to deliver in terms of value. In the entire history of commerce, only software vendors have been able to get away with a situation where they over-promise and over-charge but under-deliver. If the software does not work, the full burden of risk is on the shoulders of the customer; in the meantime, the vendor gets to walk away with its payment."
Adding further weight to the skewed value proposition Firth highlights, consider that in August 2006 both Business Connexion and Standard Bank reported that their earnings were down due to the implementation of new software. "Such a situation is untenable, and SaaS has arisen to address this disparity."
"The majority of SaaS deployments continued to be focused in individual departmental initiatives, such as sales force automation, except in small and medium size businesses (SMBs). In SMBs, we are beginning to see vendors provide capabilities to support more end-to-end processes, such as opportunity to order and in integration as a service where companies are already using SaaS for large projects," DeSisto said. "However, no provider offers the functionality capability or process management capabilities on par with on premise software to support end-to-end cross departmental business flows."
One of the major benefits of SaaS, says Parry, is that it is ideally suited to the agile business that is becoming the norm of our economy. Because service-based software is delivered through an on-demand business model, it enables companies to respond with speed to customer demands and market opportunities. "According to the SaaS model, a software application is delivered to multiple customers, and can be monitored and adapted to changing customer usage on demand - whether that customer needs to up or down their requirement."
Compared to licensed software, SaaS offers many benefits. Firstly, the company pays only for the software it uses, such as number of seats deployed, for example. This goes a long way in eliminating wasted software spending. And, with a low cost of entry - start-up costs are relatively small - SaaS is also suitable for small or departmental level deployments, and does not impact other IT resources.
As SaaS solutions become more mainstream, and more enterprises adopt them, the dynamic of how they are bought and sold is changing. During the past few years, the primary acquirer of SaaS has been a line of business leader, such as the vice president of sales or the head of human resources, without much involvement of central IT.
"The limited central IT involvement is changing as the IT organisation realises that SaaS solutions are here to stay and that they must look to leverage the upside potential of these approaches, rather than see them as a threat to their existing modus operandi," DeSisto said. "Line of business leaders and central IT should be involved in the selection process and then in the ongoing management of a SaaS contract. Having both parties represented leads to better initial decisions being made and to more efficient, effective ongoing management."

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