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Issue Date: February 2008

Closing SaaS window of opportunity for SA service providers

14 February 2008
Wayne Human, IQ Business Group

Software as a Service (SaaS) is here to stay and prosper, with the South African market following in the footsteps of its first world counterparts.
However, as the years leading up to the 2010 soccer world cup see a significant reduction in the cost of bandwidth, the way will be opened for overseas SaaS application service providers to move in to our market.
It is therefore extremely important for any Service Provider within South Africa wishing to enter into the SaaS model to realise that a finite window of opportunity exists to provide a world class SaaS model to the local market.
And they should move quickly because SaaS is going to be big - very big.
Gartner predicts that by 2011, 25% of new business software will be delivered as SaaS. One could say that SaaS is to software what activity-based costing (ABC) was to finance.
ABC was the rage in the latter part of the 20th century and has matured into a mainstream costing mechanism during the first decade of the 21st.
ABC, however, is more applicable in certain industries (manufacturing, financial services) than others.
Similarly SaaS focuses on customers who have significant computing needs and very little competence or interest in hosting and deploying these solutions in their own organisations. The highest adoption rates are associated with SaaS applications which support simplified, common business processes or large, distributed virtual workforce teams.
Markets which are showing initial success with the SaaS model include customer relations management, video conferencing, human resources, accounting and e-mail, to name a few.
SaaS has matured from the application service provider (ASP) model and has addressed many of the failures associated with the ASP model. This is evident by the growth of SaaS vendors such as which has in excess of 600 000 users of their globally recognised customer relationship management (CRM) solution.
The growth of the SaaS market is further supported by the adoption of per-use licensing models by the large software providers such as Microsoft with the introduction of their service provider licensing agreement (SPLA). SaaS however is not only about changes to licensing models but more importantly allows for multitenant environments and supports the ability to configure the software per tenant to meet business requirements.
SaaS has specifically focused on the SMB (small medium business) sector and delivered niche applications to this sector. The next phase is to expand SaaS to deliver solutions to the Global 2000 companies (and not just in terms of a department within a company).
In order for SaaS to provide solutions to a broader market the following enhancements to the model will have to be considered:
* Integration - integration between hosted environments and a company's back office environment will be important to provide an end-to-end solution. For example, how do you integrate a hosted SaaS CRM solution with the profitability of a customer when the profitability information is typically hosted in an on-site line of business systems such as SAP?
* Security - security is a major factor for Global 2000 companies where information is typically core to a company's competitive advantage. The question that must be answered by SaaS providers is "Would my company's information be as secure in your environment as it is in ours?"
* Availability, performance - typically SaaS Service providers offer contractual obligations in terms of back-end availability and performance but do not take ownership of the IP connectivity and performance. In future SaaS service providers are going to have to provide an end-to-end availability and performance obligation. Typically customers would not utilise SaaS as a model for realtime critical applications if an end-to-end availability and performance cannot be guaranteed by SaaS service providers.
* Back-end process - significant work has to be conducted to ensure mature and sustainable processes are used by SaaS service providers. The move into the Global 2000 will require SaaS service providers to have sustainable processes that effectively manage the usual ITIL processes as well as automated billing models etc. These have to be backed up by regular audits of the environment to ensure that the risk faced by customers is minimised.
SaaS in South Africa
The major debate surrounding SaaS within the South African context revolves around two issues: bandwidth and client maturity.
* Bandwidth - the bandwidth issue is self explanatory. In South Africa, bandwidth costs are substantially higher than first world countries, especially the cost associated with international bandwidth.
This typically precludes SMBs from utilising SaaS applications offered by overseas-based companies like without significant constraints on application performance. This has led to an opportunity for companies to host locally in South Africa due to the competitive advantage of SMBs not having to procure dedicated international bandwidth at significant costs to ensure application performance.
The cost of local bandwidth has also spawned an additional model which looks at hosting solutions at clients' sites (the service provider owns the hardware and software and leases this to the client on a pay-per-use model). This model however takes the SaaS model back to an ASP model where every customer gets their own instance of the software and each instance of the software has to be updated individually.
* Client maturity - client maturity in terms of adoption of SaaS in the South African market is still in its infancy. Clients are still concerned with security of information and are still of the opinion that in order for work to be done, resources and servers have to be on site.
The mindset is borne out by the number of companies that have actually outsourced ICT functions to a virtual team with remote support being the norm. The number of companies that have employed this model in a South African context is significantly lower than the companies that have outsourced but kept on-site resources and servers. The mindset has to change in order to shift mission critical data to secure off-site locations hosted and managed by a service provider.
It is IQ's opinion that the South African market will move increasingly towards SaaS and the adoption of SaaS will play an important role in South African companies stepping onto the world stage.

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