October 15, 2007 (Computerworld) -- Software-as-a-service may have come into the enterprise through "the bathroom window," but it's definitely becoming part of the mainstream, says SaaS expert Mike West, vice president at Saugatuck Technology Inc., a boutique management consulting and subscription research company focused on disruptive technologies.
And it's an alternative to in-house operations and outsourcing that IT shops can and should use to deliver services and improve their infrastructure in a cost-effective way. SaaS can offer high-quality services at a lower cost than other alternatives, and it's particularly good for supporting mobile and geographically disbursed populations, whether they are sales staffers, telecommuters, customers or business partners worldwide. And in its latest iteration, says West, the technology is offered by leading SaaS vendors as complete platforms unifying normally stovepiped sets of services, supporting underlying data capture and analysis.
Here are West's answers to some basic questions about the SaaS market. IT and business users (and Internet service providerss trying to evolve into SaaS providers) need to know the following information about this new and quickly evolving option for purchasing IT services:
1. What is SaaS?
"Software as a service, sometimes known as on-demand software, is a new model for deploying business services ... that requires the provider ... to make access to the functionality available typically through a browser," West says.
It can be seen as the evolution of the application service provider (ASP) model. It differs from ASP in part in that while that model usually provides a unique instance of the underlying application for each user organization, SaaS typically uses a multitenancy architecture, sharing a single instance of an application and a single database of user data among all of a service's customers. This model provides enormous economies of scale, often allowing SaaS providers to sell services at a significantly lower cost than traditional outsourcers or even ASPs, and to deliver superior return on investment to customers.
The ASP model was criticized for providing generic versions of complex applications such as enterprise resource planning. Advances in underlying technology now allow SaaS providers to provide limited amounts of customization of user interfaces, functionality and even underlying data structure. Basically, West says, the software is aware of the identity of each user and consults a customization database to determine what customized features to apply.
However, SaaS solutions typically don't provide the full customization that would be available with the internal installation of a complex software package such as SAP. Definitely, one of the things users considering SaaS must determine is whether their organization can live with the managed customization that SaaS supports.
2. What about security? If our data is sharing a database with other organizations, possibly including competitors, how can we be sure we are safe?
"The security solutions offered by SaaS vendors are quite excellent," West says, and the danger of corporate espionage is virtually nonexistent. In some cases, some SaaS providers can even keep critical data inside firewalls for those clients who may require it. However, SaaS clearly isn't the right solution for preserving the nation's nuclear secrets. Obviously, this is another element that potential users need to consider, and many will prefer to keep some data and applications in-house for security reasons. On the other hand, internal corporate security isn't perfect, either.
3. How do SaaS providers charge?
"Typically, users pay as they consume the service on a subscription basis," West says. "Pricing per user per month is the most common model. Pricing by transaction is another. There are a variety of metrics." This is one way in which SaaS differs from outsourcing. "It can allow an organization to try something out with little risk," he says, because the organization isn't committed to a three-year fixed-rate contract or hasn't made a huge upfront investment in hardware and software licensing. However, SaaS providers usually offer significant discounts to customers who make multiyear commitments, West adds.
This pricing model also can make SaaS a better choice for fast-growing companies that anticipate huge growth in use of their IT infrastructure and for services with large annual fluctuations in demand, which is common, for example, in retail.
4. What kinds of services do SaaS vendors provide, and how do they deliver those services?
Companies such as Salesforce.com Inc. (CRM), Concur Technologies Inc. (expense management), Taleo Corp. (human resources), NetSuite (SMB Suite), SAP AG's Business ByDesign (a comprehensive suite of IT business services for small and midsize businesses) and RightNow Technologies Inc. (CRM) provide a wide variety of services spanning both end-user functionality and IT infrastructure, such as network security, e-mail and collaboration. The latest trend in service development is for SaaS vendors to provide entire sets of IT services -- "everything a business could need" -- on a unified platform, West says.
These services are delivered across the network and are usually accessed via a browser. This makes them ideal for supporting populations of mobile users, including field sales and support as well as consumers. "There are actually different interfaces for mobile workers," West says. "For instance, Salesforce addresses the sales community, and they are, of course, mobile. They have very good support for mobile PCs, handheld devices, BlackBerries, iPhones -- whatever you want to point to, they can definitely support those devices."
Because they are delivered over the Internet, this also makes them ideal for federated, geographically distributed and virtual organizations that reach beyond corporate boundaries to knit business partners together, and for delivering advanced services, such as financial analysis, to customers.
5. Is SaaS mostly for SMBs, or does it have things to offer to large enterprises?
Recently, SaaS penetration in the small-to-midsize business (SMB) market has been growing quickly, but penetration is happening in waves, West says. He estimates that the SaaS market may actually have greater penetration in large companies today, if one includes 2007 plans to implement SaaS solutions.
6. How mature are SaaS services?
Saugatuck Technology identifies three waves of market development. In the first, stand-alone SaaS services penetrated organizations mostly by selling directly to business units, with little IT involvement or, in many cases, knowledge.
In the second stage, which the industry is presently in, IT is either contracting for services directly or working with business units to ensure that the services meet corporate standards for security, integration with internal systems and other issues. SaaS services support increasing levels of integration both with other SaaS services running on a common system and with internal IT.
SaaS vendors typically provide standard service-level agreements (SLA) and in general provide a high level of service. West says that "99.5% is the lowest standard in SaaS, and it sometimes goes higher, to three 9s or four. Very few data centers can really claim that. They may say they are going to go to five 9s, but that doesn't really happen."
On another level, SaaS vendors are aggressively adopting new technology, so their services are evolving rapidly. "We are on the outskirts of Wave 3, which is kind of 'It's everywhere, it's everywhere,'" West says. This third stage in Saugatuck's model includes full functional integration between the SaaS services and the customer's infrastructure to the point of moving the focus to workflow. "It will be another form of business functionality rather than some renegade thing that has come in. So it is rapidly becoming a norm, if it is not already a norm, in many large enterprises."
And marketplace vendors are unifying their own services and in some cases combining services from several providers into comprehensive suites on a single underlying system. These typically have a large anchor service analogous to the anchor store in a mall, with a long tail of more specialized services focused on a market.
For example, WebX Connect, now owned by Cisco Systems Inc., is about to introduce a comprehensive collaboration offering aimed at helping highly distributed and global organizations in "bringing everybody together in a virtual space," West says. Salesforce.com has AppExchange, which provides services from several SaaS vendors through a common set of application programming interfaces. Axiom, a partnership of American Express Co. and Reardon, provides a marketplace of services for business travelers anchored by American Express Travel Services with a "tail" of about 1,500 partners on a single platform.
By combining multiple -- usually stovepiped -- sets of functionality on a single platform, these marketplaces can provide their customers with comprehensive usage data to support business intelligence analysis possibilities not available through traditional IT approaches. This is becoming another differentiator between SaaS and other alternatives such as traditional outsourcing.
7. How mature is the SaaS market?
The market is in its early high-growth phase, having passed the inflection point in the typical high-tech market scenario, West says. It's characterized by large numbers of fairly small vendors, with more entering constantly. In this case, the growth in the number of providers is being aided by some very large organizations, including Microsoft Corp. and IBM, and some small middleware vendors such as Progress Software Corp., which are helping business partners, particularly independent software vendors, move into the market.
West warns vendors that the migration from independent software vendor to SaaS provider is fraught with pitfalls, and he recommends that they seek help where they can find it. He recommends that users have contingency plans prepared in case their SaaS vendor fails. One difference between renting services and buying software and running it in-house is that if a service provider fails, the service could evaporate immediately, with no warning.
8. Is SaaS more than a flash in the pan?
"We believe it is the future of software, or one of the important elements in the future of software," West says. "You can't discount the traditional license model entirely, but certainly there is a strong argument economicswise that favors SaaS in the marketplace."
9. What, if any, involvement should service users have with the provider once the contract is signed?
"I think the user also should be very, very involved in the functional evolution of the SaaS offering," West says. "In other words, the user should participate actively in the user community, in the user conferences, because the evolution of the software is driven more firmly than in any previous generation of software by the feedback from buying community." In fact, some SaaS vendors have suggestion boxes built in to the user interfaces of their software.
"One thing about SaaS is a sense of community, and you should be prepared to be part of that community because it will pay back dividends," West says. "Continuous and aggressive innovation is a hallmark of a SaaS vendor in terms of their offering -- R&D that doesn't target two-year release cycles but is constantly looking at how to introduce new functionality. So they're on the lookout for feedback from their users, and they incorporate it whenever they can."
Bert Latamore is a journalist with 10 years' experience in daily newspapers and 25 in the computer industry. He has written for several computer industry and consumer publications. He lives in Linden, Va., with his wife, two parrots and a cat.