Although some would trace back the roots of software as a service to mainframe timesharing, what we would now call SaaS, or on-demand computing, is really experiencing its second coming.

The first SaaS generation of the late 1990s promised to make the web a vehicle for application delivery but most of those early, self-styled application service providers, or ASPs, collapsed because of funding issues, limited network speeds and a dearth of specially designed applications. However, over the last several years, the second generation has proven that the on-demand model can work across application types, even for very large deployments.

Why all the fuss about SaaS? The main attractions of the model are that services can be rolled out quickly with a sharp reduction in costs incurred on servers and administrative staff.

All end-users require is a client device that can access the internet, and upgrades and patches are all performed remotely without interruption to service. Charges are predictable and regular, usually paid for on a monthly tariff.

"The future of computing is on the internet. What we're witnessing is the end of software"

Marc Benioff, CEO, Salesforce.com

As Steve Jones, head of SaaS at Capgemini’s global outsourcing group, puts it, “SaaS represents a quicker time to market and a more business-centric cost model than most other software licensing models. This means that not only can the business provision the software directly, but that the CIO can align the IT costs more directly to its business impact. SaaS is becoming more of a priority because of these two elements; the CXO isn’t after SaaS per se, but an answer that is good enough, quickly provisioned and priced in line with the benefit it delivers.”

“What we offer is outstanding value,” says John Paterson, CEO of customer relationship management (CRM) SaaS firm Really Simple Systems. “Customers are looking at a CRM roll-out costing £50,000 to £100,000 and we come in at £20,000. Because there’s no customisation, it’s quick to deliver; on the other hand, it won’t have the user-specific functionality that you would get with a traditional installation. That’s the trade-off customers are looking at. However, they often put us in as an interim solution while they’re rolling out a bigger system and in more than 50 per cent of cases we end up staying there. The big system is often delayed so even the ‘temporary fix’ often becomes a one-year or two-year temporary fix.”

Although often pigeonholed as only suitable for smaller businesses that need to get projects up and running quickly and at minimal cost, SaaS is proving itself as a model with the legs to appeal to blue-chips. Leading the way is the poster boy of the SaaS generation, Salesforce.com, under the charismatic leadership of ebullient CEO Marc Benioff. Developed as a system primarily intended to automate the needs of sales executives and keep tabs on customers, the company has helped create an opportunity for peers and rivals by proving the scalability and reliability of the model. Also, having originally appealed to smaller firms, Salesforce has been instrumental in showing that SaaS can also be appropriate for large companies. Customers with thousands of Salesforce seats include Merrill Lynch, Cisco Systems, Dell and payroll giant ADP.

Although the bulk of Salesforce revenues still come from sales force automation and CRM services, the company’s bold ambitions extend well beyond those confines. Already closing in on becoming a $1bn revenue company, the nine-year-old firm’s next aim is to be at the centre of a developer nexus where thousands of independent software companies and end-user organisations develop programs using Salesforce’s developer tools and datacentres. Supporters say that plan could make Salesforce the new Microsoft for a generation of computing architectures that rely on resources being located “in the cloud” rather than on the hard disks and tape drives of desktops and servers.

“The future of computing is on the internet,” Benioff has said. “What we’re witnessing is the end of software.”

The company’s hyper-growth and brash marketing have made Salesforce synonymous with SaaS but it has been joined in the limelight by other successful companies that use the same model.

These include call-centre contact management firm RightNow Technologies, business applications providers NetSuite and Intacct, employee performance management firm SuccessFactors, and expense management outfit Concur Technologies.

SaaS is also making inroads among the world’s largest software companies with banner-name developers moving to become, or at least rebranding themselves as, SaaS players. In the last 12 months alone, SAP, Oracle and Microsoft have introduced major initiatives, while Cisco has acquired WebEx for its web-based conferencing service.

SaaS strategy
Many firms still view SaaS as a tactical offering for small and medium-sized companies but that is changing. RightNow is aimed squarely at enterprises and can list British Airways, T-Mobile, Vodafone and many other brand names as being on its impressive customer roster. Also, NetSuite has thousands of seats at Carphone Warehouse, Concur sites include IKEA, and SuccessFactors counts Kimberley-Clark and Radio Shack among users. Underlining the scale of these providers, NetSuite and SuccessFactors have recently floated on the public markets, joining veterans such as Salesforce and Concur.

Despite these success stories, critics of SaaS still snipe that, even in the case of many large organisations, the CIO is bypassed in order to address the short-term tactical needs of sales, marketing or other divisions. Defenders counter by saying that might have been true once but now is the time for CIOs to get involved in the SaaS action.

A snapshot guide to SaaS vendors

Salesforce.com
The 800-pound gorilla of the sector with by far the biggest brand. Initially focused on CRM but now turning to third parties to build a platform for all sorts of applications.

NetSuite
Provides a suite of on-demand business applications for small and departmental customers. Bills itself as being positioned “above Sage and below SAP”.

RightNow
Mostly targets call centres and CRM operations of larger firms and offers both SaaS and on-premise software.

SuccessFactors
Provides a service for monitoring performance of staff.

SAP
Beginning to make moves to appeal to smaller firms and satellite operations that do not need the full power of its enterprise
applications suite.

Oracle
Expanding SaaS offerings but terms are not overly attractive.
CEO Larry Ellison holds stakes in Salesforce and NetSuite.

Microsoft
Offering hosted CRM and online extensions to Office.

“The lines of business brought us in to solve problems but then we had to deal with the CIOs,” says Zach Nelson, CEO of NetSuite. Nelson believes that fewer CIOs are today resistant to SaaS because they realise that it is no threat to their power bases or opportunity to innovate.

“All you’re really outsourcing is grunt work that should have been done by the vendor,” he claims. “Installing the software and tuning it doesn’t make the organisation better. The original vision of IT was that it was to be a business partner. Now, IT really can be that and CIOs don’t have to worry about the basics. The transformation is towards these guys [the CIOs] becoming business experts. The question becomes ‘how do you run the business’ and not ‘how do you run the database’.”

John Appleby, CEO of SaaS consulting firm Saaspoint, agrees that the decision-making process is changing.

“More and more frequently, the CIO is involved in the decision regarding SaaS,” he says. “Before it was the sales vice president, sales operations [leaders] and customer support managers who we would speak to. In fact, the IT department were the last people we would speak to because it was like trying to tell a turkey how good Christmas was. Now, the IT department really embraces SaaS. Also, [CIOs] want to have SaaS projects on their CVs. If you are a CIO who really wants to deliver solutions, this is manna from heaven. As Salesforce.com says, we’re allowing the CIO to mean ‘chief information officer’ rather than ‘chief infrastructure officer’.”

Appleby argues that the questions being asked about SaaS are also changing from earlier in his career when he worked at Salesforce.

Good security
“It’s probably unfair to say [early CIO scepticism over SaaS] was people looking after their personal fiefdoms. It’s fair to look at issues such as security and availability and ask questions – and these questions have now been answered. Customers eventually realised the level of security Salesforce could provide was greater than what they could do themselves.”

However, other SaaS players say that smaller firms will often bypass IT bosses.

“Most of our customers are small businesses with under 100 people and don’t have CIOs, but we also sell to divisions of larger organisations and government,” says Really Simple Systems’ Paterson. “In these, we will occasionally come across the CIO but we mostly talk to lines of business such as marketing divisions. They sometimes say, ‘Don’t talk to the IT people because they’ll probably try and stop it’. Some CIOs are fine and say: ‘This has my blessing so let’s just run through the failover and security aspects and sign it off’. Most CIOs have more work than they know what to do with and this is one less project for them to worry about. Occasionally though, you see larger companies with lengthy approval cycles where the attitude is ‘we paid for 20,000 licences upfront and we’re not allowed to move away from the company standard’.”

However, veterans of the sector say there has always been a blurred line on SaaS decision-making, while arguing that the demarcation will become clearer in the event of a macro-economic downturn.

Out of the clouds

Pim van der Horst is CIO at Kas Bank, a 200-year-old Dutch finance house. Strictly a business banking service, van der Horst says this is as conservative an industry as you are ever likely to find.

Kas’s business is about secure transactions and financial services for investment houses and van der Horst is currently migrating his 1,000-seat infrastructure from IBM Z Series mainframes to Microsoft software running on Intel-based servers. Demand for security and compliance solutions have also led him to consider SaaS as his key issues are performance and business continuity in a tightly regulated sector.

In Holland, for example, a bank’s datacentre cannot to situated below sea level, presenting some obvious problems for local firms. SaaS is attractive, he says, because when he talks to his CFO he can offer to make the balance sheet lighter. Also, he adds, the rapidly changing banking industry means Kas finds itself in competition with PayPal and Amazon.com, so having applications run as a service frees up resources. But van der Horst says there are also more opportunities to trade on the bank‘s established reputation by offering financial services based on managed infrastructure.

He says that he’s also happy to run applications such as CRM “in the cloud”
as they are not business-critical to him.

“In my experience, SaaS has been a CIO issue for a while, or at least it has had CIO attention,” says Denis Pombriant of Beagle Research, an analyst firm that specialises in the CRM segment.

“Often, a line of business will initiate the project and the line-of-business people will act as their own spokespersons, giving the impression that the CIO wasn’t involved. But when you talk to the CIO in question, you frequently get a statement like ‘We didn’t have time to do this any other way. We were glad there was an on-demand solution for this’. Some organisations might have financial thresholds for CIO involvement – a deal bigger than X number of dollars, for example. For a long time, SaaS has been able to fly under that radar but those days are ending, especially as the economy cools and companies want to control spending.”

Saaspoint’s Appleby agrees that the macro-economic outlook could be a driver for SaaS.

Money-saving measures
“SaaS progress is going to be driven in part by economic decisions,” he suggests. “Now, especially with the economic situation the way it is, there’ll be more attention on CIOs saving costs. Salesforce will be great for declining economic situations because it contributes to the top line. There’s exponential return on investment.”

Where next for SaaS? The movement is showing signs of going way beyond the CRM, sales force automation and security heartland areas of activity.

SuccessFactors, for example, is demonstrating that SaaS is good for gauging the performance of employees, providing opportunities for both management and staff to view their objectives.

“Our application is one where every person in the organisation would use it,” says Randy Womack, CIO and vice president of operations at SuccessFactors. “The only comparison is with Word or Outlook. Vice presidents of human resources are very important to us but we’re typically dealing with the CXOs because they’re the ones dealing directly with employee productivity. Companies that are more mature are looking at compensation, talent management and succession planning. The CIO we deal with has to wear two hats: a technology hat and a business operations hat.”

For Womack, the opportunity to remove risk is an obvious strength of the SaaS model.
“It’s similar to a typical procurement process where the CIO has to figure out return on investment and security, and own the service level agreement,” he says. “First and foremost, it’s important to show top-line improvement and the business impact to the organisation. It’s a huge shift of risk. It’s not necessarily cheaper [in the long term] than doing it yourself [and installing software on premises] but you’re able to move very quickly and get immediate value. ”

Even on the desktop, the SaaS model is having an effect with companies such as Google, Zoho and others putting desktop applications such as word processing, spreadsheet and presentations programs web-based services. These are appealing to technologically-savvy users but there are signs that the movement is spreading to enterprises. For example, Capgemini last year signed a deal to provide consulting and deployment services for the Google Docs applications suite. Google claims L’Oréal, Procter & Gamble and General Electric as customers.

Although these are early days for web-based productivity applications, the sector should be watched closely by CIOs, in the very least as a way to put pressure on Microsoft and its pricing, terms and conditions for Office.

Vendors in the sector are positive about options for stepping out from Salesforce’s large shadow and broadening the appeal of the model.

“We’re a very different beast to Salesforce.com,” says NetSuite’s Zach Nelson. “It was important at first [to associate with Salesforce] because Salesforce was seen as the black hole of all SaaS interests, but our competition was always going to be SAP. ”

One major change in the sector could come through the familiar route of mergers and acquisitions. So far, activity has been relatively low key but, the thinking goes, if SaaS firms threaten the dominance of giants, they could easily be swallowed up. Salesforce, for example, has regularly been linked with an acquisition by Oracle, Google or even Microsoft. Interestingly, Oracle CEO Larry Ellison has stakes in both Salesforce and NetSuite.

An alternative possibility is that those same giants ramp up their own SaaS offerings. So far, Oracle, SAP and Microsoft have only taken baby steps into on-demand computing and must fear that anything more could disturb the cash-cow businesses that were founded on the client/server model. However, with Gartner predicting that SaaS could represent a third of all business application spending by 2012, they might be forced to move faster than they would like.

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