There is a revolution under way – and if you’re a CIO, it’s coming in your direction. It’s called Software-as-a-Service (SaaS). It owes its roots to the (failed) application service provider movement (ASP) of the 1990s. It’s coming from a foundation of start-up vendors targeting the small and medium enterprise market but all of the leading applications vendors are making SaaS noises to a greater or lesser degree and the number of enterprise level deployments is increasing. SaaS is an inevitable item on the corporate IT agenda. From the point of view of CIOs within organisations that means that if you haven’t already been asked by the CEO or FD about SaaS and its relevance to your company, then you will be soon. So what is it? Why does it matter? And is it right for you and your organisation?

"The majority of SaaS deployments continue to be focused in individual departmental initiatives, such as sales force automation, except in small and medium size enterprises (SMEs)"

Robert DeSisto, research vice-president, Gartner

We can start with the last question first as it’s the easiest. The answer is... maybe. The SaaS evangelists will try to convince you that SaaS is an inevitable future; the sceptics will say it’s just another deployment option; and the doubters may argue it is not something to be considered as a viable enterprise computing option. The reality is that there are cases when it’s suitable and cases when it’s downright unsuitable.

That said, let’s look at the facts amid the hype. Even by the standards of the bandwagon driven software industry the SaaS movement has chalked up some enormous propaganda wins. Tails have wagged dogs to enormous effect. Start-up vendors like NetSuite and have gotten under the skin of the larger vendors such as SAP and Oracle, setting agendas that belie their relative unimportance in terms of market size and weight.

The best example – or worst, depending on your point of view – was the niggling ease with which enfant terrible put CRM market leader Siebel on a totally reactive footing. Tom Siebel, whose company arguably defined what we understand as the CRM market, allowed CEO Marc Benioff to take the lead in drumming SaaS into the public consciousness. Ironic really, as Siebel killed off his own SaaS operation after a few months, effectively leaving with a clear path to success. Now even Microsoft and SAP – the most reluctant of converts – have been forced to come up with SaaS strategies, meaning that all the applications powerhouses are now on an on-demand footing, to varying degrees. That last point is very important from a CIO perspective. Although all the vendors are talking about SaaS, they’re not all talking about the same thing. Far from it. So, first work out what vendors mean when they tell you they have a SaaS offering.

SaaS and ASP

It’s tempting to think that SaaS is just a souped-up version of the ASP model that failed to make an impact in the 1990s. This is an argument that sceptics may champion, including some supposed vendor converts. They will be quick to assure you that if you are daft enough to buy into the SaaS argument, you can always come back inhouse with remarkable ease. Two things differentiate SaaS from ASP. The first is the emergence of the internet as a viable, secure and recognised platform for conducting business. That simply wasn’t there in the 1990s. Second is the concept known as multi-tenancy.

“SaaS can be viewed as software delivered through an on-demand model,” says Robert Bois, senior research analyst in AMR Research’s customer management practice. “It’s important to distinguish that SaaS is different fromtraditional application hosting. This leads us to the concept of single tenancy, multi-tenancy, and mega-tenancy. “In the traditional hosting model referred to as single tenancy, a service provider licenses an application from an independent software vendor and remotely hosts and manages the application for a start-up charge and a maintenance fee. The SaaS model makes use of software architecture called multitenancy, in which one instance of the software and data model is provisioned to multiple customers, and can continually monitor and adapt to changing customer usage on demand. Some vendors now refer to multi-tenancy as mega-tenancy. The two are the same but ‘mega’ helps imply the ability to scale. In practice, SaaS vendors often provide blends of these models to balance cost effectiveness and scalability.”

Let’s start with a definition. 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-foruse basis or as a subscription, based on usage metrics. That translates into: it’s software delivered to you as a service, via an internet browser and paid for on a per usage basis. No more having to buy 100 licences for software when you only have 65 users. Now you pay for 65 seats, then scale up or down as needed. The basic principle makes perfect sense. If we want electricity in our homes, we don’t dig up the garden, build a generator and produce our own power. Instead, we go to a company that provides electricity, buy as much or as little from that company as we need and then pay a bill on a monthly or quarterly basis. If we need more electricity in any given period, we pay more; but if we then need less, we pay for less on a usage based subscription model. The traditional enterprise applications approach has caused companies to become used to ‘building their own generators’ – and at considerable cost and waste.

But surely SaaS is not for the enterprise? It is for the smaller firm or for smaller departmental implementations that need to get up and running quickly and efficiently. “The majority of SaaS deployments continue to be focused in individual departmental initiatives, such as sales force automation, except in small and medium size enterprises (SMEs),” argues Robert DeSisto, research vice-president for Gartner.

"The hosted providers have generated a great deal of market hype and we see clients jumping into decisions like lemmings off a cliff"

Steve Bonadio, senior programme director, Meta Group

“In SMEs, 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.” But this view may well be falling out of favour. It is certainly true that the majority of the SaaS start-ups grew out of the SMB heartland but there are an increasing number of enterprise customers.

It is also true that there were teething troubles with some deployments – Gallileo’s rollout of Siebel On Demand with BT and then IBM springs to mind – but then the same can be said of on-premise deployments of a certain scale. How many cheques have so many CIOs ended up writing to systems integrators to get an on-premise enterprise SAP implementation up and running? Large companies are buying into the idea of SaaS according to a new survey of CIOs by management consultants McKinsey & Co. The survey found that 61 per cent of companies with sales over $1 billion plan to adopt one or more SaaS applications over the next year, a dramatic increase from the 38 per cent who were planning to install SaaS applications in 2005. This is a view backed up by the San Diego-based Services and Support Professionals Association (SSPA), which also reports that SaaS is gaining traction in such organisations. But there are different drivers behind SME and enterprise adopters of SaaS. SMEs are more focused on an interest in customised solutions rather than broader benefits. Some 5.1 per cent of small and 15.2 per cent of medium-sized firms owning PCs plan to adopt a SaaS solution during the next 12 months, according to International Data Corporation research.

In the end it is going to come down to cost and to ROI. How much is it going to cost and how quickly are you going to see a return? The popular view has been that SaaS short-term costs are lower to begin with but that over time, the model may turn out to be less robust in terms of ROI than SaaS evangelists would have you believe. The analogy is with property. If you move to a new town for six months, you probably rent accommodation; if you’re planning to move there for six years, it’s probably more cost effective to buy. If you buy into that argument, then the next question is where this tipping point comes? With hardly any SaaS deployments with a long enough track record to checkThe SaaS effect out, the answer is it depends on which analyst firm you choose to believe. Gartner argues that through 2010, the SaaS model can lower the total cost of ownership for moderately complex CRM deployments by ten per cent to 13 per cent over three years and by four percent to six per cent over five years, compared to on-premise systems. But the more complex the rollout, the more likely it is that the ROI will not be delivered as expected.

But according to a study by analyst firm Aberdeen Group, SaaS implementation times and ROI cycles are growing shorter in such areas as sourcing and procurement; supply chain management; financial management; and product lifecycle management. CRM application implementation takes less than two months and ROI is realised in less than six months, according to a study, which surveyed 631 companies from March to July 2006. “Although the value proposition of SaaS is seductive, companies considering SaaS need to educate themselves on a number of factors to make a solid buying decision,” says Beth Enslow, senior vice-president of enterprise research for Aberdeen. But perhaps you need think less in terms of ROI and more in terms of total cost of ownership (TCO).

"Although the value proposition of SaaS is seductive, companies considering SaaS need to educate themselves on a number of factors to make a solid buying decision"

Beth Enslow, senior vice-president of enterprise research, Aberdeen Group

“That is really where the rub is,” says Steve Bonadio, senior programme director at research firm Meta Group. “Hosting vendors do tell us that it’s a heck of a lot cheaper than an on-premises approach. The hosted providers have generated a great deal of market hype and we see clients jumping into decisions like lemmings off a cliff.” Meta has put together a comprehensive model to test the TCO of the two approaches. “The model shows that in year one, hosted CRM will indeed be cheaper, up to 50 per cent cheaper than on-premises,” he says. “On-premises implementation costs are front-end loaded, in the form of licences, hardware, implementation services and infrastructure. With the hosted model, you pay by the drink on a per user per month.

“But the analysis reveals that over the long-term five year costs, there’s a breakeven point at approximately the three year mark. After that hosted will cost more than the on-premises alternative. You end up paying more as you go on. With on-premises you will pay maintenance but it will be less than the cost of pay as you go.”

So is it a case of buyer beware? The answer to that is – of course – yes, just like any other form of computing. That said, there are now tangible examples of happy users of the SaaS model. According to a survey of customers and prospective customers carried out by Ovum, 51 per cent of customers are happy to be described as ‘converts’, while 41 per cent chose the next level down, ‘fairly positive’. Only eight per cent described themselves as ‘neutral’, and none were ‘cautious’ or ‘negative’. Existing customers were generally positive about extending SaaS, with as many as 18 per cent keen to run the whole of their business on SaaS as soon as it was technically feasible. Whether that day will ever come remains to be seen. But for now, the children of the revolution are growing up fast...

The growth of SaaS

The analyst firm Gartner Group says that Software-as-a-Service represented approximately five per cent of business software revenue in 2005 and, by 2011, 25 per cent of new business software will be delivered as SaaS. The adoption of the SaaS software delivery model has varied significantly by market segment. SaaS accounted for approximately eight per cent of CRM total software revenue in 2005 Gartner estimates, with 2006 SaaS revenue set to reach 12 per cent of the total. But other markets, such as the ERP and supply chain management segments, have seen less than four per cent adoption. This is set to change however, with vendors in the BI and ERP spaces now offering their products as SaaS solutions.