Software-as-a-Service (SaaS): The New Game

Projected to reach over $10 billion in the next several years, Software-as-a-Service (Saas) has been heralded as the most significant game-changing force to hit the software industry in 20 years. But what does SaaS really mean to consumers and to businesses? And how has it changed the game, really?

By: Scotty Fletcher

Software-as-a-Service vs. Enterprise Application
As DVD and CD sales give way to Web-based solutions such as Netflix and iTunes, the message is clear: today’s consumers want flexibility. The desire to subscribe outweighs the desire to buy and, when given the choice, most consumers prefer the "pay as you go" model.

For many, Software-as-a-Service is a natural progression of technology’s response to consumers and it fits the bill – in a big way. According to Gartner, 40 percent of e-commerce deployments will use a complete SaaS solution and 90 percent of e-commerce sites will subscribe to at least one SaaS-based service by the year 2013.

"SaaS represents a paradigm shift in technology," said Michael Boardman, senior analyst at TripleTree, a leading research investment bank that focuses on technology and delivery models such as SaaS. "What began as an emerging and disruptive technology has become a mainstay in the business world and it now impacts all verticals, leaving a very light technology footprint."

More flexible than enterprise applications, SaaS applications are completely deliverable online. Because there is no complex infrastructure or implementation required, customers can be up and running in a matter of weeks – sometimes days – compared to on-premise solutions, which can take months to fully implement. Upfront licensing fees are eliminated and there is no expensive infrastructure or hardware to purchase and install. Upgrades are automatic, frequent and free.

With SaaS, the IT burden has been lifted. As a result, customers get a software solution that is easy to use, costs less upfront and, in many cases, provides more value in the long run. And as a customer’s needs evolve, the terms of the subscription – including pricing and packaging options – can be adjusted along the way.

Consumers aren’t the only ones who benefit. Because they operate on a subscription basis, SaaS firms and investors enjoy a predictable, recurring revenue stream and cash flow through annual or multi-year contractual relationships and rely less on new sales and repeat business.

Additionally, because SaaS applications are delivered entirely online, there is less overall IT involvement required by decision-makers – a roadblock that can stall or completely shut down large enterprise software deals.

"The most tangible benefit we have heard from our customers is that SaaS requires significantly less attention from IT, so business problems get solved faster," said Matt McConnell, president and CEO of Knowlagent, a SaaS provider to the call center industry. "Staffs have been dramatically cut over the years and IT has a short list of priorities. Typically, when another department has an issue that needs IT’s attention, they have to get in line. Now, with SaaS, when business people find a solution to their business problems, there are fewer objections from IT because they are not required to be as involved."

The Business Effect
As the trend towards on-demand continues, the message is clear: Subscribing is in. And with this transition, companies must adjust their infrastructure in order to survive.

"Running a subscription-based business is very different than running a product business," Tien Tzuo, former chief strategy officer and chief marketing officer of SaaS pioneer, Salesforce.com, wrote in his SandHill.com article, The Global Transformation to On-Demand.

Some of the major differences, Tzuo outlines, include multiple pricing and packaging options, flexible invoicing and payment schedules, complex queue-to-cash processes, and a host of different metrics used for evaluating the company’s overall success.

"Subscription businesses often lack adequate systems to support how they work, which may be the single biggest obstacle to their success and growth," Tzuo said. "Today’s systems were all built for managing and distributing products, not for managing a recurring subscription business."

This lack of supportive technology for subscription businesses, he says, can result in an inability to launch new products and pricing models and can force scarce engineering resources to focus on non-core business activities.

The People Effect
A new playing field also affects the team.

When Knowlagent transitioned from an enterprise model to SaaS in June of last year, it was an adjustment for the company’s staff.

"Positions in every area of the company change," said McConnell. "When marketing an enterprise model, for example, the focus is on branding and name recognition. With a SaaS model, it’s far more about lead generation. In enterprise sales, the emphasis is on big sales with a narrow, deep focus. With SaaS, it’s about volume and pipeline. Everything changes. We have found that some people are able to adapt and, in some cases, you need to inject some new DNA."

This transition can be especially difficult for software veterans with extensive experience in the premise model – many accustomed to large contracts with lucrative perpetual licenses.

"Similar to the "bubble" generation of early 2000, SaaS represents an innovative, fast-changing environment that is especially attractive to the young, computer literate workforce living in today’s Web 2.0 era," Boardman said. "Things are moving quicker and there are lots of young, tech savvy people excited about this way of delivering technology."

SaaS appeals to many organizations because it allows IT staff to focus less on integrations and installations and more on strategic, value-added processes. This will ultimately lead to more jobs in the IT field, Boardman said.

"There has been a lot of investment of venture capital in the SaaS market and a lot of excitement around SaaS," he said. "Lots of jobs are being created as a result. Small and mid-sized businesses are a vastly underserved market in the software world. They need applications that are cheap, accessible and easy to use. There are thousands of solutions that SaaS providers can bring to this market, which will lead to many new jobs."

Drawbacks to SaaS?
As with any breakthrough technology, SaaS has its critics.

One criticism of SaaS is that customers don’t always know what they need. Some say that fast, cost effective on-demand implementations without expert consultation can lead some customers down the wrong path. Others argue that because the SaaS model is so available to everyone, competitors can sign-up quickly with the same provider, offering customers an equal online experience. Still others claim that though upfront fees are lower with SaaS than with on-premise solutions, users should beware of unexpected hidden costs associated with maintenance, upgrades, development and integrations.

"The drawbacks with SaaS today are primarily around customization and control," said Boardman. "For example, a large financial services provider that has to comply with SEC regulations on Wallstreet may require very customized software that can be installed onsite and monitored by internal IT resources. There are still some large companies out there that require a level of customization and security that can be better served by an on-premise solution, but this is changing. Even they are beginning to make the move to SaaS."

For Knowlagent, the decision to move into the SaaS arena was a clear one.

"The best reason we saw to make the transition was that we found a better business model for both the software vendor and the buyer," said McConnell. "When that happens – when there is a better model for both parties involved – change is inevitable."

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