Saturday, February 11, 2006

SaaS – Mega Disruption

The least significant feature of SaaS is that it is a new software delivery mechanism. That is only a side effect. Unlike the Time Share system in the 70’s or Mainframe based application delivery in the 80’s, SaaS has several disruptive elements that will change the face of the software industry like no other development before.

10 Strategic Aspects of Software as a Service

1) Time to value
With average implementation times of 1 day to 6 weeks, SaaS software is an order of magnitude faster productive than any traditional business application. While traditional business software needed to be installed, configured, embedded in existing IT infrastructure, adjusted to fit with other software and mostly customized not only to fit the customers needs but simply to put to work – SaaS applications in contrast go live immediately and can be used from day one. An ROI can be expected in a matter of months – not years. Even so customization capabilities may be limited – updates and usability will immediately increase.

2) Perpetual service model
SaaS vendors have no other chance than provide excellent service to their respective customers on an ongoing base in order to stay in business and ensure the renewal of the service. Support is typically provided on a 24x7x365 basis – at no extra cost. There is no “product delivered – thank you very much”. SaaS is based on a perpetual service model, versus a perpetual license model.

3) Major transformation in usability and support structure
Since SaaS companies are build on the premise of a perpetual service model, a large amount of creativity goes into usability and serviceability of their products to ensure a profitable operation. Substantial investments go into user interface design, intuitive process design and more or less bug free applications. Since support contracts are no more separate line items – there is a big interest on the vendor side to drive support down; next to zero.

4) Financial predictability
Traditional IT cost was a collection of cost items such as software license, software maintenance, software support, hardware cost, hardware maintenance, up to date hardware to support the software, adjustments in server infrastructure, other operational expense including space and air-conditioning. While this was very hard to plan and predict, SaaS licenses include all of the above – including personnel and support. This is a rather simple to plan per user, per org, per what ever unit over time expense.

5) Leveraged Administration, reduced cost
In the traditional IT environment every update, every upgrade, every data migration is done one by one for every single company individually. SaaS providers by contrast do the same job for hundreds or even thousands of companies over night. Also here the motive to make this error free and as cost effective as possible SaaS providers invest strategically in operations efficiency and leverage the critical mass of customers to always outperform an individual IT center infrastructure in cost, availability and scalability.

6) Data security and reliability
As we learned from various studies, between 70% and 90% of security fraud happens within a company by internal personnel. Data access to not only mission critical but also personnel and other sensitive data need to be granted to a variety of people internally. SaaS providers in contrast invest in security mechanisms and typically operate their systems by people who have no interest in the individual data of the respective clients. By risking the integrity of an entire company SaaS providers have a much higher motivation to ensure data protection than many IT organizations.

7) Meta Data - Business Benchmarks
As our business world is more and more focusing on efficiency, process optimization and improving operational infrastructure we are in the need for benchmarks and data points to actually measure effectiveness in relation to our respective industries and to other industries. A currently very underestimated side effect of SaaS is the ability to collect “Meta Data”, information from all sorts of businesses about sales process times, average lead closure rates, average marketing campaign response data, personnel churn and hundreds of other data points. Even so the business ethic of a SaaS provider would suggest to keep that information highly confidential on a per customer bases, it is of enormous value to our business society to understand the aggregated results and averages. While this is extremely difficult to aggregate with customized and behind the firewall application software, it is a huge treasure of the SaaS methodology. It will take quite some time for some companies to appreciate the benefit of benchmark data vis-à-vis contributing with their critical and sensitive information but as the old saying goes “what you can measure, you can manage and what you can manage gets done”.

8) Technology Free Information Management
Companies, primarily flexible organizations or start-ups may go with Technology Free Information Management and entirely word with SaaS providers. No capital expenditure for the back office, no IT service team, no backup, no update, no data migration, no software installation, no security management. Not only will those companies have a competitive advantage in their operational flexibility and reduced cost but more importantly in their ability to switch to most current technology and most appropriate applications for their respective business.

9) User Integration
In the 60’s computer users where primarily programmers and operators. In the 70’s some educated and trained business administrators joined. In the 80’s and 90’s more and more all employees of a company were integrated in the internal Information Architecture of a corporation. The “last mile” is the integration of legally independent business partners and customers. In a traditional software model this goal is limited to EDI and some dedicated and individual system integrations. The SaaS model how ever also here opens a new world. The combination of Internet Technology, Webservices and the SaaS model allow applications and connectivity that partners and customers can be integrated in a homogeneous business process while maintaining their independence. From dedicated host software to standardized PC software to SaaS reflects the evolution of user integration and user centricity.

10) Explosive Growth.
In the next 10 years, over 500 Million PC users will use SaaS one way or the other, partly or exclusively. If a main stream application cost $50 per year and reaches 30% market share, the respective vendor would make $7.5 Billion annual recurring revenue. He may lower the price to 50Cent per year and still make $75Million. Software will become so cheap – we almost wonder whether it is even possible. Unlike predictions that the industry will consolidate after a few years like the current IT industry, SaaS will grow in variety like any other consumer industry.

Plus the obvious tactical advantages such as omnipresence of the respective application on a global scale, ever faster technology improvements with less hassle of update processes, lower cost if implementation and experimenting with new solutions, new application and other reasons. It is not the software delivery model that makes a SaaS application it is the disruptive service structure, meta data and explosive growth potential.

1 comment:

alwayson said...

A few more:
1. Substantially less complexity - no need to support multiple platforms (HP, Sun, etc.) to conform with client's IT standards. This had been an enormous tax on software developers in the past.
2. Far lower configuration costs - availability, storage, networking are all handled by experts with total knowledge of the software, as opposed to overworked IT staff with limited experience.
3. Total version control - Freedom from the hassle of dealing with customers that don't upgrade to the newest version, requiring complex support systems and costly sales cycles to incent upgrades.

We are doing it at Offermatica

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