Software as a Service (SaaS)
What is it?
Software as a Service (SaaS) is an emerging business model that offers tremendous benefits for both service providers and service consumers. However, not in all cases this model is appropriate and certain considerations must be taken into account in the decision process.
In its earlier incarnation, SaaS providers were called Application Service Providers or ASPs. The ASP model failed for several reasons, the primary reason being that providers were under the impression they could extend existing software products to the Web with very little modification. This resulted in dismal performance and a poor user experience. All current SaaS implementations were designed with the Web in mind from the ground up with new technologies introduced to enrich the user experience and seamlessly scale with the user load. Many published articles provide an account of the factors that were detrimental to the success of the ASP model. There seems to be a consensus among most market analysts about the viability of SaaS as a business model. There are several success stories corroborating the positive outlook for this segment (for example, salesforce.com).
So when should an organization or company consider using the SaaS model in their business processes?
1. There is a need to effectively manage collaboration and information sharing among multiple geographically disparate independent locations.
2. Work periods may stretch beyond core work hours and core workdays due to a variety of constraints and the nature of work.
3. Major upfront investment is needed to develop and deploy the necessary IT infrastructure.
It is always amazing to see the prevailing paradigms about the software development business. Here are some of the most commonly held misconceptions:
- The cost of developing software decreases as technology becomes more advanced. This is simply not true. As technology becomes more advanced it require more skilled resources to develop and maintain new software systems. Yet again, the IT market is experiencing shortage in skilled workers which results in higher cost to build and maintain software.
- Global competition, off-shoring and out-sourcing has reduced the cost of developing software. Some portions of the software development process can be outsourced; however, the core technology of a software provider must be developed and maintained in-house to protect its Intellectual Property (IP).
- Once a system is completed, it remains static and no additional investment in development is needed. Changes in business processes, new regulatory procedures, newly reported security vulnerabilities and improvements in technologies all have a major impact on a whole system or its sub-components. In order to keep a system up-to-date and fine-tuned, it requires continuous maintenance and different levels of upgrades.
- Buying off-the-shelf software is more cost-effective in the long run. This may work for certain types of software applications, such as word processors, spreadsheets, etc. These type of generic software can be applied to a basic business processes and does not require major customization. However, when dealing with complex enterprise-level software, very seldom is this the case.
- Software is just like any other consumer product and consumer should not be forced to rent it. Due to the dynamic nature of software and the need for frequent upgrades, this is not true any more. The average software product goes through upgrades 4 to 6 times a year. Can you imagine changing your plasma television every couple of months because a new and better model is on the market? Many software applications rely on data that are gathered continuously and communicated over the Internet (Anti Virus metadata for example). In many cases the user is paying for the subscriptions to the data updates and not the software itself.
When it comes to pricing, software does behave like any other market commodity. Greater quantities do result in lower cost per unit. This is especially true in the case of SaaS because there is very little overhead in providing it to more consumers. Obviously, there is always a point in which greater capacity is needed to support growing demand and usage volumes. However, if the particular application was architected properly, reaching this point will take a long time and the overhead of scaling up to address the demand will be minuscule relative to the resulting added revenue.
Innovators and early adopters are well aware of the fact that the product they are using and paying for has not reached a stable price level and may not be mature and feature-rich. However, they are rewarded by the ability to help shape the product and customize it to their needs. The service provider is well aware of this and is willing to go a great length in order to appease early adopters. Loyal consumers are part of a tightly knit special interest group who enjoys early access to features and whose feedback is highly regarded. If the product is successful, early adopters are also being credited with the success and although they may not share the revenue, they do share the reputation and fame of being associated with a successful product. Joint professional papers and presentations at industry conferences are common venues to reward committed early adopters.
One of the major benefits of SaaS to consumers is the fact that no major upfront investment is needed to initiate the relationship with the service provider. If, for some reason, the consumer wishes to terminate the relationship with the service provider, this can be done at will and with very minimal or no cost. Assuming the software service is still needed, switching to another service provider for whatever reason (better price, more features) is possible and easy.