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A profound shift is occurring in the way that enterprise applications are purchased and delivered. The traditional model of application deployment, in which the customer acquires a perpetual license and assumes responsibility for the software's implementation and ongoing management, has many disadvantages for end users. Increasing dissatisfaction with the costs, complexities, and length of time that it takes to recognize value from their investments have pushed software buyers to demand alternative models of application delivery, such as Software as a Service (SaaS). This paper will provide an in-depth analysis of the evolving industry and offer recommendations to software companies on how they can transform their businesses to better meet the needs of customers, take advantage of new revenue opportunities, and avoid losing market share to competitors.
Software Consumption is Evolving
Multiple factors have converged to accelerate the adoption of the SaaS model. From an end user perspective, SaaS is attractive because it enables them to simultaneously minimize costs and maximize performance. Traditional software delivery has left buyers of enterprise applications disgruntled by resource-intensive deployment cycles that take years and often yield mediocre results. SaaS, which allows customers to purchase applications on a subscription, or ?pay as you go? basis, dramatically reduces upfront costs and enables the immediate recognition of value. If the software does not meet objectives, the customer can stop using, and paying for it.
The inherent flexibility of the SaaS model is a significant benefit for the end user. Due to the rapid pace of technological innovation, the requirements of today's businesses are constantly changing. Many companies have essentially found themselves ?stuck? with expensive packaged or custom software solutions that no longer meet their needs. Over time, this accumulation of ?shelfware? has heightened resistance toward new investments in enterprise applications. SaaS eliminates the risk of obsolescence associated with traditional software implementations and provides immediate access to functionality.
Finally, SaaS transitions the burden of deployment and management from the end user to the software vendor, and forces vendors to take responsibility for the performance, security, and stability of their applications. In sharp contrast to the traditional model of application delivery, in which customer IT departments are handed a gold disk and tasked with installing the software and ensuring that it runs properly, SaaS meets the needs of many of today's organizations to enhance application performance without increasing IT budgets. Instead of trying to fix problems internally with more people, and more equipment, or through the purchase of expensive professional services support contracts from software vendors, SaaS enables end users to lower the total cost of ownership of their application(s) considerably and maximize the potential for return.
Industry analysts have identified the transition that is occurring in the software marketplace and are actively tracking this growing demand for SaaS. Gartner predicts that by 2008 over 50% of software licenses purchased will be via service1. Like it or not, it is clear that SaaS is a disruptive technology that has already begun to change the landscape of the software industry, and vendors that choose to ignore this fact will likely find themselves unable to compete in the future.
What Does This Mean For Software Vendors?
The challenges associated with the successful delivery of SaaS can be daunting for the average ISV. SaaS requires revised business models, rearchitected code, and instant proficiency in an entirely new set of operational disciplines: 24x7 systems management and call centers, hosting and networking, security, disaster recovery, and more. Most software companies are aware of the significance of the SaaS model, but are struggling with at least one of three foundational aspects of SaaS delivery: business model, code, and/or 24x7 operations.
Before a vendor can bring a SaaS offering to market, the vendor must determine how to price the product. Various metrics can be used?per user, per transaction, per page view, etc. The software company must also determine how to bill its customers. Will customers be billed monthly? Annually? Will upfront payments be required? What will the terms of service be? In addition, the software company must reexamine sales compensation structures.
The software company must also consider the recoding of its application(s).
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