Software as a Service

How far can the pay-as-you-go approach take you? Proponents say the road less traveled is about to become jammed.

But it’s worth noting that most successful technology attacks begin at the low end, and there is ample evidence that SaaS, though not yet the all-purpose solution its proponents claim it to be, is broadening its appeal and shaking off the problems that plagued its first iterations.

Some of the success of the SaaS model has to be attributed to, which has managed to not only take a healthy bite out of the market share of traditional CRM vendor Siebel Systems, but has also proved to be a relentless proselytizer for the SaaS approach. Indeed, Siebel was forced to respond with its own hosted software offerings, and in late 2003 spent roughly $70 million to acquire hosted CRM vendor UpShot. Today, even Siebel sings in the SaaS choir. “All enterprise-application companies are going to have to modify their delivery strategy to offer a hosted, as well as an on-premise, solution,” says Bruce Cleveland, senior vice president and general manager at Siebel’s CRM OnDemand unit.

Investors, which have been largely skeptical of technology for the past five years, have also endorsed the concept of hosted software: both and RightNow Technologies executed successful IPOs last year. And two bellwethers of the ASP business, USinternetworking and Corio, have finally managed to either eke into the black (USi) or be acquired by a software giant (Corio was acquired by IBM in March, in a move seen as key in allowing IBM to quickly offer small and midsize businesses a hosted option).

In total, worldwide spending on SaaS exceeded $4 billion last year and is expected to grow to $10.7 billion by 2009, according to IDC. In an IT environment where many vendors are learning to live with single-digit growth, that’s an eye-popping CAGR of 21 percent, a figure that leaps to 40 percent when looking at major services companies such as IBM. (Meanwhile, independent ASPs will see revenue grow about 16 percent, which may explain why many believe the IBM-Corio deal will usher in a spate of acquisitions — unlike actual dinosaurs, the metaphorical kind have proved time and again that deep pockets provide a substantial Darwinian advantage.)

SaaS comes in two basic flavors. “Net-native” or “Web-native” companies develop their own applications and design them to be run via the Web for a multitude of clients. Other companies don’t develop their own programs, but simply take over the management of applications that customers have already licensed from traditional vendors. The latter approach is how most ASPs operate today; customers still buy software outright, but arrange to have it run from remote data centers, saving on infrastructure, manpower, and other support costs. Currently, the market is divided about equally between vendors that have developed their software expressly for the Net and those that simply host standard programs in their own data centers, according to IDC analyst Amy Konary. But she believes the Web-native approach will eventually win out.

Whether developed specifically for remote hosting or simply hosted to eliminate the cost of acquiring and managing infrastructure, the appeal of on-demand software lies in its speedy deployment, low up-front costs, and overall promise of savings. When a customer licenses software for on-premises use, it pays an up-front fee, along with ongoing yearly maintenance costs that typically run to 15 percent or more of the initial licensing fee. Additionally, the customer must acquire the hardware and supporting systems (such as a database) to run the application, and will most likely need to employ pricey consultants to get things up and running. That makes for hefty overhead, but companies have usually been willing to pay it because they feel it buys them maximum control.


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