If you ask 10 different Software Industry executives to define Software-as-a-Service (SaaS) you may walk away with almost as many definitions.
In its purest form, SaaS is a single instance, multi-tenant software application that is hosted by the vendor. There are never multiple versions of software to support because all customers share the same, most recent instance of the application.
A SaaS software solution is built from the ground up to take full advantage of the Internet. Enterprise software up-front license and installation fees, along with service and maintenance contracts, are replaced by pay-as-you-go pricing and white gloves customer support.
So why all the buzz? Is SaaS really revolutionary? Is it here to stay? Should my company be thinking about a SaaS strategy?
A common battle cry among SaaS executives is that SaaS is a democratizing solution for Small to Mid-Size Businesses (SMB’s). Companies that could never before afford Enterprise software solutions can now afford them. Call it a mini revolution.
Compare purchasing software to home buying. Without mortgages, a home buyer would need enough money to pay the entire purchase price up front. Mortgages allow a home buyer to put little money down and make a predictable monthly payment for a home that they could otherwise not afford. Even the little guy can buy a house.
SaaS executives view Software as a Service in the same way. With no upfront license fee, and a predictable monthly bill, small companies can take advantage of robust business applications that were once exclusively affordable only to their larger competitors – CRM, HR, Payroll, e-Learning, Project Management, e-Commerce and Analytics among others.
Another benefit is that a customer can be up and running with a new business application within hours, days or weeks, not months or years. Value and return on investment can be immediately measured. Customers are up and running faster and at less cost.
The economics work for vendors as well. For vendors the game is volume. The cost for a software company to host software (people, data centers, bandwidth, capital costs) is in many cases cheaper than providing technical support, multiple version support, and training for installed products. Since monthly payments are low, the vendor needs many customers to become profitable. Once profitable however, revenues are predictable and grow steadily. A SaaS vendor does not need to “discount†in order to meet quarterly revenue targets.
What will drive growth in SaaS?
As power shifts from CIO to CFO and other front line business owners, there will be a rebirth of purchasing. Software purchasing will be driven by business people. Business decision makers will demand solutions that are easy to use and help drive growth or reduce cost. Complexity will give way to point-and-click simplicity.
On a macro level, by rallying around their SaaS initiative and pushing the SaaS message, companies such as IBM and Oracle give credibility to SaaS. Just like when they embraced Linux.
SaaS Shortcomings?
A major criticism of SaaS, especially by companies that earn their living by installing and customizing commercial applications, is that a one size fits all application does not take into account that some customers have unique business models and may want to customize software to fit their needs. SaaS companies need to anticipate where people typically modify software and make their software configurable.
Shifting Customer expectations
The go-go days of “must-have” software applications to keep up with the competition are behind us. Software companies used to be able to get customers to pay up front for new software development or extract large up-front license fees. Hello March of 2000. Now, customers are expecting to pay for value as it is received. They are more discriminating.
Finally, customers want software to be a tool to solve a business problem. A non-technical business user should be able to quickly get the hang of it. This is the world we live in.
I have a few takeaways from my recent conversations with SaaS executives. SaaS vendors are focused on creating easy-to-use applications for the business user, not IT departments. Many SaaS companies start by focusing on the small to mid-size market and growing over time to meet the needs of larger organizations.
Since customers don’t make large upfront investments, and can switch fairly easily, customer service is critical to success. This dynamic more closely aligns the vendors success with the customers success. If the customer continues to derive value from the application, they will continue to use it. The customer is not “stuck†with a large upfront, no turning back investment. This is the check and balance that ensures that the vendor continues to keep pace with customers needs.
SaaS companies are developing subscription-based delivery models for technology and services around certain business problems. The business model changes the economic value proposition for customers by allowing them to get significant return on investment with minimal upfront cost (faster implementation, cheaper total cost of ownership).
