6 Things SaaS Needs To Do In 2009

Software as a service is making headway, but can't yet be called a game-changer in the enterprise software market. Here's what must happen for SaaS to gain wider acceptance in 2009.

Mary Hayes Weier, Contributor

January 7, 2009

9 Min Read

Software as a service has made headway in the past few years as an alternative to traditional licensed software, but it can't yet be called a game-changer in the enterprise software market. InformationWeek has identified six things that must happen for SaaS to gain widespread acceptance in 2009.

1. Get Solid, Believable Commitments From Microsoft, Oracle, And SAP.

SaaS continues to gain momentum, but pure-play SaaS companies such as Salesforce.com, NetSuite, Workday, and even Google aren't likely to steal a big chunk out of the enterprise software market within the next few years. Most large, global companies won't walk away from their heavy investments in companies like Microsoft, Oracle, and SAP, which enjoy massive customer and partner ecosystems and consistently good earnings and revenue growth.

The big software companies still have the upper hand, and SaaS won't destroy it. Rather, the success of SaaS in 2009 will depend on to how much support it gets from the established vendors.

So far, support of SaaS among the big three has been riddled with occasional missteps and self-contradictions, but this could change in 2009. SAP made a big deal out of the Business ByDesign SaaS ERP suite for midsize businesses it launched a year ago, but has since slowed down the rollout, saying it's having a difficult time making money off of it. In the coming year it plans to develop SaaS functionality modules that hook into customers' on-site SAP ERP systems, helping to protect its profitable software-licensing model while offering SaaS to customers in areas where it makes sense.

Microsoft this year released SaaS CRM and collaboration services. It's also planning a SaaS version of Microsoft Office, but details are vague. Like SAP, it's sticking to a "software plus services" approach, in hopes of keeping that traditional software revenue coming in. In sum, it's still unclear how Microsoft's SaaS strategy will play out.

Oracle offers a SaaS version of Oracle/Siebel CRM and promotes its databases and servers as a good infrastructure choice for SaaS software vendors, but hasn't ventured much into the application side of SaaS. CEO Larry Ellison has been vocally critical of the profitability challenges of SaaS, but he may be having a change of heart: During a quarterly earnings call with press and analysts in December 2008, Ellison specifically pointed to a large SaaS customer win over Salesforce.

The big three vendors are taking tentative and occasionally unsteady steps toward SaaS. If they are to be believed, however, the pace will pick up in 2009. And that's what SaaS will need to transition from niche to necessary. 2. Escalate From "Very Good" To "Excellent" Uptime Ratings

Most SaaS-resistant IT managers don't like the idea of their companies' customer records or financial systems being run and managed by an outside party. So far, SaaS vendors' record of uptime and availability has been pretty good. But for SaaS to make major headway and lure over the resistors, it needs to achieve a near-perfect record of uptime and availability.

Everyone knows that there is no such thing as 100% uptime, but a lapse in service is even more unsettling when an IT manager can't dispatch his or her own staff to fix the problem. Such lack of control creates a psychological barrier to SaaS for some IT managers, and to overcome that barrier, SaaS needs to be near perfect.

What's more, for SaaS providers to succeed and gain the trust of IT managers, they must provide transparency into where their data centers are and who runs them. The infrastructure for SaaS varies widely: Salesforce runs its own data centers, but many smaller SaaS players contract with data center providers. (Aravo, for example, which provides supplier relationship management SaaS to hundreds of thousands of GE employees, uses data centers from Rackspace.)

In addition to providing customers with detailed processes for ensuring uptime and availability, they should also offer such details as the geographic locations of the data centers they use and their step-by-step process for handling episodes of downtime or any disaster that could impact service, including an earthquake or long-term power outage.

There have been some publicized incidents of downtime, including Salesforce's data center crashes of a few years ago, and more recently Google's Gmail outages. It's likely some companies that were considering Salesforce or Google Apps were scared off by those brief blips in accessibility.

Still, these incidents have been relatively minor and far between. If a major, catastrophic SaaS outage were to occur, it would land a major blow to the model. For SaaS to continue its momentum in 2009, it needs to sail through with a record that is at least as good as it was in 2008. As the SaaS model matures, customers will expect availability and uptime to improve, too.

3. Offer Cheaper, Easier Integration

Companies are turning to SaaS to lower costs and complexity. But unless a business doesn't mind keeping that software service separate from the rest of its operations -- which typically run on on-site, licensed software -- it has to integrate the SaaS with its onsite applications. That's where complexity and cost can come in, and why many businesses continue to bypass SaaS.

There is ongoing progress on the integration front. Early customers of SaaS provider Workday have been teaching the startup what they need in terms of integration. There are a number of companies out there providing SaaS integration services and technologies, including Bluewolf, Boomi, Cast Iron, Informatica, and SnapLogic, among others, and there will likely be more coming into the market in the coming months.

Still, too much of the responsibility of integration falls on IT managers' shoulders, and for SaaS to truly succeed, SaaS providers must do more to make integration easy. That includes forging active technical partnerships with traditional software vendors to ensure smooth integrations, and ensuring their offerings stay up to speed on the integration front with a traditional vendor's software upgrades. Otherwise, it'll mean more integration work for the SaaS customer.

When considering SaaS, CIOs are listening carefully to their peers' SaaS integration stories. For SaaS to expand significantly in 2008, these integration tales better be short and sweet.

4. Prove That SaaS Is Less Expensive Than Traditional Software

SaaS appears cheaper because businesses typically are "renting" the software, paying a yearly or monthly subscription fee, rather than paying millions of dollars in up-front license fees and allocating the money and resources to implement software onsite. And SaaS vendors claim they can keep their prices low by allowing customers to share software applications while keeping their data separate (e.g., multitenant SaaS).

Yet SaaS, too, can require substantial money and resource investments, particularly if integration with on-site software is required. What's needed from the analyst community are more detailed research reports on the total cost of ownership of various SaaS applications with comparable on-site software applications. If SaaS providers visited potential customers armed with objective, in-depth research that supported their claims of SaaS's superior TCO over licensed software, they'd have a more convincing argument.

5. Build A Better Record Of Profitability And Growth

There's hasn't been another SaaS vendor that's matched the consistent revenue growth and profitability of Salesforce, which recently surpassed the $1 billion-a-year revenue mark and was added to the S&P 500 (replacing the beleaguered Freddie Mac). But one company's success doesn't prove the health of an industry (or, in this case, the broad acceptance of a new software delivery model).

The SaaS model is clearly a difficult one on which to make money, since SaaS providers don't get the millions of dollars in up-front licensing fees that they can then pour into operation and research and development.

That's why NetSuite (for ERP SaaS), while consistently showing double-digit revenue growth each quarter, has never once reported a profitable quarter in its eight years of existence. RightNow Technologies, another good-sized SaaS provider, has had spotty financial performance over the years. Intacct (ERP) and Authoria (human resources) show promise with reported strong growth, but it's unknown what kind of profits, if any, those companies pull in, since they're not publicly traded and don't release earnings statements.

Startup Workday (ERP) also shows promise with big deals with Flextronics and Chiquita Brands, yet the company is still very much in the ramp-up stage. Concur is both profitable and growing, yet it's in a very niche business (employee expense management).

In fact, with all its success, analysts can't even agree on the future of Salesforce. Cowen & Co. analyst Peter Goldmacher has been consistently critical of the company, warning investors against Salesforce stock, saying in a November note that "we continue to believe Salesforce.com is struggling in the enterprise."

There's a reason traditional software companies like SAP and Oracle have moved so slowly with SaaS: It's not as profitable as traditional software licenses and maintenance. More SaaS vendors need to prove that it's a good business to be in to attract investors and talent. Venture capitalists have been fairly willing to invest in SaaS startups and even older SaaS companies, but the funds will dry up if the profits don't start pouring in.

6. Convince Customers That They Can Live Without Customization

Most businesses have taken for granted the ability to tweak and customize software to their liking, while recognizing that each customization requires time and resources. But one of the reasons SaaS costs less is because it's a one-for-many (e.g. multitenant) application, which means little or no customization.

Take Workday, for example, which offers a variety of configurations and solicits input from customers on features and functionality, which it may include in service updates. But it's not customizable, and many of its customers like it that way. It keeps things simple. After all, how much customization do you need in a human resources application?

There are, however, forms of SaaS customization: Salesforce, for example, offers a development environment for creating SaaS applications and extensions that run on its platform. But in many cases, SaaS is more about choices in configuration than software code that's been tweaked beyond recognition to fit the needs of a specific customer. That's why SaaS providers will need to convince customers that options in configurations are an acceptable alternative to customization.

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