Archived Articles SaaS, the remote revolution | SaaS, the remote revolution |
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It’s quietly sucking the brains out of your computer Feature July 11, 2007 Under several different names, Software as a Service, or SaaS, has been around for a long time. But now that business model is poised to revolutionize small business and consumer applications just as it has transformed the IT function of large enterprises over the past several years. Carnegie Mellon University professor Bob Monroe, a veteran of SaaS pioneer Ariba, has been tracking the evolution of SaaS. In this, the first of a series of four articles highlighting Monroe’s analysis, he explains the genesis of the revolution. By Peter Longini, Managing Editor There is a huge revolution taking place in the multi-billion software industry. And so far, most consumers haven’t even noticed, although they may sometimes be amazed at how easy it has become to do computer tasks which once seemed so tedious. But in just the past few years, a business model known as Software as a Service, or SaaS, has begun to transform the way the nation’s largest companies – companies with huge investments in IT assets and staff – manage their corporate information. And it’s having ripple effects among all types of users. Today SaaS, which saw its initial success among small and mid-size companies that couldn’t afford the elegant, custom-built, enterprise software solutions enjoyed by their larger brethren, is rapidly moving up the corporate food chain, as well as down market to the point where it is bringing real benefits to even the smallest business and individual users. However for those who make a living at creating software for their customers, it is turning out to be a wrenching change.
Outside the box That represents a sharp break from the practice which dominated the industry until recently. “It’s not the Microsoft Office business model where you get a CD in a box, insert it, key in your code, and then have software you can use,” he said. “Instead, you simply point your browser at a Web site, it quietly downloads a little software behind the scenes, and you have an application you can use. You’re only downloading a piece of the application. The interesting and powerful aspects of the application are actually happening on servers that are owned by the software service provider.” Some of it is quite straightforward. Google Docs and Spreadsheets, for example, are tools available to anyone who logs into the company’s Web site. They offer a workmanlike word processor as well as a spreadsheet program which you can use for free and then store the resulting documents on Google’s server, also at no charge. “Google has such a tremendous money machine with their advertising business that anything they can do to get more people to spend more time at their site increases the likelihood they’ll click on an ad,” Monroe said. “Google can offer this service to drive traffic, to increase the value of Google as a brand, and to irritate Microsoft. Microsoft can’t afford to offer Office for free because if they give away Office, it won’t drive other business. But if Google gives this away, it drives their core business.” Google is only one example of a consumer-based SaaS business model. There are plenty of others. For example, there are companies that provide digital photo storage and editing sites which make their money selling you prints, coffee mugs, and calendars. Turbotax has become a SaaS-based service. SaaS-based blog providers format, post, and deliver your text without all the fuss and bother of your first having to create HTML pages. And many elaborate fantasy games, like World of Warcraft, are both played and paid for online. Perhaps the best known consumer-oriented SaaS business is eBay. “eBay is arguably a technology company; they’ve got very sophisticated software development, they’ve got very sophisticated engineering that goes into creating the marketplace. But what they’re really selling is access to the marketplace, and they make their money on commissions. Their service is that when you offer a bicycle for sale and someone buys it, you pay a commission,” he said. Down to business But when IT professionals or people in the software industry talk about SaaS, they’re not really thinking about consumer grade services, Monroe noted. Instead, they are thinking about larger enterprise grade systems. “Salesforce.com is the poster child right now for enterprise grade SaaS,” he said. “Customer Relationship Management systems are large, enterprise systems that coordinate sales and marketing throughout a large, distributed business. They tend to be very expensive – a few millions of dollars to purchase the software and then a larger number of millions of dollars to roll it out and deploy it throughout a large company. It’s a very, very expensive proposition for mid- to large-size companies. “It was so expensive that it was prohibitive for smaller companies. But smaller companies still need to manage their sales process. So Salesforce.com came in and created an online, Web-based CRM system, charged a fee of $65 per person per month, and hosted everything. The software ran on their servers, you accessed it through a browser; you could configure it any way you wanted for your company. You didn’t have to install software in your own data center; you didn’t have to hire people to configure and manage it; you didn’t have to worry about the servers crashing and, if they did, it was the service provider’s problem, not yours.” That transformed the CRM business. “What they ended up doing was opening up enterprise CRM capabilities to small and medium-size businesses that were previously priced out of the market,” he said. Their software may not be as sophisticated as Oracle’s, but for its modest price, and with the ability to get a customer’s account up and running within days, that wasn’t such a big deal. “A lot of IT executives and business executives are looking at the cost of $65 per person per month, versus the cost of a multi-million dollar licensing agreement followed by three or four times that of consulting and other professional services to install and roll it out, plus the servers you need to buy, plus the staff to run your data center. Pretty soon, that $65 per person per month looks pretty good. It’s proven very, very successful. And now they’ve branched out into a wide variety of additional services.” The race to catch up As a result, everyone else is struggling to catch up. “Oracle has responded to Salesforce.com strategically by offering CRM as a service and charging with a similar pricing model,” Monroe pointed out. But it hasn’t been easy. “As a general rule, it seems very hard for companies that are used to selling installed software to make the jump. They all see that this is something they need to be able to compete with. And they’re really trying. But old habits die hard. This is a difficult transition. It requires a different way of thinking about what a product is; it requires a tremendous amount of operational excellence. You not only have the need to produce code that’s bug-free, you’ve got to actually run everything and keep it going.” Of course, the capability of processing and managing data remotely from the end user is nothing new, and the SaaS business model – formerly known as Application Service Provider or On-Demand Computing – isn’t new, either. But until fairly recently, a series of concerns over data security, custom configuration, and integration with other datasets held the SaaS model back from wide acceptance. “All of these have been reasonable objections at different times,” Monroe noted. “It’s not that those arguments are spurious or superstitious, it’s more a question of the technology needing to mature – of technical and business solutions needing to be developed for those problems. If you go back ten years, these were all very legitimate issues. But there have been technical, business, and social solutions developed to the point where they’re much less a concern now then they even were a few years ago.” As a result, the value the SaaS revolution is bringing business customers is proving to be enormous. And there are some offsetting benefits for the software provider as well. “There is a tremendous amount of cost reduction you can realize if you run everything on a standard set of hardware,” he noted. “You don’t need to test as much; you don’t need to build as much flexibility in. Think of the testing problems Microsoft has whenever they introduce a new piece of software. They’ll be used in thousands of different combinations of hardware and video cards and networking cards and monitors and operating system versions and patch levels – all of which they have to test against.” Culture shift Still, there’s a sensitive cultural issue that most software suppliers will need to overcome, according to Monroe. “Top-gun software developers tend to develop a distain for IT people – people who don’t make software but run it, configure it, and make it work inside organizations. They seem to view it as a less skilled craft than actually writing the software. But it turns out that it’s actually very difficult to do well. So there’s a tendency by pure software companies to underestimate just how hard it is to provide a highly robust, highly available, and highly secure IT infrastructure. And you’re going to have to do that if you’re going to offer your software as a service.” “You no longer just have to make sure you haven’t put security holes into your software,” he said. “You have to have a network that’s hardened and able to withstand attacks from determined professional hackers trying to get it. You have to deal with the fact that if one of your servers goes down, you can’t just deny your customers access to their data. That takes a lot more than just writing good software. It takes a completely different mindset in terms of how you run the business. The most effective SaaS organizations are run with military precision: there are procedures, there are policies, there are chains of command. And that’s a very different mindset than the one most effective software companies have grown up with.”
About the Author: Peter Longini is the Managing Editor for Inside Product Strategy™. He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it . |
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