Archived Articles The SaaS Revolution - Part IV: What it takes to succeed as a SaaS service provider | The SaaS Revolution - Part IV: What it takes to succeed as a SaaS service provider |
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And the winners are... Feature October 17, 2007 Software as a Service has become the rising star of the commercial applications business. By now, the qualities that propel some SaaS providers into the winners circle – as well as those which hobble others – have grown clear. CMU professor Bob Monroe, a veteran of SaaS pioneer Ariba, has been tracking the evolution of online service delivery. In this, the concluding article in a series highlighting Monroe’s analysis, he explains who the winners are and why. By Peter Longini, Managing Editor Software delivered as an online Service, or SaaS, is among the fastest-growing segments of today’s software business. Although it hasn’t been available for as long as packaged software, software hosted on remote servers and accessed by customers through the Internet – as distinct from locally installed software that comes shrink-wrapped from the producer – has been around for some time. As a result, patterns of success, as well as blueprints for failure among companies choosing to follow that strategy, have now become apparent. At least that’s the conclusion reached by Bob Monroe, a professor in Carnegie Mellon University’s Tepper School of Business who has made a point of keeping his finger on the pulse of the software industry. Market makers The biggest SaaS winners tend to fall into one of three categories, most of which have little resemblance to traditional enterprise applications, according to Monroe. The first group includes almost all the big, obvious Internet success stories – Google, eBay, Amazon.com, Facebook, etc. These might not be the first names you think of as Software-as-a-Service companies but all of them have built tremendous businesses on top of software that they provide only as a service. Google has built a fantastic advertising platform, search platform, and various other things – they’re clearly a SaaS winner,” he said. “It’s the same with eBay. They don’t sell the software to produce a marketplace – they sell the service of a marketplace that’s completely driven by software. Collaborators The second group involves applications that use the Internet to integrate different people’s work. “Salesforce.com is a good example. If a sales person just wanted to keep their own contact information, they could do it on a PDA and it would work just fine; there’s no reason to go online for it,” Monroe said. “Where it really becomes interesting is when somebody needs to manage an entire sales force or manage an entire marketing campaign from beginning to end. If you want to coordinate all these different sales people and make sure that one sales person knows what the other is doing, you really need a networked application. Traditionally, that’s where you get into enterprise software.” But traditional enterprise software like Oracle’s application suite is installed on the customer’s own servers with employees connecting to it from behind a carefully controlled firewall. Problem is, you need to build up a data center with its associated infrastructure and make sure it all works properly before you can use it. Salesforce.com, and Netsuite – another SaaS company – do all of that themselves and then deliver the results to their customers’ PCs online. And even though their earlier offerings lacked the depth and scope of an installed ERP system, the SaaS companies are catching up. “They’re both evolving toward offering everything you need to run a small- to mid-size enterprise through SaaS,” Monroe pointed out. “They both started in specific vertical niches but they have much broader scope at this point. Netsuite started as an ERP type product to help plan resources throughout an enterprise. And now they’ve gotten into customer relationship management, business intelligence, data warehousing – a whole suite of enterprise applications. But what really makes them valuable is coordinating peoples work. And because it’s offered over the Internet, it’s a lot easier for the people whose work is being coordinated to access it from anywhere.” WebEx is another good example of online collaborative software, according to Monroe. “The idea with WebEx is that you have shared online space for a meeting. It’s like a conference call where you can present what’s on your screen to other members of the meeting and they can interact with it. There’s very little, if anything, to install. But what they offer is a service where it manages this shared meeting space for you. They’ve been quite successful. They were bought by Cisco for more than $3 billion earlier this year, and they were profitable at the time.”
Generics At least two other characteristics define successful SaaS companies, according to Monroe. One applies particularly to companies operating in the enterprise, rather than the consumer space: it is to provide a service capable of being shared by a wide customer base. “It’s the idea of providing a commodity service that’s generic across many different companies and meeting needs that are common to many different people. One example might be taxes – making sure they’re collecting the proper state and local sales tax on transactions. It’s a general-purpose, broadly applicable function that companies don’t see as strategically important. If they lose the records on who has been to what training programs, their business isn’t going to stop. Contrast that with a company losing the ability to process orders as they come in. If that happens, the business has stopped – almost by definition. So you need to decide how critical the application is to your customers’ business. If what you’re trying to provide in your software is at the heart of the way your customers differentiate themselves from their competitors, it’s probably not a good candidate for SaaS.” Techies The other success characteristic is technical excellence. “How hard is it for somebody to set up the infrastructure they need to provide this software capability,” Monroe encourages companies to ask themselves. “In some cases, it’s pretty simple; you’ve got a server, you install the CD, you configure it for 20 minutes, and then access is available in your company. But providing something like a robust, secure email system for thousands of people is quite difficult to do. It opens all sorts of potential security holes. It’s difficult, for example, to set up your email server so spammers don’t break in and use it to send out millions of other spam messages, or theives break in to steal confidential company data. So those applications that are harder to run properly may be good candidates for SaaS. And because they’re hard to do right, many customers will be better off going with a service whose specialty is doing that.” Amazon.com, which many believe to be the best online retailer in the world, has developed an especially elegant suite of e-commerce systems which they make available to companies who don’t want to manage the technical infrastructure of an online business. “Go to Amazon and search for anything,” Monroe suggests. “There are actually thousands of retailers. But Amazon handles the order, the payment, the credit card processing, the stock information, and basically tells the retailer: ‘ship this item out to the following address,’ and they get paid for doing so. There are literally thousands and thousands of businesses that sell their things through Amazon this way.” Control freaks But there are also cases of companies which have labored hard to make SaaS work, only to see disappointing results. “Microsoft may be a good example of a company struggling with providing profitable applications over the Internet,” Monroe noted. “Their internet efforts have been, almost across the board, unprofitable. The only really successful SaaS example they have so far is Windows Update, which has been very effective for keeping people’s operating systems patched and up-to-date. They have invested a lot of money in their Windows Live offering, which attempts to provide many services over the interenet but they’re late to the game. Thus far they haven’t been very successful. They seem to be doing things with yesterday’s mindset – fighting the last war instead of the new one. “Traditionally, Microsoft has tried to control everything. Throughout its history, Microsoft has been extremely successful by controlling the one thing that really gave them leverage over everybody else – the operating system. They’ve used it as a sledge hammer that dictated what other people had to work with. Microsoft did what was good for their operating system. And they tried very hard to do that with online services, but it didn’t work at all.” What has ended up being a winning SaaS strategy so far, according to Monroe, has been using lightweight, easy to use, invisible-to-the-end-user, quick to set up, easy to integrate standards that are open, not proprietary. Microsoft’s approach of trying to control the Internet the way they control the operating system, has been a major failure. “Salesforce.com and Netsuite and Amazon are all building ecosystems of customers and suppliers within the business community,” Monroe said. “Amazon says: ‘you want to be an online retailer? Great! Come and work on our platform. We’ll own the platform but we’ll be more than happy to let you host your shop on it for a fee.’ The winning players have been quite open in their standards. They’ve published them and tried not to keep too tight a chokehold on them, in the interest of growing faster. But Microsoft wanted to control everything from the beginning, so they’ve had a very difficult time generating that ecosystem and keeping it going.”
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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