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SaaS Myths Debunked

I'm using this post to comment on the most popular Software as a Service (SaaS) myths which seem to circulating the Web in what I believe is a feverish pitch and last ditch effort by non-SaaS software companies trying to inject FUD (fear, uncertainty and doubt) to slow the most impressive industry movement and technology disruption we have witnessed in at least the last 20 years.

Myth #1: SaaS is still relatively new and untested.
On-demand Customer relationship management software vendors such as Salesforce.com and NetSuite have been in business over six years, are publicly traded and have a market following. Salesforce.com has more than 1 million subscribers worldwide and continues high double digit growth every year. The oldest and largest SaaS purveyor? ADP -- the world's biggest payroll application outsourcer -- has been in business for nearly 60 years and served about 600,000 customers worldwide. For the year ended 2008, the SaaS industry is currently $6B USD and growing at about 32% CAGR. The combined market cap of publicly traded SaaS vendors is over $17B USD.

Myth #2: SaaS is just an evolved version of the application service provider (ASP) hosting model which failed in the dot com ear.
While on-demand software isn't a new idea, the economic and management concepts of subscription pricing, hosted delivery and outsourced administration have combined to make current SaaS providers and solutions more successful than prior era models. The ASPs and hosting companies of the dot-com era failed for two reasons. First, they did not fundamentally change the architecture of their software applications, but simply resold legacy applications to organizations that didn't want to house them on their own systems. The up-front capital expenditure and recurring costs of hosting legacy applications proved to be too much for the ASP customers to withstand. Today, both the technology and the corporate mind set have advanced. Most companies now consider various IT functions and business applications commodities and not core competencies. This has made SaaS, essentially an outsourced application management business and far more attractive and efficient than the prior ear ASPs.

Myth #3: SaaS only relieves companies of the up-front costs of traditional software licenses and does not lower total IT costs.
SaaS not only removed the capital expenditure investment for traditional perpetual licensing but also reduces the need for IT infrastructure investments and IT labor needed to administer and support enterprise business applications. Several analyst studies have demonstrated that for most business software types, SaaS TCO (total cost of ownership) remains lower than on premise software. Further, shelfware software and excess hardware or software capacity just in case you need it are eliminated.

Myth #4: SaaS is only for the SMB (small and midsize business) market and will not be accepted by large-scale companies.
Organizations of all sizes and types are adopting SaaS business software systems and realizing the benefits. SaaS solutions deliver scalability, reliability and performance which meet or exceed on-premise systems for even the largest companies.

Myth #5: SaaS only works well with front office applications such as customer relationship management (CRM) or sales force automation (SFA).
While SaaS certainly makes sense for several types of customer facing business processes, SaaS solutions are gaining steady penetration in the back office and other types of business software systems. These range from accounting software and financial applications to supply chain management (SCM) and channel management systems. On-demand supply chain management vendor Click Commerce boasts Arrow Electronics, Delta Airlines, Tyco and Volvo as hosted customers. On-demand Enterprise Resource Planning (ERP) software vendor Aplicor retains the Department of Commerce, Tyco, France Telecom and Ford while hosted accounting software vendors Intacct and NetSuite boast thousands of back office customers.

Myth #6: SaaS solutions will only have a slight impact on the software industry and will degrade over time.
As long as the quality and reliability of SaaS solutions continues to improve, the business value proposition of faster time to market, lower TCO and the delegation of non-core competencies will never lose appeal.

Myth #7: It will be simple for the established software giants to engineer SaaS systems and then dominate this market.
The on-demand software industry is a fragmented market. The top 10 SaaS players own less than 50% of the hosted market - and these are big players like Cisco/WebEx, Microsoft, Salesforce, NetSuite, Citrix and Omniture. The technology, cultural and revenue business model changes required of SaaS are no small undertaking for established software companies. Existing software companies have to re-architect and re-develop their legacy systems for thin-client delivery over the Internet. They then have to redesign their sales and financial models to accommodate the pay-as-you-go subscription pricing model. They have to rebuild their corporate cultures to achieve a more service-oriented rather than product-centric model. They also have to reset Wall Street and investor expectations that the days of very large up front cash generation are being replaced by much smaller, but long term, annuity revenue streams.

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April 25, 2008 at 10:30 PM in SaaS | Permalink | Comments (0) | TrackBack (0)

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This blog is focused on hosted, on-demand or software as a service (collectively SAAS) business solutions. To qualify as a SaaS solution, the service should be offered on a subscription (pay as you go) purchase price, housed in a multi-tenant data center and delivered remotely over the Web to web browsers. Business applications include about any front office or back office business system. Frequently cited business applications include Customer Relationship Management (CRM) systems, Sales Force Automation (SFA) systems, Enterprise Resource Planning(ERP) systems, Supply Chain Management (SCM) systems, Manufacturing Systems and Human Resource (HR) systems.