| A confluence of factors is driving customers to adopt | | | | systems in place so they can generate greater sales, |
| a new generation of web-based, on-demand business | | | | without requiring additional staff or cumbersome |
| applications via the Internet. The emergence of these | | | | processes to properly support new customers. |
| Software-as-a-Service (SaaS) solutions is being driven | | | | With the success of consumer-oriented on-demand |
| by three primary forces: | | | | solutions, an expectation has been set that |
| | | | business-oriented hosted application solutions will be |
| 1. Growing frustration among corporate end-users and | | | | equally easy to acquire and use. Many online vendors |
| executives with the costs and complexities associated | | | | have promised highly automated procurement, billing |
| with traditional, on-premise applications. | | | | and reporting systems. However, the reality can be |
| 2. Broad-based acceptance of consumer-oriented, | | | | very different for many SaaS providers. |
| on-demand services which are setting a new standard | | | | Tier 1 Research reported at its SaaS Evolution Summit |
| for ease-of-use and cost-effectiveness. | | | | in March 2007, that only 13% of SaaS providers had |
| 3. Rapid evolution of enabling technologies which | | | | "click-to-buy" functionality on their websites. Although |
| makes it more economical to develop and deliver | | | | many of these companies offer online demos of their |
| SaaS solutions. | | | | applications, when a customer decides to subscribe to |
| As a consequence of these trends, corporate | | | | the service a salesperson must become engaged to |
| adoption of Software as a Service is accelerating. | | | | administer the transaction. |
| This adoption is not only among small- and mid-sized | | | | While this human interaction may seem attractive, it |
| businesses (SMBs), but also large-scale enterprises. It is | | | | can result in a clumsy and costly manual process. This |
| not only in "front-office" applications, such as customer | | | | is especially true as corporate customers demand |
| relationship management (CRM), but also in | | | | varying contracting arrangements. Some may want |
| "back-office" areas, such as accounting and financial | | | | per user pricing, while others may be seeking |
| systems. Industry-specific, vertical market oriented | | | | usage-based pricing. Companies that don't have |
| SaaS solutions are also emerging. | | | | integrated order entry and service provisioning |
| The rapid growth of the SaaS market has attracted a | | | | capabilities to handle new customers or modify the |
| widening array of competitors, both start-ups and | | | | service levels of existing accounts will face serious |
| established independent software vendors (ISVs), | | | | operational constraints as they try to scale their |
| seeking to capitalize on this new opportunity. This | | | | business. |
| competition is placing greater pressure on aspiring | | | | The marketing hype surrounding on-demand solutions |
| SaaS providers to develop and deliver highly | | | | has also set an expectation that companies will be |
| differentiated solutions at the lowest possible cost. | | | | able to acquire online services on a true, |
| One of the key attractions of SaaS solutions is their | | | | pay-as-you-go basis. But many companies also lack |
| ease of deployment and use from a customer, or | | | | reliable service usage metering and measurement |
| end-user, perspective. These same attributes are | | | | capabilities to properly monitor and bill for services. This |
| critical for providers of software as a service who | | | | deficiency can create billing disputes and cause SaaS |
| must acquire new customers and scale their | | | | companies to miss new service sales opportunities. |
| operations in a cost-effective manner. However, this | | | | These issues can become even more complicated |
| "on-boarding" process is fraught with complications and | | | | when a company attempts to enlist channel partners |
| pitfalls that can lead to service delivery problems and | | | | to sell its services, or when a company attempts to |
| customer dissatisfaction. | | | | integrate its solutions with third-party SaaS providers. |
| As a result, Software as a Service is fundamentally | | | | Tracking these transactions can create a multitude of |
| changing the nature of the software industry and the | | | | provisioning, metering and billing issues. |
| way software companies do business. In many cases, | | | | Closely associated with these service management |
| the shift to a SaaS model is forcing ISVs to think like a | | | | issues is the multi-tenant architecture which makes |
| web company, rather than a software vendor. This | | | | SaaS scalable and profitable. Many aspiring Software |
| means creating new ways to engage customers via | | | | as a Service companies are migrating from an |
| the web, as well as setting new standards for rapid | | | | on-premise, single-instance, packaged software |
| deployment of their applications. | | | | architecture, and need help designing, developing and |
| If a software vendor can't quickly and cost-effectively | | | | hosting a new multi-tenant architecture to ensure it can |
| on-board customers, it won't succeed in this online | | | | withstand escalating customer demand. |
| business. And if it can't automate the on-boarding | | | | In many business application areas, sophisticated |
| process, it can't build a scalable and profitable business. | | | | certifications are required to comply with governmental |
| Yet, Tier 1 Research has found that only 13% of | | | | and/or industry regulations. An increasingly important |
| Software as a Service providers had "click-to-buy" | | | | certification in the online transaction business is the |
| functionality on their websites. And, amazingly 70% of | | | | Payment Card Industry Data Security Standard (PCI |
| web applications and on-demand companies do not | | | | DSS 1.1). |
| have an integrated billing solution. | | | | This worldwide data security standard applies to any |
| The State of the SaaS Market | | | | organization which stores, transmits or processes |
| The Software as a Service market is being driven by | | | | credit cardholder data. Because many hosted |
| a combination of ten macro-trends: | | | | application customers will acquire these online services |
| | | | via a credit card, it is essential that the SaaS vendor, |
| 1. Globalization | | | | or its hosting partner, have proper PCI procedures and |
| 2. Commoditization/Differentiation | | | | certifications. |
| 3. Mobility & Worker Dispersion | | | | In addition, many companies are still relying on hosting |
| 4. Consumerism | | | | companies that cannot consistently meet their |
| 5. Web 2.0 | | | | availability and performance promises. These vendors |
| 6. Social Networking | | | | are under the misconception that hosting is a |
| 7. On-Demand | | | | commodity business and can be taken for granted. |
| 8. Reliability/Security | | | | They fail to recognize that many general purpose |
| 9. Operational Efficiency | | | | hosting companies lack high-availability service delivery |
| 10. Out-tasking | | | | capabilities, comprehensive management systems and |
| Globalization has changed the competitive landscape | | | | proactive reporting mechanisms to support the "five |
| within nearly every major industry sector. Globalization | | | | nines" service standards necessary in the SaaS |
| has not only opened up new markets, it has also | | | | market. |
| opened the door to a new set of offshore | | | | As a consequence, the SaaS providers relying on |
| competitors offering low-cost products and services | | | | general purpose hosting companies are often notified |
| which is commoditizing many markets and creating | | | | by their customers when service outages occur. This |
| price competition. This commoditization is making it | | | | is no way to win and retain customer trust and |
| more difficult for companies to differentiate their goods | | | | confidence, and build a Software-as-a-Service |
| and services. | | | | business. |
| Worker dispersion and mobility is also allowing people | | | | In fact, falling short in any of these areas can have a |
| to work anywhere, creating new challenges for | | | | detrimental impact on the quality of the customer |
| companies seeking to give these employees access | | | | experience, harm customer satisfaction and lead to |
| to corporate applications and databases remotely and | | | | customer abandonment. Just as in the wireless service |
| securely. At the same time, many workers and | | | | business, customer churn can be very costly in the |
| corporate executives are becoming comfortable using | | | | SaaS market. But, with the plethora of online chat |
| on-demand, web-based solutions in their personal lives, | | | | rooms, reports of poor customer service travel faster |
| and are seeking the same ease of use and low cost | | | | and further in the market, seriously undercutting a |
| services to address their corporate and professional | | | | vendor's chances for success. |
| needs. | | | | However, most aspiring SaaS companies face |
| Business professionals have also become more | | | | escalating competitive pressures which require them to |
| comfortable using online services, such as and iTunes, | | | | focus their energies on building the best on-demand |
| in their personal lives. This positive consumer | | | | applications possible, rather than worrying about the |
| experience has set a new standard for the | | | | service delivery infrastructure and operational |
| ease-of-use they expect from their software | | | | processes which will support them. The subscription |
| applications in their professional lives. | | | | fee structure associated with web application delivery |
| Today's Web 2.0 and social networking tools are also | | | | also makes it difficult for companies to invest in their |
| being applied to the corporate environment, creating | | | | own service delivery infrastructure and support staff |
| new ways for dispersed workers to interact internally | | | | to address these issues. |
| and corporations to engage customers externally. | | | | How Application Delivery Companies Are Addressing |
| Growing dependence among companies to | | | | the SaaS On-Boarding Challenges |
| communicate internally and externally via the Web has | | | | Many vendors will have to turn to a third party hosting |
| also made them more aware of the escalating | | | | company for infrastructure or support. Application |
| challenges of delivering reliable and secure online | | | | hosting or delivery company must go beyond traditional |
| services. These pressures are intensifying as they | | | | hosting and managed services in order to maximize |
| attempt to gain greater operating efficiencies in an | | | | ROI for ISVs. The most up-to-date application |
| increasingly competitive market. | | | | management companies will provide an On-Demand |
| Organizations Turn to On-Demand Solutions to | | | | platform including an end-to-end set of services which |
| Overcome the Shortcomings of Legacy Applications | | | | enable Web application and on-demand companies to |
| The growing interest in SaaS solutions is also being | | | | more quickly and effectively develop and deliver their |
| driven by escalating frustration, among corporate | | | | online solutions. |
| executives and business end-users, with the | | | | Along with this inclusive set of services, hosting |
| fundamental shortcomings of traditional, on-premise | | | | companies should offer a payment and collections |
| software applications. | | | | processing solution to help web application and |
| This frustration is due to the fact that over half of | | | | on-demand companies overcome the challenges of |
| legacy software deployment projects take twice as | | | | billing for software delivered via the web. Ideal tools in |
| long or cost twice as much as originally estimated, and | | | | this niche would include--at a minimum--account |
| nearly a third of software projects are cancelled | | | | activation, pricing and rate implementation, accrual of |
| before they are completed, according to government | | | | usage information, invoice generation and delivery, and |
| studies. | | | | the processing of payments, collections, and service |
| The cost overruns continue after the deployment | | | | suspensions. ISV's should also seek a hosting solution |
| process is completed because maintenance and | | | | that would provide real-time account creation, user |
| management costs to keep traditional applications up | | | | authentication and authorization, activity tracking, pricing |
| and running can often be ten times the original license | | | | and rating, billing, and customer service that can scale |
| fee, according to AMR Research. AMR Research has | | | | to millions of users. This scalability and flexibility is |
| also found that the majority of legacy application | | | | something that application management companies |
| deployments which are completed are under-utilized. | | | | must provide in order for the delivery of the application |
| This is because many organizations over-provision | | | | to be successful. |
| their license agreements to simplify the procurement | | | | Application delivery and hosting companies also need |
| process. | | | | to provide ISVs and developers with comprehensive |
| In an increasingly competitive marketplace, companies | | | | analytics packages. This is also crucial to the success |
| cannot afford the inefficiencies of legacy applications. | | | | of a given application since it enables web application |
| Instead, a growing proportion of organizations are | | | | and on-demand solutions companies to obtain a wide |
| looking for new ways to acquire software functionality | | | | range of operational indicators to better manage their |
| without the added hardware and staff costs, and | | | | business and optimize their performance, such as: |
| ongoing administrative hassles of the past. | | | | - Bandwidth consumed |
| As a result of this rising customer interest, Gartner | | | | - Performance thresholds |
| predicts over 25% of all software sales will be via | | | | - Units consumed: Clicks, seats, downloads |
| services by year-end 2011, but it is likely that this | | | | - Sign-on rates |
| number will actually turn out to be far greater. | | | | - Customer churn |
| Maybe the clearest indication of the magnitude of this | | | | - Growth rates |
| shift toward software services came from Microsoft's | | | | - Advertising ROI |
| CEO, Steve Ballmer, who predicted at a gathering of | | | | - Feature utilization |
| public sector CIO's in March 2007 that 80% of their | | | | - Daily revenue run rates |
| organizations would be utilizing SaaS solutions by the | | | | Finally, its behooves ISVs to recognize that the |
| end of the decade. | | | | subscription fee model associated with SaaS can |
| The Challenges of Meeting the Varying Needs of | | | | represent a significant impediment for many ISVs who |
| Business Users in an On-Demand World | | | | are attempting to start-up and later scale their |
| The good news is that a growing number of | | | | operations. This makes success-based pricing models |
| organizations are willing to adopt | | | | advantageous for ISVs, since they would pay for |
| Software-as-a-Service to achieve their business | | | | application management services as they would |
| objectives. However, based on their consumer | | | | generate revenue from their SaaS solutions. This |
| experiences, they expect that they will be able to | | | | eliminates expensive investments in infrastructure and |
| easily acquire on-demand solutions via a simple online | | | | staff and reduces start-up risk. |
| transaction and immediately begin to utilize the online | | | | Summary and Conclusions |
| application to meet their business needs. | | | | As organizations become increasingly fed up with the |
| However, corporate demands can be far more | | | | costs and complexities of legacy applications, they are |
| complicated than consumer expectations. Many | | | | becoming more receptive to on-demand software |
| companies will want to try an application before they | | | | alternatives. The pervasive nature of on-demand |
| buy it. They may want to acquire a single user license | | | | services in the consumer world has also made |
| before making a commitment to an enterprise license. | | | | business professionals more aware of the potential |
| They may want to vary the number of users, number | | | | benefits of the alternatives emerging in online web |
| of application modules or level of usage. They may | | | | applications. |
| want to use the on-demand applications in business | | | | However, the ease of use and reliability of these |
| situations which require varying levels of security and | | | | consumer-oriented, web-based services has set a high |
| reliability. | | | | standard for the quality of service which corporate |
| The intensifying competitive landscape is creating | | | | users expect from their aplication solutions. They |
| greater pressure on aspiring SaaS vendors to deliver | | | | expect it to be just as easy to get on-board with |
| highly differentiated solutions at the lowest possible | | | | SaaS solutions as it is to acquire popular online |
| costs without sacrificing quality. Many of these aspiring | | | | services. ISVs seeking to become leading on-demand |
| on-demand solution providers have not fully considered | | | | vendors must implement procurement and provisioning |
| the complexities of delivering reliable and | | | | system which makes this possible. |
| cost-effective solutions. They often depend on viral | | | | Ironically, the pay-as-you-go subscription services |
| marketing and social networking tactics to grow their | | | | model associated with SaaS makes it difficult for ISVs |
| installed base of customers, but are not prepared for | | | | to invest in service delivery infrastructure, provisioning, |
| the variety of ways that potential customers might | | | | billing and reporting systems to fully meet the needs of |
| want to acquire their on-demand solutions. However, a | | | | their customers. Instead, ISVs must focus their limited |
| bad experience can reduce the likelihood of repeat | | | | financial and staff resources on designing web-based |
| customers and customer referrals. | | | | applications which are more compelling than their |
| Therefore, SaaS vendors must design the solutions to | | | | competitors. |
| maximize their ease-of-use and optimize the user | | | | As a result, smart ISVs are teaming with service and |
| experience. The quality of the user experience | | | | application delivery providers who can do more than |
| depends on the reliability and performance of a SaaS | | | | simply host their applications. They are looking for |
| provider's service delivery capabilities, as well as the | | | | providers who can help them design their applications |
| lifecycle of procurement, provisioning, metering, billing | | | | to ensure they are scaleable and secure. They are |
| and reporting components which are integral to the | | | | looking for providers who can monitor and manage the |
| service delivery process. | | | | applications 24x7. They are looking for providers who |
| Given the impact of escalating price competition within | | | | can help them provision and charge for their |
| the Software as a a Service market, it is essential for | | | | applications. And, they are looking for providers who |
| successful SaaS providers to have cost-effective | | | | can help them build a successful SaaS business in an |
| customer acquisition and application management | | | | increasingly challenging market. |