Business Two Zero

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SaaS - the insider’s guide

by David Terrar @ 11:51 on October 11, 2006.

This is BTZ’s Software as a Service Insider’s Guide and resource page, which explains the terminology, the importance and characteristics of the sector, and then links to some of the solutions and resources available for you to find out more.

What is Software as a Service?

Traditionally, companies would either make or buy the business applications they needed to run their operations, along with the necessary hardware infrastructure installed at their offices. Even a small business with a few PCs needs to find somebody in their organisation to take on the role of the IT Manager – to install the applications, manage the new versions that come from the author at regular intervals, to make sure the systems and data are regularly backed up and stored securely off-site, to think about a disaster recovery plan – all the necessary technical and management issues that can rise to a significant overhead in any company and need a large team in bigger organisations. This is the traditional or “on premise” approach to buying software.

Software as Service is the term for a new delivery model that is changing the balance of power in the software industry from the vendor towards the customer. Well actually the approach isn’t that new. In 1961 the respected Computer Scientist John McCarthy was the first to publicly suggest (in a speech given to celebrate MIT’s centennial) that computer time-sharing technology might lead to a future in which computing power and even specific applications could be sold through the utility business model (like water or electricity).

To explain the term properly, we need to also explain some related jargon. Software as a Service (SaaS), Application Service Provider (ASP), On-Demand applications, are all variants of hosted or managed services. What they all have in common is that the end user has access to applications through a web browser and an Internet connection, and somebody else is taking on the headache of IT management. However, ASP generally refers to the company hosting and managing the software – they could be providing managed applications, or they could take over the management of existing traditional software. They often use an extra layer of software (such as CITRIX) to “web enable” traditional Windows or Client/Server software so it can be accessed by a browser.

What’s the difference between SaaS and ASP?

There are two key differences between ASP and SaaS. First, the better SaaS providers have architected their solutions from scratch for Internet access, and so they are easier to use, more scalable, and provide better performance. The second is that their whole business model is based round a utility style, “pay as you go”, subscription approach, whereas the ASP provider still has to licence traditional software and middleware, which means they will usually be more expensive and though they charge monthly, they often make the customer commit to a 3 to 5 year contract. The difference in business approach is fundamental, and covers all aspects - from the way you commission and pay your sales force, through the way the way you provide support, and develop the product. SaaS providers are used to a much shorter release cycle - monthly or even weekly compared to the traditional software provided by an ASP, which will typically be 12 to 18 months between new versions.

Importantly, because the SaaS provider is “pay as you go” they have to focus on customer service every day because the customer isn’t tied in quite the same ways as “on premise” or traditional software and could easily take their data and switch to another provider - the vendor takes the risk on the service bein successful. This is very different to either ASP or traditional software, where the risk is balanced towards the customer, because they pay up front for the project, or sign a long contract. This is the difference between the likes of Twinfield, Salesforce.com or NetSuite compared to companies like Online50 or other ASPs.

Wikipedia adds to the differentiation:

“ASP versus SaaS
The reason for moving away from the term ASP or Application service provider is that the ASP generation was merely traditional client-server applications with HTML frontends added as an afterthought. These applications were hosted by third-parties who ordinarily did not have application expertise, but were managed servers. Because the applications were not written as net-native applications, performance was poor and application updates were no better than self managed applications. By comparison, current net-native SaaS applications or independent portions are updated regularly, many daily.

This gradual shift in the terminologies also is a direct reflection of the change in the business requirements demanded by clients. The focus in SaaS is more on what the customer wants rather than what the vendor could give as was the case in an ASP.”

What is On-Demand?

The On-Demand term could be applied to either type of solution, and really refers to the deployment model. It is another term for the Utility computing approach where computer resources are provided on-demand on a “pay as you go” basis. Because the term is more easily recognised than SaaS, some providers use the term regularly in their marketing. Additionally, the providers who have older client/server products delivered with an ASP approach are using the On-Demand term in their marketing because they can’t present their solution as true SaaS, and they want to avoid using the ASP term. As well as highlighting their different approach, the term is often associated negatively with the rapid rise and fall of some ASP companies in the dot-com bubble of 1997-2001.

Why is SaaS important?

In a new report, analysts from research firm Gartner said Software as a service will constitute 25 percent of new business software delivered by 2011. IDC has forecast the global software as a service market which will be worth $11 billion over the next three years. Whoever you listen to, the important message is that SaaS based solutions are becoming a regular, mainstream choice in many markets and sectors.

SaaS Providers

NetSuite
RightNow
Salesforce.com
Twinfield
Winweb

The Saas Showplace has very complete directory of SaaS providers by Application category.

Further BTZ reading on SaaS

Software as a Service Myths and Legends
SaaS vs Traditional Software TCO - important, new SIIA white paper
Is Enterprise Software doomed? - Update