SaaS–What is it and why is it important to you? Jie Liu, Ph.D. Professor Department of Computer Science Western Oregon University
What is SaaS
Software as a service (SaaS 撒 4 丝 ) is a software distribution model in which applications are hosted by a vendor or service provider and made available to customers over a network, typically the Internet.
Shortly, in the SaaS model software is deployed as a hosted service and accessed over the Internet, as opposed to “On Premise.”
The traditional model of software distribution, in which software is purchased for and installed on personal computers, is sometimes referred to as software as a product .
SaaS Characteristics and Benefits OpSource -- Treb Ryan
In the traditional model of software delivery, the customer acquires a perpetual license and assumes responsibility for managing the software.
There is a high upfront cost associated with the purchase of the license, as well as the burden of implementation and ongoing maintenance.
ROI is often delayed considerably, and, due to the rapid pace of technological change, expensive software solutions can quickly become obsolete.
Revenue Options For SaaS Firms
Subscription (monthly fee per seat)
Transaction based pricing (like credit cards)
Ad-based revenue (e.g. pay per click)
Lower Cost of Ownership
The software is paid when it is consumed, no large upfront cost for a software license Salesforce.com has a best-of-breed CRM system for $59.00 per user per month, with no upfront
Since no hardware infrastructure, installation, maintenance, and administration, budgeting is easy
The software is available immediately upon purchasing
Focus on Core Competency
The IT saving on capital and effort allows the customer to remain focused on their core competency and utilize resources in more strategic areas.
Users can use their applications and access their data anywhere they have an Internet connection and a computing device
This enhances the customer experience of the software and makes it easier for users to get work done fast
Freedom to Choose (or Better Software)
The pay-as-you-go (PAYG) nature of SaaS enables users to select applications they wish to use and to stop using those that no longer meet their needs. Ultimately, this freedom leads to better software applications becaus vendors must be receptive to customer needs and wants.
New Application Types
Since the barrier to use the software for the first time is low, it is now feasible to develop applications that may have an occasional use model. This would be impossible in the perpetual license model. If a high upfront cost were required the number of participants would be much smaller.
Faster Product Cycles
Product releases are much more frequent, but contain fewer new features than the typical releases in the perpetual license model because the developer know the environment the software needs to run
This new process gets bug fixes out faster and allows users to digest new features in smaller bites, which ultimately makes the users more productive than they were under the previous model.
Additionally, it is not necessary for the customer to continually upgrade the software. Each time the user accesses the software, it is the “latest and greatest” version that’s available.
Increased Total Available Market –
Lower upfront costs and reduced infrastructure capital translate into a much larger available market for the software vendor, because users that previously could not afford the software license or lacked the skill to support the necessary infrastructure are potential customers.
A related benefit is that the decision maker for the purchase of a SaaS application will be at a department level rather than the enterprise level that is typical for the perpetual license model. This results in shorter sales cycles.
Enhanced Competitive Differentiation
The ability to deliver applications via the SaaS model enhances a software company’s competitive differentiation. It also creates opportunities for new companies to compete effectively with larger vendors. The tangible value that customers can realize from the SaaS model versus the perpetual license model is a compelling selling point.
On the other hand, software companies will face ever-increasing pressure from their competitors to move to the SaaS model.
Those who lag behind will find it difficult to catch up as the software industry continues to rapidly evolve.
Lower Development Costs & Quicker Time-to-Market –
The main saving is at testing (35%).
Small and frequent releases – less to test
Application is developed to be deployed on a specific hardware infrastructure, far less number of possible environment – less to test.
This, in turn, provides the software developer with overall lower development costs and quicker time-to-market.
Effective Low Cost Marketing
Between 1995 and today, buyers’ habits shifted from an outbound world driven by field sales and print advertising to an inbound world driven by Internet search. The SaaS delivery model is perfect for marketing programs that exploit this shift.
Predictable MRR Revenue
Traditionally, software companies rely on one major release every 12-18 months to fuel a revenue stream from the sale of upgrades (long tail theory). This puts a lot of pressure on the organization to hit an arbitrary date to meet corporate financial commitments.
In the SaaS model the revenue is typically in the form of Monthly Recurring Revenue (MRR), which is far more predictable and less tied to the development schedule of the next release of the software.
Improved Customer Relationships
SaaS contributes to improved relationships between vendors and customers. In the traditional model once the software is sold, it is largely up to the customer to make it work. The SaaS model creates a more symbiotic relationship between vendors and customers and provides vendors with greater opportunities to please their customers
Protecting of IP
Difficult to obtain illegal copies
Price is low, making getting an illegal copies totally unnecessary
Bill Gates and SaaS
In a now legendary 1995 memo, bill Gates raised the alarm that Microsoft was unprepared for what he termed the “Internet Tidal Wave.” Fast forward 10 years to last October, Gates blasts out another high-priority e-mail, this time warning of a coming “services wave” of applications available instantly over the Internet. “The next sea change is upon us,” he writes.
What referred as “services wave” are represented by Web 2.0, SaaS, and SOA
Why SaaS will be successful
The IT industry is notorious for promoting new technologies with limited real-world value in search of a market. At the same time, there have been many worthwhile innovations that have failed to win widespread industry acceptance because they couldn’t be easily adopted.
SaaS isn’t just another IT fad that will fade away because it doesn’t fulfill its promise. Instead, there are a growing number of enterprises of all sizes that are generating measurable cost savings and performance improvements as a result of adopting SaaS.
This track record of success is accelerating the rate of adoption and expanding the range of applications that are being converted to the SaaS delivery model. It is also dramatically changing the competitive landscape of viable SaaS providers.
Relative startups, such as Salesforce.com, RightNow, and others, are now viewed by customers as equal or even superior to the far more established and historically more powerful major ISVs, system vendors, and outsourcers.
Why SaaS will make it
First, the shift to SaaS 2.0 is being driven increasingly by the acceptance of SaaS as a viable software delivery model. Saugatuck survey indicate that, as of Q1 2006
12% of U.S.-based companies are using SaaS applications
13% designing, prototyping or implementing their first SaaS application
14% percent are planning to do so later in 2006 or in 2007.
Second, SMBs will lead SaaS 2.0 adoption .
Saugatuck's latest research highlighted the "tipping point" toward accelerated SMB adoption in 2006-2008.
Most importantly, SMBs are now embracing SaaS for mission-critical workloads at twice the rate as large enterprises.
Third, due to the highly decentralized and fragmented procurement model of SaaS (often sold to business rather than IT buyers), Saugatuck found that most executives substantially underestimate current SaaS deployment and usage, suggesting that the penetration rates noted above might be very conservative.
Recent Sarbanes-Oxley compliance audits at two very large firms revealed that they had, respectively, 22 and more than 45 actively-deployed SaaS applications. Prior to the audits, they both believed that they had less than 10 actively deployed SaaS applications.
Two major business models are vying for an growing share of software spend: Software as a Service and Open Source.
Although the market size for SaaS was relatively small ~$6 billion in 2005, it is poised to grow more than 20 percent annually.
SaaS has already gained traction in number of application areas and should make gains across a much broader cross-section of applications over the next 3 years.
Out of 34 application areas we have examined, only nine are unlikely to see some SaaS adoption over through 2008
S O F T W A R E 2 0 0 6 I N D U S T R Y R E P O R T - SAND HILL GROUP
SaaS adoption by segment – Enterprise S O F T W A R E 2 0 0 6 I N D U S T R Y R E P O R T - SAND HILL GROUP
Change In IT Spending SaaS COGS (Cost of goods) represents amount going to infrastructure hardware, software and head count
CUSTOMER ADOPTION OF SaaS GROWING FAST Cutter Consortium – WW later 2005
Why Going SaaS Cutter Consortium – WW later 2005
A Look Ahead
The numbers show that SaaS is a far more attractive economic model than the perpetual license model.
Over the next 3 to 5 years, the sharp distinction between SaaS and traditional software models will blur. Traditional vendors will introduce and expand their SaaS offerings.
SAP recently announced their On-demand CRM and Marketing solutions.
Oracle inherited the on-demand business of Siebel.
The enterprise software market will see more offerings from these and other vendors based on SaaS.
What will distinguish the winners from the losers will not be the model itself but how the model is executed.
Open new markets, revenue streams, and distribution channels
Provide a stable, recurring revenue model
Afford consolidation of development and support efforts around single versions of code
Earlier days – the first step – we are only mirroring the existing software (Tim Chou)
Understand your business objectives and definition of a successful outcome (idea)
Select and staff your services delivery team (people)
Define and understand the infrastructure needed to deliver your SaaS application (hardware)
Select your hosting facility and Internet Service Providers (ISPs)
Procure the infrastructure and software required to deliver your SaaS application (security your platform)
Ready to Run
Deploy your SaaS delivery infrastructure
Implement disaster recovery and business continuity planning
Integrate a monitoring solution
Establish a Network Operations Center (NOC), Client Call Center and ticketing system
Design and manage Service Level Agreements
Document and manage the solution while open your business
Want to start one? Capital Considerations
“ It takes 70% to 100% more capital to fund a SaaS company to break-even than a traditional perpetual license company. It also takes 2 to 3 times longer to get there .”
SaaS companies need an average of $35M in VC capital, versus $20M for a similar perpetual license company.
It takes 6 to 7 years to get to break even
Public equity markets pay a 10% to 20% premium for predictable revenue streams
SaaS companies move faster than big companies. They can introduce new features instantly versus waiting for the next major release. Think years.
SaaS requires an architecture that supports end user customization
Industry standards are critical for interoperability
Steady state business models require 15-18% for engineering and 30-35% for Sales and Marketing.
Michael Skok of North Bridge Venture Partners
Key Architectural Considerations
Scale the application
Scaling the application means maximizing concurrency and using application resources more efficiently – optimizing locking duration, statelessness, sharing pooled resources such as threads and network connections, caching reference data and partitioning large databases are examples of best practices for scaling applications to a large number of users.
Scale up and scale out
Enable multi-tenant data
The single-tenant data models of many existing on-premise applications constrain running application instance to only use operation and business data owned by a single organization. In a multi-tenant SaaS environment, this application instance and data ownership binding must be relaxed. For example, when a user from Acme is accessing customer information using a CRM application service, the application must be able to retrieve the customer data for Acme and not for any other companies. In order to enable multi-tenancy, the underlying application data model must be designed to accommodate flexibility for manipulating tenant specific data.
Sharing resources (One instance to run them all)
Many SaaS customers will want to customize the application services they subscribe to. Altering workflows, extending business documents, modifying business rules and customizing brands, logos and user interfaces are all within the plausible realms of application customizations. The challenge for the SaaS architect is to ensure that the task of customizing applications is simple and easy for the customers, yet at the same time, not incur extra manual development or operation costs for each customization. Expect meta-data to play a big part in SaaS solutions.
Customization through configuration
SaaS Maturity Levels ASP Minimum starting point
High Level Application Architecture
Want to start one ？ Other Considerations
Three key points of caution for users and vendors alike:
First, the relatively low ranking of "pre-existing vendor relationships" as a key priority among executives that we spoke to when selecting SaaS providers (10th on a list led by Price, TCO, Ease of doing business and Vendor Reputation) should be viewed as an important warning signal to existing software vendors.
Second, in our judgment SaaS providers need to be careful not to apply a one-size-fits-all deployment and licensing model for all customer segments.
While a completely leveragable framework might work well for SMBs, large enterprises will have much more demanding requirements for flexibility in how they want to deploy, pay for, upgrade, integrate and customize their SaaS applications.
Third, building effective sales channels (Systems Integrator , Independent Software Vendor, and VAR) will be critical to SaaS adoption growth, as companies will still require significant application and data integration with their IT environment. Non-traditional channels (e.g., banks, telcos, web portals) will become key success factors for many SaaS solution categories, especially when targeting SMBs.
Integrate into existing enterprise applications, architectures, and databases.
Supporting complex business processes and cross-enterprise tasks is beyond current products.
Protecting their proprietary data
How is the data protected from unauthorized access?
How is the customer assured access to the data?
How much effort is necessary to migrate data back to the enterprise or to another SaaS provider?
Cutter Consortium – Kaplan
Future of SaaS
Media and Content as a Service: MCaaS
Media distribution as a service
Any digital content
SaaS as a Service: SaaSaaS, SaaS2
VARs sell and manage SaaS packages
More importantly – SaaS 2.0
SaaS 2.0 Again From Saugatuck
Secure, flexible and efficient business processes and workflow. While cost effective software delivery and TCO have been key to the success of SaaS 1.0, the business drivers for SaaS 2.0 will be about helping users transform their business structures and processes. In this way, SaaS 2.0 has the potential to have much in common with Business Services Provisioning.
Service level agreements: While SaaS 1.0 offerings have delivered service level improvements in many cases, SaaS 2.0 will provide a much more robust infrastructure and application platform driven by Service Level Agreements (SLAs). This is fundamental due to the increasing focus on business mission-critical application delivery.
Rapid achievement of business objectives. Rather than SaaS being positioned and sold as a rapid implementation and deployment environment, SaaS 2.0 is much more about the rapid achievement of business objectives. In this sense, it is very clear that SaaS is not about the technology. The nuts and bolts infrastructure and application functionality that make up a solution is becoming much less important, while the business results that can be achieved and "getting the job done" are increasingly paramount.
Value-added business services. As core horizontal business application functionality delivered via SaaS becomes commoditized, vendors and service providers will increasingly differentiate with an array of value-add business service plug-ins (both programmable and non-programmable). In this way, SaaS 2.0 will deliver a blend of business process, application functionality, and managed services at an operational level. Effective management of the usage and benefits of such services requires consulting and analytics - delivered as part of the overall SaaS bundle. SaaS Integration Platforms (SIPs) will emerge as vendors, consultancies, and VARs learn how to bundle and deliver these critical, value-added capabilities.
Business impact via SaaS "Network Effect." Saugatuck defines the network effect of SaaS 2.0 as a cascading and radiating impact of business improvement and change within, across, and beyond the user enterprise. In other words, SaaS 2.0 deployment increases and improves choices, efficiencies, effectiveness, and business capabilities within the user enterprise, and between the enterprise and its suppliers, customers and business partners. New business opportunities emerge as a result of SaaS adoption and integration into user business operations.
Low-cost "white-label" vertical solution stacks. The business and technological flexibility and managed services aspects of SaaS 2.0 will engender a slew of custom, vertically-oriented solutions that will be used by SMBs, including firms below the 1000-employee/$250M revenue line (that have often eluded enterprise application vendors). When enterprise vendors begin delivering such SaaS 2.0 solutions, VARs - long the SMB channel of choice for enterprise vendors - will increasingly view those vendors as direct competitors. While many VARs will continue to act as channel partners, providing local/regional service and support - others will build or re-label competitive SaaS 2.0 vertical solutions, often using open source-based software and SOA standard components to reduce development costs and improve standardization and adaptability for customers.
SaaS Integration Platforms provide application sharing, delivery and management services. As users add SaaS applications over time, SIPs will play a critical role (especially in large enterprises) as a solution "hub" that provides integration, delivery, and management services. While IBM and Microsoft are well suited to this task, a number of emerging players are already well positioned, including offerings from Jamcracker (Pivot Path), OpSource (Optimal On-Demand), and Salesforce.com (AppExchange) - as did the recently-defunct Grand Central Communications that was heavily focused on providing a web services-based SaaS development and integration platform. On top of this are a long list of point solutions and management offerings across the entire technology stack.
SaaS Market S O F T W A R E 2 0 0 6 I N D U S T R Y R E P O R T - SAND HILL GROUP
Properties of SaaS Technologies
Will have to be priced based on usage
Will need to be able to leverage multiple SaaS offerings
Open Standards Based Technologies
Uptime will be key
OpSource -- Treb Ryan
Software-as-a-Service (SaaS) is one of the most compelling and challenging IT and business innovations of the past two decades (Saugatuck).
SaaS is now at a critical “tipping point” between the current generation of software
functionality delivered as a service (what Saugatuck calls SaaS 1.0), and the
emerging generation of blended software, infrastructure, and business services arrayed
across multiple usage and delivery platforms and business models (what Saugatuck
calls SaaS 2.0).
That intelligence, and Saugatuck analysis, indicates that SaaS is beginning to shift
from a pure software application delivery scheme to a very sophisticated usage and
delivery model for business process functionality.
Saas is entering a period of accelerated adoption, driven by the acceptance of SaaS as a viable software delivery model by the SMB market.
Traditional business drivers such as efficiency and customer service
are clearly leading SaaS customer adoption . SaaS adopters have been
primarily seeking to reduce software costs and improve service levels for business applications. But, adopters are increasingly discovering SaaS
offers additional flexibility, customization, and configurability for specific
business or market conditions.
Large enterprises have been the most prevalent early adopters of SaaS,
as they seek to supplement existing enterprise applications and support
♦ Over the past few years, SMBs have been more cautious in SaaS adoption,
with many taking a “wait-and-see” attitude. However, SMB executives
are now leading the SaaS adoption charge (2006-2010), and
are embracing SaaS as a business critical, strategic investment at twice
the rate than larger enterprises.
♦ SaaS 1.0 is characterized by horizontally-focused applications with
web-services-based front ends and multi-tenant data models on the
back ends. Multi-tenancy allows for economies of scale that were previously
unavailable under the single-tenant application hosting model.
♦ Due to its highly decentralized procurement model, most user executives
substantially underestimate how many applications are already in
use in their companies today.
Key market drivers will evolve from today’s cost-effective software management solutions
(SaaS 1.0) to enabling companies to change how they do business (SaaS 2.0).
♦ SaaS is now entering a period of accelerated market adoption (or a
“ tipping point”). SaaS 2.0 will incorporate advanced SOA and business
process management technologies to provide richly configurable
applications with robust application and data integration capabilities ,
along with improved workflow.
♦ The business drivers for SaaS 2.0 will be about helping users transform
their business structures and processes , and the way they do
business. In this way, SaaS 2.0 has the potential to have much in common
with Business Services Provisioning .
♦ With this shift, it is very clear that SaaS is not about the technology .
The nuts and bolts infrastructure and application functionality that
make up a solution is becoming much less important, while the business
results that can be achieved and “getting the job done” are increasingly
♦ SMB executives are embracing SaaS as a business-critical, strategic
investment at twice the rate than are executives of larger enterprises.
Further, SMBs have a higher propensity to adoption application that
are database-driven, and that support a highly distributed workforce.
♦ While human resources/benefits administration, travel services, and a variety
of core back-office and financial functions have led the way thus far
The relatively low ranking of "pre-existing vendor relationships" as a
key priority when selecting SaaS providers (10th on a list led by Price,
TCO, Ease of doing business and Vendor Reputation) is an important
warning signal to software vendors .
♦ While a one-size fits all deployment and licensing model (founded on
the principals of net-native, pay-for-service, multi-tenancy) works well
for SMBs, large enterprises will have much more demanding requirements
for flexibility in how they want to deploy, pay for, upgrade, integrate
and customize their SaaS applications.
♦ Improving system price performance, as well as accelerating SOA,
open source and utility computing adoption will all have a multiplier
effect on SaaS 2.0 growth.
♦ Accelerated adoption of SaaS will further be driven by the establishment
of credible and advanced advertising-supported revenue models.
Customers and stakeholders will discover that the business impact of SaaS is
heightened by the SaaS “Network Effect” - the use of one common solution
across many market participants, introducing new economies of scale and opportunities
to improve business performance.
• “ White-label” vertical SaaS solution stacks will come to be the primary vehicle for
SMBs to access business functionality – especially for “small” enterprises. Saugatuck
expects numerous new entrants to bring solutions of this nature to market.
• Sales channels (SI, ISV and VAR) will be critical to SaaS adoption growth, as companies
will still require application and data integration with their IT environment.
♦ Non-traditional channels (e.g., banks, telcos, web portals) will become
key success factors for some SaaS solution categories.
• SaaS Integration Platforms (SIPs) – solution hubs that provide application
sharing, delivery, and management solutions – will become critical to broader
♦ Three or four dominant SIP Master Brands will emerge by 2010, and
will manage more than 30 percent of core SaaS offerings to users.
Monitoring and billing capabilities of these platform providers will
enable increasingly attractive pricing.
♦ Further, these capabilities will create such value-added services as analytics,
domain-specific best practices consulting, and business processspecific
♦ Ultimately, it will be large enterprises that demand richer SaaS integration
and management services for the increasing complexity and
mission-critical nature of SaaS 2.0.
• Software vendors face a fundamental rethinking of how they are organized,
how they build software, and how they go to market. This will affect vendors’
core strategies and frameworks around product architecture, product management,
pricing, licensing and sales models, as well as customer care.
Why SaaS will be successful where ASP failed
Today, more than half are already using at least one SaaS application.
This time, customers understand that for many SaaS applications, what you see is what you get.
Business Models: Early ASP business models (if they had one at all) ignored reality. They emphasized technology (what the ISVs understood) and played down (or ignored) issues like marketing and profit margins. Today’s SaaS providers make use of hosting partners who can manage large data centers with economies of scale and offer the synergy of providing customers with a portfolio of applications.
ISV Offerings: An individual ISV generally offers only his own application. But today there are many ways to be more appealing. We like double-dipper Intacct which hosts their application on IBM’s SP infrastructure (IBM has a portfolio of SaaS offerings) and then they provide their offering on the SalesForce.com site, providing exposure to a growing audience. (SalesForce.com users employ Intacct on an IBM site, although they would be unlikely to notice.)
SP Offerings: SPs have learned that their job is to provide great infrastructure and first level support – and then to look for a way to differentiate themselves. (Early SPs tended to all look alike.) An SP might collect ISVs who sell to a particular vertical market, so that the could offer a complete portfolio and focus marketing efforts. Or an SP might provide some level of integration among applications or provide a platform for offering higher level function on top of his own (or a partner’s) offering.
The complete list of myths on SaaS
Customer loses control
Security is a problem
Difficult to integrate
SaaS is Risky
Hosted is only good for small businesses and projects
Costs more over time
Service could be poor with a SaaS
SaaS companies have an unproven business model
SaaS companies are competitive with the IT organization