Editors Note: This story is part of Innovations 2006, a continuing series of stories from the reporters and editors of Ziff Davis Internet. Instead of the usual mile-high look at the year ahead, these articles examine particular technologies and markets in transition, including whats in store for them.
Software as a service has won such broad acceptance in the IT industry that it has entirely lost its identity as an experimental business model for software distribution.
As a result, SaaS companies and analysts expect that the business model will continue to become more mainstream as a diverse array of on-demand service providers continue to come into the market.
In 2006 “we should expect another year of solid growth and the reason for that is pretty apparent,” said Denis Pombriant, principal analyst with Beagle Research Group in Stoughton, Mass.
“I think that the idea touched a nerve” and more companies of all sizes are willing to try out software as a service.
“We are a long way from satisfying the demand that has been created” for hosted applications, Pombriant said. Many of the companies that started using hosted applications were small and midsize companies, he noted.
But now larger companies are starting to subscribe to hosted services as a way of possibly reducing their software licensing costs, he said. “We are only at the beginning of getting the large enterprises involved in this,” Pombriant said.
Even more significant is the growing diversity of SaaS applications that are appearing on the market. Its no longer just the familiar names in customer relationship management, such as Salesforce.com, RightNow Technologies Inc. or NetSuite Inc. that are vying for subscribers.
There are new companies “with new business models, new ideas and they are all going hosted,” Pombriant said.
Among the newer ventures is Five9 Inc. based in Pleasanton, Calif., which markets a hosted call center service that is based on voice over IP and runs as a platform for sales order, customer support and bill collection.
Five9 maintains a partnership with Salesforce.com for CRM services and Cary Fulbright, the companys vice president of marketing, is a former Salesforce.com marketing executive.
BlueRoads Corp. is a four-year-old company based in San Mateo, Calif. that focuses on CRM in the indirect distribution channel.
Pombriant thinks that BlueRoads is taking an innovative business model with its effort to bring CRM to the Channel.
Rearden Commerce Inc. is another promising on-demand software company that impresses Pombriant.
Rearden, based in San Mateo, has developed an on-demand services platform that links users to a variety of business or personal services, such as shipping, travel, Internet conferencing, dining and scheduling.
Patrick Grady, Rearden Commerce CEO, said that he prefers to think of his company as a Web 2.0 business that happens to deliver its services in a typical single-instance, multi-tenant, on-demand model.
The Rearden platform can link buyers and companies to key suppliers or link employees to essential services through a consistent interface that is designed to optimize ease of use and productivity, Grady said.
Reaching an Inflection Point
The platform tries to resolve the “state of diminishing returns” that business users face in having to access disconnected applications, Web sites and services that they need to use to perform their jobs every day, he said.
The platform can provide instant links to key service providers such as United Parcel Service, Federal Express or the U.S. Postal Service for shipping, local dining guides, travel reservation services and suppliers of all kinds.
These days, individual employees have more responsibility than ever for handling travel arrangements, conferencing and shipping rather than referring them a central office or administrator, Grady noted.
The Rearden platform is designed to give organizations better control over their service expenditures and help maintain relationships with preferred suppliers, thus improving employee productivity, he said.
Software industry entrepreneurs and venture capitalists are both strongly interested in SaaS in terms of the business value and potential return on investment it offers, said Drew Clark, co-founder and director of strategy with IBMs Venture Capital Group.
SaaS is appealing to entrepreneurs because “they dont have to go out and hire a direct sales force. They dont have to hire technical marketers to go out to demonstrate the product,” because they can do that from the hosted facility, he said.
As a result, Clark said the industry has reached “an inflection point in how software is delivered and consumed using the software- as-a-service capability,” he said.
This is also reflected in VCs investment decisions. “Several of our VC friends have told us recently that they really are only investing in new companies that bring their innovation forward as a service model,” Clark said.
SaaS and open-source software is a powerful combination because it allows new ventures to leverage the large community of open-source developers and the on-demand delivery model to bring new products to the market “at a very low cost.”
The combination is “dramatically driving down the cost of being able to get to your first beta or your first customer,” he said.
Clark cited the estimates of Joe Krause, founder of Excite Inc. and now the founder and CEO of the JotSpot Wiki workgroup collaboration service, who was able to launch his latest venture for only about $100,000, 30 times less than what it cost him to launch Excite.
These savings are passed on to software buyers in terms of lower license fees and because they dont have to invest in the IT resources to support the on-demand applications, he noted.
Certainly, for small and midsize businesses “2006 will be a huge year for the acceptance” of SaaS, Clark said. This wont necessarily be true for large enterprises, however.
“They have a lot of other issues, such as legacy integration and customization that might take a little bit longer to resolve,” he said.
Gaining Customer Acceptance
One of the premier proponents of SaaS, Marc Benioff, CEO of on-demand CRM company Salesforce.com in San Francisco, agrees with the view that SaaS has achieved a critical mass of acceptance.
“In 2006, more companies are going to be looking for on demand than ever before to try to move away from the [on-premise] software model,” Benioff said.
“I think that on-demand is just getting going…we are just at the beginning,” he said. But it has taken years of development work to get to this point, for Salesforce.com and other on-demand software ventures, he noted.
Benioff said he believes that office productivity software, such as word processors, e-mail and spreadsheets, will be the next application to be offered on demand.
There has been a significant shift in customer attitudes and their knowledge about SaaS over the past couple of years, said Stephen Savignano, CEO of Ketera Technologies Inc. of Santa Clara, Calif., which markets an on-demand corporate spending management application.
A couple of years ago, Ketera and other SaaS companies spent a lot time explaining the basic concept of SaaS and how it worked, he said. Potential customers had many questions about application hosting, data security, performance and reliability.
Now more frequently when Ketera starts this conversation, the customers “put up their hands up and say you dont have to explain that to me. Im already there. Thats why Im talking to you,” Savignano said.
Now, he said, customers want to know how the on-demand products will evolve and ask “what is the next generation of software as a service?”
However, Savignano contends that some customers are being confused by the established client-server application software vendors—which he calls “wolves in sheeps clothing”—that are now claiming to offer their products as on-demand hosted services.
Customers need to be careful to make sure that the applications are single-instance, multi-tenant applications, he said. Or they are offering the on-demand model as a way to enter the small and midsize corporate market while they continue to charge their large enterprise customers exorbitant software license and maintenance fees, he said.
Customers are moving to on-demand SaaS applications because they can get out from under these fees with a service that is provided at manageable per user costs and with guaranteed service level agreements.