SaaS: the business solution

I have been reviewing quite a lot of material recently regarding Software-as-a-Service (SaaS):

  • First, the pros and cons of SaaS as it applies in the construction collaboration market have been debated by NCCTP members for an article to be published in a supplement to UK trade magazine “Building” next week.
  • Second, I received an email from Chris Perrine of Springboard Research regarding its latest research into the state of the SaaS market in Australia and New Zealand (ANZ).
  • Third, Phil Wainewright has written a withering critique of remarks made by Oracle president Charles Phillips on a recent trip to London.
  • Finally, thanks to the Autodesk staffers’ blog Connected, I was directed to an excellent white paper (PDF) from the Software and Information Industry Association (SIIA) on total costs of ownership as it applies to SaaS.

The forthcoming ‘Building’ NCCTP article is only short and tries to reflect vendors who are pure SaaS and those who also promote self-hosted solutions. Such an article is inevitably something of an uneasy compromise and so cannot convey the full range of arguments and counter-arguments. The other items I have read this week present a strong business case for SaaS over locally-hosted IT solutions.

The Springboard research, for example, reflects advice and global trends reported by Mckinsey, Gartner and Saugatuck (among others), indicating greater awareness of SaaS and forecasting dramatic growth in the SaaS market. Springboard forecasts the ANZ SaaS market will “have a compound annual growth rate of 65% and will reach AU$506m (that’s around US$418m or £207m) by 2010.

Why is SaaS making such inroads? Springboard’s Phil Hassey points out: “As maintenance costs go down with SaaS, enterprises have found a spin-off benefit with the opportunity to cut down on expensive in-house or outsourced IT personnel, compared to the traditional software model where implementation and software upgrades cost more money and time.”

Interestingly, some business users are sidestepping the IT team; in many instances, Springboard says, “SaaS applications are being used without the involvement or knowledge of the IT department, as business users find it easy to subscribe to and deploy SaaS.” Ease of deployment, ease of use and management, and zero/low maintenance were all factors driving the use of SaaS and were more influential than pricing.

Wainewright v. Oracle
In “Oracle’s misconceived SaaS strategy”, Phil Wainewright takes issue with four Oracle assertions regarding SaaS. I particularly enjoyed his dissection and rebuttal of Phillips’ views on multi-tenancy, and on ownership of software – as he quite rightly points out: “What customers really want to own is their business processes, and the SaaS model gives most customers much more effective day-to-day control than any conventional software package.”

The SIIA white paper was published a year ago (September 2006) and its executive summary begins with a Gartner claim that:

“the annual cost to own and manage software applications can be up to four times the cost of the initial purchase. As a result, companies end up spending more than 75% of their total IT budget just on maintaining and running existing systems and software infrastructure.”

SaaS, of course, offers an alternative approach:

"The Software-as-a-Service (SaaS) revolution allows companies to subscribe to software applications and outsource operating the back-end infrastructure to the SaaS vendor. In most cases, the SaaS vendor can do this much more cost effective; providing overall cost savings for the company. As a result, companies can spread their IT budget across many more applications to support and grow their business operations which will in turn contribute to the bottom line.”

The white paper is a very useful introduction to the SaaS concept (chapter 3 gives a succinct explanation of why SaaS is different to application service provision, ASP, while chapter 5 features an interesting discussion on the extent to which IT should support an organisation’s non-core activities), but the real meat in the document comes in the chapters (7, 8 and 9) that focus on the TCO discussion. The executive summary says:

“Software and hardware costs are well understood but the people resources associated with traditional software applications are often underestimated or omitted in a TCO analysis. As a result, the usage driven subscription cost of SaaS applications can seem to be the more expensive solution over a multi-year period. However, when these people resources are correctly associated, deploying a SaaS application becomes – in many cases – the more cost effective option.”

This is backed up (in chapter 6) by examples drawn from analysts such as Gartner and IDC (even Microsoft are quoted as saying “the initial purchase is usually only 5% of the total cost of owning and maintaining a program”) and by analysts’ views on email and groupware applications.

Countering the argument (also presented by at least one NCCTP member in an initial draft of the article) that “even with the higher upfront costs, there is a break-even point where traditional software becomes much cheaper than the SaaS subscription model,” the SIIA refers to research from IDC which showed that “when people resources and cost of upgrades are correctly taken in consideration, this break-even point may never be realized.”

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