May 25, 2009, 9:51 AM — Software-as-a-Service (SaaS) has gone from a curiosity to the mainstream in just a few years as businesses turn to the technology to take advantage of the inherent economies of scale. Yet that's only the beginning.
The reality is that businesses have just begun to leverage the real power of SaaS to transform the way they work, compete and survive. With thousands of companies using the same solution every day, SaaS companies can develop new applications and intelligence solutions that would be impossible to deliver in a software or managed service environment.
After all, in a traditional, on-premise software environment, the vendor is far removed from the customer and has little insight into their day-to-day challenges. They cannot foresee important shifts in client businesses that will foretell future needs and remain more or less in the dark about how they can truly add value for clients. The result: Much needed functionality often does not emerge until a dire need bubbles to the surface. This lack of agility can cause irreparable harm to a client's competitive position.
And it is no picnic for the customer, either. Unless the customer is a major player, it has little clout when it comes to requesting changes from software providers.
SaaS analyst Jeff Kaplan of Thinkstrategies says, "companies that purchased legacy applications are denied the benefit of keeping pace with innovation in two ways. First, there is no mechanism for the customer base to contribute feedback to vendors in an effective fashion. Second, they often are leery of software upgrades for fear of disrupting their business. In a SaaS environment they needn't worry about that because all customers are working off essentially the same code base. Moreover, the iterative process of code updates in a SaaS environment alleviates business disruptions, enabling customers to benefit from enhancements immediately."
It's also important to note that SaaS providers today recognize they're in the service business, not the software business. Every aspect of the software development process is about taking responsibility for the client's success, as opposed to past models in which a vendor built a product and imposed the burden of success on the client."
Operating in a vacuum
According to a report from Forrester Research, TechRadar for Sourcing & Vendor Management Professionals: Software as a service, about 21% of enterprises are piloting or already using SaaS, and another 26% are interested in it or considering it.
Many businesses that initially held back on deploying SaaS for fear of losing their ability to customize the tools have realized they made a poor tradeoff. Often the customizations they created did not deliver the desired business benefits they were hoping for, and many times they actually hindered the organizations, making them more vulnerable to reliability problems and cost overruns.
By modifying software to meet one very specific environment, they boxed themselves in and cut off opportunities to benefit from the lessons learned (and enhancements gained) by their peers. In these turbulent times, that model is simply not practical.
A future-proof relationship
Alternatively, in a SaaS environment, the SaaS provider is intricately tied to the success of its customers. They're working with users every day, gaining essential real-time feedback about how software functionality is being applied in myriad real-world settings. They're learning the ins and outs of their clients' businesses and shifting their service and support accordingly.
Today, SaaS providers and users alike are beginning to realize a strategic advantage from the symbiotic SaaS relationship that goes well beyond cost-cutting measures. In a traditional software model, if one customer innovates, no one else can truly benefit. In the SaaS model, all new capabilities are immediately accessible to the rest of the customer base. This could include taking advantage of existing integrations built by the SaaS provider or new functionality developed for one client and extended to the greater user community.
What's more, the collaborative SaaS environment, born out of the open source community movement, cultivates continuous enhancements that make for ease of use, lower cost, faster time-to-value and fewer risks.
As SaaS matures, we're seeing providers evolve through three "waves".
Wave 1: Replace mature, single tenant software applications – The early players in SaaS got started by finding applications ripe to be delivered as a turn-key business service in a multi-tenant environment. Most early success among SaaS providers was just that: Taking an existing piece of software and finding a better way to deliver it.
Wave 2: Apply SaaS model to solve new problems that were impractical for existing mature single tenant software applications -- Once these firms created an initial foothold, many realized that the SaaS model itself had inherent advantages for solving problems that could not be tackled in a traditional software model. They leveraged a common, centrally hosted architecture to get multiple companies working together, often across the globe, to solve a common business process.
Wave 3: Leverage "by-products" of SaaS business to launch new, higher value services -- Now SaaS companies are realizing their whole business model actually produces assets that are quite valuable. Providers have a clear picture of how their software is being used. Over time, they can aggregate data collected through these interactions and report back to customers, giving them unprecedented insights into their individual performance as well as industry-wide benchmarks.
By leveraging the information assets produced as a byproduct of the SaaS provider's business, SaaS customers can gain access to an unprecedented wealth of knowledge that would otherwise not be available. If leveraged wisely, this information is enormously powerful for developing new functionality, providing greater efficiencies and adapting to emerging needs.
Ultimately, SaaS ensures that providers are tightly connected to the success of their users. For the first time, customers have a seat at the table in directing their software road map. They can not only capitalize on a wealth of new functionality but gain access to unparalleled information assets that will prove beneficial for strategic planning. And they continue to gain additional financial advantages with each new product enhancement. In the end, those who thought SaaS was good just for cost cutting haven't seen anything yet!
Frome is chief strategy officer and executive vice president of SPS Commerce.