Software as a service (SaaS)--or on-demand software--is coming on fast as the Next Big Thing: delivering pay-as-you-use applications over the internet. This may sound a lot like what applications service providers (ASPs) have been doing for years. But some key differences seem to be turning the lackluster business of outsourcing packaged applications into an incipient software revolution. Microsoft, coming a little late to the SaaS party, has now jumped into the pool with a characteristic big splash. Business Week Online recently quoted an internal memo from chairman Bill Gates: "This coming 'services wave' will be very disruptive ... Services designed to scale to tens or hundreds of millions will dramatically change the nature and cost of solutions deliverable to enterprises or small businesses."
So what is it that makes SaaS so different and revolutionary? Basically, it's a new purchasing scheme that shifts how software is issued: Buy services--that is, aspects of business logic and code--not packages, which have traditionally bundled a lot of key related functions. These are some of the advantages:
Lower costs by getting IT off the apps-upgrade treadmill of waiting for big new revisions then retraining and suffering through business disruptions during deployment. With SaaS, the provider generates updates whenever and makes them simultaneously available to all users.
Shorter time to market: no servers, staging, version maintenance, security, or performance to worry about.
Lower total cost of ownership (TCO). Instead of paying licensing and maintenance fees for a software package, SaaS customers pay a flat amount per user per month and can drop the service at will.
SaaS is headed toward (ultimately) integrating all business applications, from accounting to financial apps to supply-chain management to marketing campaigns. Users from different departments in an enterprise can access each other's data. Authorized users, suppliers, and customers can collaborate in using the software and even in designing upgrades. Analytics inform decisions at all levels of management.
The overarching ecosystem of service-oriented enterprise resource planning (ERP) is moving toward a capability affectionately called mashups--combining existing applications to yield new ones.
AMR Research estimated that revenues from on-demand services will increase to $2 billion this year, up from $1.5 billion last year. Still, that's less than 10% of revenues for the whole software industry. But it's growing at the rate of 20% a year.
Jeffrey Kaplan is a sourcing-strategy consultant who keeps a directory of SaaS players for THINKstrategies, Inc. As of Jan. 1 this year, the directory listed 450 players in 70 application and industry categories.
SaaS poster child
The current darling of the SaaS world is seven-year-old Salesforce.com. In the fiscal quarter ended April 30, the firm posted revenues of $105 million, up 63% year-over-year. It serves 444,000 individual users at 22,700 customer companies. The customer roster includes Advanced Micro Devices, America Online, Dow Jones Newswires, Nokia, and SunTrust. Salesforce serves companies of all sizes, so the number of users at any company ranges from one to 75,000. Several have 5,000-10,000 users.
Salesforce plays host from its on-demand platform that customers can use to run either a Salesforce customer relations management (CRM) solution or to build brand-new on-demand applications. The latter option is in fact one of the company's signature offerings, called AppExchange. Users can come to this website and share one another's applications, tweak an application--or mashup existing applications to create new ones. For example, a 24-hour HIV clinic in Chennai, India used AppExchange to develop a program that it uses to maintain medical histories, schedule office visits, and handle billing, lab tests, and other services. …