Understanding Software-as-a-Service

How it differs from the ASP model

Software-as-a-service (SaaS) has been growing rapidly in popularity since the beginning of the decade, and the trend shows no signs of slowing down.

It’s especially hot in application areas that are more commoditized like CRM, HR, recruiting, security and IT management. Forrester Research predicts SaaS CRM will grow to 22 percent of overall CRM spend by 2010 (up from only 2 percent in 2003).

SaaS poster children like salesforce.com tout it as a revolution in computing that will be “the end of software,” rendering client server as irrelevant and outdated as mainframe computing. However, many are leery, wondering why SaaS will succeed where ASPs went largely out of fashion at the beginning of the decade; others still are confused about what SaaS is.

The term “SaaS” typically is used to describe Web-based applications like salesforce.com, Google and eBay that were built to run in a browser, meaning firms don’t need to install anything and can access their software from any browser connected to the Internet. Unlike traditional on-premises software where each firm runs its own instance of the application, SaaS users all share the same code. Upgrades happen automatically and simultaneously for all customers, eliminating the concept of software versions and making big, expensive, time-consuming upgrades a thing of the past.

While some use the terms SaaS and ASP interchangeably, SaaS in its purest definition differs from the ASP model in several key ways. SaaS solutions are typically multitenant, meaning customers share processing power and database space that is managed by the SaaS vendor. In contrast, ASP solutions are typically single-tenant, client-server architectures with a Web front end attached by a third party. Because ASP solutions are based on traditional on-premises software, the solutions are upgraded only every one to five years, depending on when the software publisher has an upgrade available and when the ASP provider is able to apply that upgrade for its customers.

SaaS usually is sold through pay-as-you-go subscription pricing where firms rent rather than own the software. Because firms don’t need to make a big upfront investment, SaaS provides a low-risk way for firms to invest in software. Additionally, SaaS has shifted power to the business user by allowing solutions to be bought, deployed and managed by business or power users with no IT involved.

While the SaaS model offers significant benefits, there are also several key tradeoffs. SaaS solutions are more restrictive in the types of customizations they support and have more limited integration capabilities than on-premises solutions. SaaS solutions can be more expensive over time since firms rent at a constant price versus an on-premises solution that involves a higher upfront license fee but lower maintenance fees in subsequent years. Additionally, SaaS means giving up control of your software to the SaaS provider.

Liz Herbert is a senior analyst with Forrester Research. She can be reached at her email address.

How Telcos Are Trying To Profit From SaaS
Liz Herbert

Three key roles that telcos can play in this emerging trend are: 1) host the SaaS solutions of ISVs; 2) resell or bundle SaaS solutions; and 3) acquire or develop their own SaaS offerings and sell those.

Hosting is an attractive option, particularly for telcos who already have hosting services today (perhaps operating as ASPs or managed hosting providers). Although larger ISVs like Oracle Corp., salesforce.com and NetSuite have their own hosting facilities, many smaller ISVs look to third-party providers for this capability.

Furthermore, with increasing regulations about where information can be stored (such as data privacy regulations in the EU that require customer information to stay within country boundaries), even those ISVs who have their own data centers in some geographies will need hosting partners in other parts of the globe.

Reselling SaaS technologies (often bundled with mobile solutions and mobile data plans) is another opportunity that a few telcos are starting to explore. For example, Verizon Wireless resells SaaS CRM vendor Entellium’s technology to provide contact and sales management, marketing technology, and customer service software that its small business customers can access either online or through a mobile device. Some telcos even may opt to own the technology they provide. For example, AT&T Inc. subsidiary Sterling Commerce has SaaS offerings in its portfolio.

While many telcos are exploring ways to profit from SaaS, their ability to succeed is still in question since many of the early examples are too new to judge their success. Furthermore, similar attempts have not always been successful in the past. For example, Siebel CRM OnDemand partnered with T-Systems and BT for both hosting as well as reseller services and saw little uptake of its product through these channels.

Telcos who succeed will be those who carefully consider their own core competencies (hosting versus reselling solutions versus being an application vendor) and map those to the appropriate market need and segment.

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