CFO IT - Summer 2005 Issue

Software as a Service

How far can the pay-as-you-go approach take you? Proponents say the road less traveled is about to become jammed.

Norm Alster
CFO IT

June 22, 2005

In what has become a time-honored tradition, IT upstarts delight in branding their more-established competitors as dinosaurs. If you're a new hardware company, your machines are faster. Networking? Your gear pushes through vastly more data. Software? You don't even sell software, you sell "solutions," usually branded with some combination of three letters that lays claim to a new technological frontier, one that your company will define and dominate. Get on board, Mr. Customer, or be left in the dust, amid all those dinosaur bones.

This overzealous marketing hasn't escaped the notice of IT pundits, and terms such as "vaporware," "hype cycle," and "trough of disillusionment" are now part of the lexicon. But that hasn't chastened IT companies, most of which are as exuberant as ever. In the case of those at the forefront of a concept known as "software as a service" (SaaS), in fact, the claims that a new era is dawning surpass pretty much any previous hype cycle you can think of.

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"Current market leaders in enterprise software will fade into oblivion," says Greg Gianforte, president, chair, and CEO of RightNow Technologies, which develops and hosts customer-service-management software. "I firmly believe that we're in the transition era from client/server computing to on-demand computing," predicts Phil Robinson, senior vice president for global marketing at Salesforce.com. "In three to five years, all applications will be delivered this way."

By "this way" Robinson means that customers will no longer buy software to run on their own computers — an approach that Zach Nelson, CEO of NetSuite, which delivers Web-based enterprise software to small and midsize businesses, dubs "do-it-yourself Stone Age software." Instead, customers will essentially rent software and access it via the Internet, without having to worry about how to manage it. Most people are already familiar with this concept: your home Web access probably entails a monthly fee to AOL, your phone or cable company, or some other type of Internet service provider (ISP). And while you may have had to install software on your PC to use the service, the vast majority of the computing horsepower needed to make things happen resides at the ISP's offices, with the cost of keeping the service up and running spread across all subscribers.

Could all this bravado be warranted? Whether you call it software as a service, on-demand computing, or something else (it's a close cousin of utility computing—see "The Meter System," Summer 2004), the idea of renting versus buying is not new. It harkens back decades to the time-sharing services on mainframes, and more recently to the application service provider (ASP) market that enjoyed a boom-bust cycle in lockstep with the dot-com era.

At the very least, predictions of the imminent demise of the business software giants seem premature. Hosted software still represents only around 5 percent of total software revenue, and most (though not all) of its success thus far has hinged on niche applications and smaller customers that simply can't afford to buy enterprise software outright.

But it's worth noting that most successful technology attacks begin at the low end, and there is ample evidence that SaaS, though not yet the all-purpose solution its proponents claim it to be, is broadening its appeal and shaking off the problems that plagued its first iterations.

Some of the success of the SaaS model has to be attributed to Salesforce.com, which has managed to not only take a healthy bite out of the market share of traditional CRM vendor Siebel Systems, but has also proved to be a relentless proselytizer for the SaaS approach. Indeed, Siebel was forced to respond with its own hosted software offerings, and in late 2003 spent roughly $70 million to acquire hosted CRM vendor UpShot. Today, even Siebel sings in the SaaS choir. "All enterprise-application companies are going to have to modify their delivery strategy to offer a hosted, as well as an on-premise, solution," says Bruce Cleveland, senior vice president and general manager at Siebel's CRM OnDemand unit.

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