SAAS: the new marketing strategy

SAAS or the online delivery of software has been a long-standing dream for some vendors and CIOs.The concept is attractive as instead of buying a software license for an application such as enterprise resource planning (ERP)or customer relationship management (CRM) and installing this software on individual machines,a business signs up to use the application hosted by the company that develops and sells the software,giving the buyer more flexibility to switch vendors and perhaps fewer headaches in maintaining the software.The traditional companies now can’t be complacent as there are available some truly SAAS models which will give them a run for their money.

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The complacence of traditional vendors is easily understood in light of the record: the first generation of online software delivery, in the late 1990s, failed to meet the reliability and quality standards demanded by business users.But an IDC report1 projects that 10 percent of the market for enterprise software will migrate to a pure software-as-a-service model by 2009.

With software as a service, a customer contracts to use an application,such as ERP or CRM, hosted by a third party, rather than buying a software license and installing the application on its own machines.Just as consumers can check e-mail or use mapping programs with their Web browsers, so too can enterprise customers access business applications over the Internet.

Factors responsible for growth of SAAS

Several factors are spurring the growth of SAAS.New software design and delivery models allow many more instances of an application to run at once in a common environment, so providers can now share one application cost effectively across hundreds of companies. A large improvement from the old standalone server model.

Also Bandwidth costs continue to drop, making it affordable for companies to purchase the level of connectivity that allows online applications to perform gracefully.
Morever many customers are eager for the shift, as they’re frustrated by the traditional cycle of buying a software license, paying for a maintenance contract, and then having to go through time-consuming and expensive upgrades.Many customers believe they would have more control over the relationship if they simply paid monthly fees that could be switched to another vendor if the first failed to perform.

At Present software-as-a-service vendors are less profitable than some traditional software vendors today, this gap is primarily caused by a lack of scale. We expect the economics of online delivery to change as the model gains wider acceptance.
Traditional software vendors across many industries, we believe, will find their privileged position threatened unless they move aggressively to serve their customers by making software applications available online.

The SAAS potential

Companies seems to be eager to acquire the technology for human-resources applications such as CRM and payroll and for collaboration tools that aren’t mission critical, involve relatively low data security and privacy concerns, have a distributed user base, and require little integration with on-premise applications and little customization.
In addition, several industry-specific applications are gaining popularity in large industries such as financial services, health care, and retail, as well as in smaller ones such as automotive retailing, law, and real estate.

The next wave of applications seems likely to involve transactions between buyers and suppliers, including procurement, logistics, and supply chain management. As customers grow increasingly comfortable with the concept, a third wave of applications more critical to business, such as hosted environments for software development, may also start to be delivered in this way. Enterprise customers and those in small and midsize businesses are likely to adopt applications at different rates.

All three waves mostly aim to replicate the functionality of applications that have been sold as packaged software and hosted on the customer’s site. The next frontier,using web 2.0 applications ,will include new classes of applications which are actually better suited for online delivery and seamlessly integrate with on-premise applications.
Strategies for software vendors.

Software developers that shift from a traditional licensed model to software as a service will need to work hard to retain existing customers. Companies that have purchased long-term contracts for updates and maintenance, for example, will want guarantees of favorable subscription pricing under the new model. Additional issues to consider during the transition from packaged software to software as a service include R&amp and customer support—not all customers will switch at the same moment, so vendors may need to run dual operations in these parts of the business.

Under the new model, the economics of the software and IT services industries will also change. Vendors will have to adapt their financial and operating models or risk losing their privileged positions.

Revenue model

Software developers that deliver software as a service experience higher sales and marketing costs relative to earnings than traditional vendors do. There are at least two reasons. First, a subscription model for software produces lower revenues during the growth phase, since payments are spread over a period rather than made immediately in a one-off license sale. Sales expenses in both models are expensed as incurred, however, leading to a higher ratio of costs to earnings for the service model.

Second, a higher percentage of a service vendor’s customers are small and midsize businesses: more effort is required to reach them compared with the large-enterprise customers that make up more of the customer base of traditional software companies. Over time, however, as subscription revenue streams become steadier, the service model may look better, since the incremental marketing and operating costs of adding additional subscribers and of offering new services and applications for existing customers are minimal.

Build a platform

As in other radical shifts that have affected the software industry over the past two decades, players who respond quickly to emerging trends will often be best placed. A first step, as noted earlier, is to understand which applications will migrate when and to position one’s own offerings early in the uptake.Receptiveness of customers to the service delivery model is critical, so vendors will need to build organizational capabilities to monitor and shape demand.

For traditional vendors, a broad platform that allows them to supplement and enhance their applications is essential, as is deciding which platform to join. Most large software companies are adept at building these developer platforms in the licensed model . Platforms for software as a service are similar in that they require vendors to establish and evangelize a set of application-programming interfaces (APIs) and standards for data exchange among applications. But platform partners in the software-as-a-service model can also build onto the back-end infrastructure of applications, where the billing, metering, provisioning, and advertising functions may reside.

This approach can reduce development costs for partners, but it also may increase those costs for the platform provider.A second key difference between the models is that version upgrades tend to occur more often and in smaller chunks with software as a service than with the traditional approach. A platform vendor typically releases a major revision once every three to five years, and the company and its partners go to great lengths to make sure that the new version works with older machines and applications and that any upgrades from partners don’t break the platform.The smaller but more frequent upgrades in the software-as-a-service model allow platform providers and partners to ensure compatibility continually with an ongoing investment in smaller increments.

Market intelligence

In the new delivery model, the sales and marketing function should follow the lead of those software-as-a-service vendors that are targeting the business side of the customer organization. One reason for this emphasis is that many of the early applications for online delivery,sales force automation, human resources, CRM,are pure business applications. Once they hand so may hesitate to change if the current system isn’t broken.

The biggest capability gap for software comalm, including e-mail, security, and storage. Even CIOs who support the concept of online delivery may be concerned about the security and reliability of this new approach and so may hesitate to change if the current system isn’t broken.

The biggest capability gap for software companies embracing the new model is in the operational and customer service skills necessary to deliver software online.The operational challenge is to host the software rather than shrink-wrap and ship it.Companies will have to develop capabilities to handle massive data center operations, systems and network monitoring, and billing.

Software vendors will also need to change their attitudes toward customer service. Complaints frequently involve incidents that are mission critical, thus demanding immediate attention. Systems outages and conn bases, and forums and as such represent a savvy and demanding user group.

Also, IT managers will need to work closely with their business colleagues to refine IT governance mechanisms to capture the best business value from online delivery. Departmental charge backs, for example, will require some redesign as software moves from large capital expenditures to smaller but ongoing operating expenses (specifically, the recurring subscription fees). Decision rights will also have to be modified. Explicit mechanisms, for example, will be needed to determine who decides the level of customization of software and who pays for it when two departments want to use the software but only one requires modifications.Customers and vendors will need to identify who should control the intellectual-property rights on modified software.   Buy Ink Cartridges &