Costs were spread among a broad user base, and customers with small IT staffs didn't have to worry about maintaining, updating, and securing these complex applications.
"Certainly economies of scale and the ability for a vendor to grow with its customer base are important to SaaS vendors," says Erin Traudt, an SaaS research analyst at IDC. "IDC believes that shared resources, such as infrastructure, and repeatable business processes are key parts of the SaaS model."
In other words, besides providing on-demand software, SaaS vendors enable their customer pool to function like a virtual distributed enterprise, benefiting from one another's knowledge and experience. But the SaaS vendors benefit from this arrangement as well.
Since SaaS is delivered via the Internet, with the vendor handling support and maintenance, open lines of communications between the two parties are a given. It's a core feature of the SaaS model.
"One of the reasons that SaaS price-points are lower than traditional software offerings is because the customers all participate in making applications better," says Morris Panner, CEO of SaaS vendor OpenAir.
While SaaS vendors offer economies of scale to their users, feedback and customization have end users functioning almost like an informal R&D office for the vendor.
One of the best examples of this is Salesforce.com's AppExchange, an online service for sharing business applications. According to Salesforce.com, AppExchange is like iTunes for on-demand applications. Customers can preview and download hundreds of on-demand applications, while also posting and monetizing their own custom applications.
How does Salesforce.com benefit, since the majority of applications aren't their own? First, they host these applications. Second, and more importantly, AppExchange bolsters customer retention, since the main Salesforce.com CRM (customer relationship management) platform acts as a Web services operating system for on-demand business applications.
This promises to change the business model of software vendors. "We are a service provider, not a software provider," says George Hu, SVP of applications at Salesforce.com. "The subscription model creates the fairest distribution of risk between vendors and customers. Our No. 1 corporate value is customer success. It's forced on us by our model."
What many SaaS vendors are finding is that they've created application ecospheres for their customers, often unintentionally.
"It's a subtle benefit, but once you're aware of it, this ability to leverage knowledge across your customer base is a real business driver," says Panner. "It's almost like a form of virtual collaboration, or collaboration by osmosis. Most powerful innovations are incremental. Economist Peter Drucker talks a lot about this. The sexy stuff isn't incremental, but the really important stuff is."
SaaS & ITSM
SaaS' most important incremental improvement may just be its impact on IT. The most basic IT maintenance and support issues are offloaded to SaaS vendors, who typically automate these processes.
"The CIOs we talk to say that 70-to-80 cents of every dollar spent on IT is spent on maintaining applications," says Hu. The on-demand model removes that burden, with the SaaS vendor maintaining applications, while also patching, updating, and securing them.
Additional benefits like routine backups and disaster recovery are also now part of the baseline maintenance performed by the service provider, not separate IT headaches.
SaaS vendors don't get swamped by these maintenance and support burdens because that's what they do. It's their core competency, and unlike previous doomed efforts at outsourcing IT and applications, SaaS vendors are succeeding for two basic reasons: One, they focus on specific applications; and, two, they automate many common IT processes.
But won't CIOs balk at this intrusion into their world? "Yes, some people think that software as a service hurts IT," says Panner. "But it's not true. The truth is that SaaS helps IT become forward-looking and strategic, rather than being forced into a firefighting mentality where they simply respond to problems."
Now, IT managers can focus on higher-level tasks, such as integrating disparate applications or achieving business goals. "Your highly skilled employees are no longer slaves to IT. Instead, IT is a tool that they use to achieve business objectives," Panner adds.
George Hu with Salesforce.com has a similar take. "I divide our effect on customers' IT into three tiers. First, there are small companies with limited IT resources. For them we act as a virtual CIO."
Next, Hu notes that mid-sized customers benefit from the leveraged IT model, sharing information across the user base. They rely on AppExchange as platform for new applications and application sharing. They have some internal IT, but it's limited. They use AppExchange to augment their efforts.
"Finally, there is the third tier, which is an emerging one for us and other SaaS vendors, the large-enterprise tier," Hu continues.
These companies have IT, and lots of it. Many spend thousands of dollars per employee per year on in-house applications. What they want is an enterprise-wide platform where they can pull stuff together, integrating various business processes. "For them we're a strategic platform that helps them move beyond the client-server model to an efficient on-demand one."
The IT-as-utility goal has been around for some time, but most attempts to achieve it have failed. Whether SaaS can succeed where others fail remains to be seen, but for now this incremental, open approach is attracting more advocates than detractors. And as long as the applications remain flexible enough to adjust to varying end-user needs and continue to integrate related applications into centralized platforms, we wouldn't bet against SaaS becoming an IT staple.
This article was published on ASPNews.com.