Microsoft's SaaS Strategy: A Giant Copes with Change

Wednesday Jan 24th 2007 by James Maguire

A Microsoft executive talks about the company’s forays into software-as-a-service. Will the software leader someday offer all of its apps thought SaaS?

The entire IT community, it seems, is agog over software-as-a-service (SaaS). The notion of delivering applications over the Internet appears to gain more market steam with every passing quarter.

Research firm Gartner forecasts that by 2011, 25% of new business apps will be delivered via SaaS, a jump from 5% in 2005. So while software-as-a-service is in its infancy – and the biggest bucks still go for traditional on-premise software – this new delivery paradigm is growing up fast.

As the software industry moves toward SaaS, one of its defining questions is: what is Microsoft’s approach to this new delivery model? As one of the 800-pound gorillas of the software business, Microsoft’s decisions tend to have industry-wide repercussions.

To find that out, Datamation spoke with Tim O’Brien, director of Microsoft’s Platform Strategy Group. In a wide-ranging discussion, he spoke about the company’s early SaaS initiatives, and its emphasis on what he refers to as a “software plus services” approach.

Not “Either/Or”

O’Brien notes that many industry observers view the movement toward SaaS as an “either/or” proposition: Either businesses will host their software on-premises, or they’ll move overwhelmingly to a SaaS model.

But he disagrees with this dichotomy. “It’s not ‘either/or,’ it’s about ‘and,’” he says. This ‘and’ scenario is where the industry is headed, in his view. Businesses will combine SaaS applications with on-premise applications, choosing between them based on a wide array of variables.

Therefore, he says, Microsoft’s strategy doesn’t focus exclusively on either the on-premise or the SaaS model. Instead, the emphasis is on facilitating customer choice.

“If the need is keeping that application on-premise and customizing it, and extending it, and doing all the things that you do when you host an application in-house, we’ll help them do that,” he says. However, “If they just want to move costs or overhead or some commodity outside their business and put it onto the cloud – that is, host it where someone else can worry about it – we want to be able to do that, too.”

O’Brien urges IT decision makers to avoid viewing the difference between SaaS and on-premise models as a black or white issue. In reality, he says, it’s a question of trade-offs.

“What is the goal you’re trying to achieve? Is the goal taking a commodity business process and moving it out of your environment so you can focus on things that are more core to your business and value-added?” This goal could call for SaaS.

Yet the total costs of SaaS need to be calculated, he says. “Think of renting software. That’s what software-as-a-service is in terms is pricing models – you’re subscribing to that. So you have the whole lease vs. buy discussion with the car dealer. If you’re going to drive this thing until the doors fall off, you should buy it. If you get a new car every three years, you should lease it.”

Indeed, the car lease vs. buy analogy calls to mind a key issue with SaaS. “The canonical question is: at what point have you paid enough for your software? So if it’s an economic discussion you need to look at, over time, what is the cash outflow stream for service-based procurement going to look like, versus if I buy the perpetual license and pay maintenance?”

Offline Situations

To be sure, O’Brien sees the advantages of the on-premise model. “There’s a whole bunch of capability in terms of processing power and storage that lives on the edge of the network,” he says. “And to just say, ‘Software as a service is going to be the be-all, and kind of the endgame here, ignores all that unused storage and processing capacity that lives on the edge.”

Furthermore, what about those moments – rare, but not gone – when people aren’t connected to the Net?

“Offline capability matters,” he says. “Despite what you read about the ubiquity of broadband and wireless access, there are some situations where you just don’t have access to a network.

“There are situations where you need local access. There are situations where you want to take advantage of some of the power you have on your local desktop. And there are some situations where you don’t want to put sensitive data up in somebody’s cloud. And there are regulatory issues there as well, like HIPAA, which says you can’t store patient data in a third party data center.”

Multiple Choice Deployment

The leading edge of Microsoft’s SaaS initiative is the company’s Dynamics CRM application, code-named “Titan.” Due for release this summer, Titan will be available three ways: 1) Traditional on-premise deployments, 2) SaaS deployments hosted by numerous hosting partners, and 3) SaaS deployments hosted by Microsoft.

Although it offers three deployment choices, Titan consists of a single code base.

The point of offering various deployment choices, O’Brien says, is enabling customer choice.

“If you’re a small or medium-sized company and you only need a dozen or two seats of CRM, consuming it as a service makes a lot of sense, especially if you don’t want to bear the IT overhead or you don’t have the staff to do that,” he says.

“But as your company grows…needs change, and the opportunity then exists for that customer to move that service-based application out of the cloud, out of our data center, right into their shop, using the same code base, same data set, same set of functionality, and the same set of customizations.”

The Titan release brings up a critical question: Given that Microsoft is making such a complex application available via SaaS, does that mean that other Microsoft apps will at some point be delivered as a service?

“To be determined,” O’Brien says. “We’re looking at this as: this is a fairly revolutionary approach.” At this point the focus is on CRM “because it is, for all intents and purposes – at least today – the canonical application category for a lot of people who think about software as a service.”

The concept of offering multi-choice deployment goes against the status quo, he says, in a market like CRM, in which vendors are “either 90% or 100% on-premise or, in the case of companies like Salesforce, 100% service based.”

Software plus Services

“Our view, from a software plus services perspective, is based on the premise that ‘software plus services’ is a better model than just software alone or just services alone,” notes O’Brien.

And what exactly is ‘software plus services’?

“It’s hard to think of an application today that doesn’t have at least some sort of service component,” he explains.

For instance, Microsoft Exchange. “So you have the messaging and collaboration application that lives on the server side and the back end. And you’ve got a rich client head on that, which is the thing we know of as Microsoft Outlook today. If you’re like me, you get a few hundred e-mails a day, and you use the local graphics capabilities of your PC and the local processor to rifle though all that content.

“But if you’re running through an airport trying to catch a plane and you need to check mail real fast, there’s a version of Outlook that runs in the browser called Outlook Web Access. And that touches the same backend, synchronized with the client.”

The point: “This is browser-based, basically Exchange delivered as a service through a browser,” he says. It’s an example of an application that can be accessed as a service, but also makes use of the local environment. In other words, it’s a hybrid.

Likewise, the future of software consumption will be a hybrid, O’Brien says. It will take many forms. “It’s going to be local code, it’s going to be server-side code, code consumed through the cloud, and a series of peer-to-peer interactions...You see the platform evolving from client-server, to client-server-services.”

Microsoft, ISVs, and SaaS

In addition to its Titan launch, Microsoft is also working to enable software as a service for its ISV partners.

In terms of technical enablement for ISVs, “We’re doing quite a bit on the architecture side to help them understand how to migrate from a so-called entry-level SaaS deployment into multi-tenancy,” O’Brien says, “to help them get the economics of scale from delivering one instance of an application to a broad market of users.”

On the licensing side, in 2006 Microsoft introduced the Software Provider Licensing Agreement (SPLA). “This is a means by which you can procure server licenses with no upfront costs and no minimum commitment,” he says. “It gives you, as the ISV, as the service provider, the ability to build out your infrastructure without having to pay all these upfront capital costs. So in other words, the upfront cost that it takes to get started in SaaS mirrors the revenue that you’re receiving from your customers.”

SPLA, O’Brien says, “is a way of licensing Microsoft software that aligns with the SaaS business model.”

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