There was a time when it was not unheard of to see CIOs spending a million dollars buying licenses of some ERP and then another million or more to implement it in their enterprise. Moreover, anecdotal evidence suggests that 40% or more of these multi-million dollar implementations did not produce the magic that was expected out of them. In response to the resulting uproar emerged the ASPs – providing access to expensive applications in a pay-per-use mode, apparently aimed at easing the pressure on the need to make large capital investments. Unfortunately, ASPs failed! The reasons were many but primarily because although the basic idea was sound, the eco-system required for the model to thrive did not exist.
The pay-per-use model is reemerging as SaaS – Software as a Service. Some of the old myths (and some new ones too) about it still continue to cloud common perceptions. However, advances in technology – especially SOA - as well as the readiness and ability of enterprises to adapt to the constraints of SaaS indicate that, unlike the first time, this second coming is here to stay.

Key Characteristics of SaaS
Pay-as-you-go, per-user monthly charges: You do not need to buy the software. You only use it and pay a fee for the privilege of using it. Typically SaaS providers price the service on a per-user basis with additional charges for storage, bandwidth, SLAs, performance guarantees, etc. While the SaaS revenue from a single customer (especially if it is a small business) may be small, its assured, predictable recurring business to the vendor.
Web-based access to the software: Anywhere, anytime access is one of the core value propositions of SaaS, wherein the end user can be anywhere in the world and get the same service over the Internet.
Multi-tenant architecture: Application delivery typically uses a one-to-many model, wherein a single instance of the software serves multiple clients.
Centralized ownership of software, upgrades, versions, patches, etc: Unlike the usual situation where the end user needs to set aside funds, processes, people and time to purchase, install, host and manage the software, the SaaS vendor takes complete responsibility for everything, including ongoing evolution of the software, sharing the costs across multiple users.

Myths and Truths

Myth 1: SaaS is a synonym for CRM and Sale Force Automation applications
Without question the most celebrated example of SaaS in operation has been Salesforce.com. After the disastrous record of the early ASPs, skepticism about the commercial success of providing software in a pay-per-use model was rife. Salesforce.com certainly demonstrated that there was hope in the basic idea. However, adoption of SaaS cuts across a much broader spectrum of business areas. In fact research done by both Forrester and Gartner, indicates that CRM/SFA is distinctly behind in adoption of SaaS compared to areas like Content, Communication and Collaboration or Human Capital Management.
What is more important is that the same surveys showed significant increase in usage of applications in the SaaS mode for Order Management, Supply chain Management, Enterprise Resource Planning, etc. Recent moves by the dominant vendors of software packages in areas other than just CRM seem to corroborate the findings of this survey. Both SAP and Oracle have recently launched their ERPs in a SaaS model, e.g. Business By Design offering from SAP and Oracle On Demand. Other moves in the market such as Ariba’s acquisition of Procuri, which provides SCM capabilities in a SaaS model, further validate these findings. Procuri is widely used for supply chain management by large enterprises like ConAgra, Domino’s, and Eastman Kodak, to name a few. The interesting implication of this is, these vendors are committing large investments because they believe that SaaS will enter into the hallowed, core business processes of enterprises – areas that are typically closely guarded, and considered mission-critical and central to the enterprises’ success.

Myth 2: Barriers to wider SaaS adoption are fears about data security, lack of required functionality, and constraints imposed by standardization
The usual dogma is that wider adoption of SaaS is hampered by the fears potential users have about keeping their data confidential. Since the SaaS vendors control the functionality, behavior and look-and-feel of the applications, potential users fear that they will have to alter their business processes to match whatever the vendors choose to implement. And that they will have to make do with shortcomings in the functional capabilities and will have to re-train their users to live with unfamiliar user interfaces.
Interestingly, none of the above figured as top concerns of enterprises seriously evaluating SaaS in a recent business technographics survey by Forrester. The top two barriers to SaaS adoption that came out from the survey were: (a) Integration of software bought as a service with the remaining in-house application portfolio and (b) Operating costs. Fear about data security was only third in order of priority. Lack of customization was fourth, and the others figured even lower in the list (shortcomings in functional capabilities did not even figure in the list of top 10 concerns!)
The implications of this are important. Techno-functional barriers can be difficult to overcome, requiring long time and large investments in R&D. Despite that, they may remain as obstacles. Overcoming commercial barriers like cost considerations are often a matter of negotiation and market pressures and therefore more readily solvable. So concerns about integration are important to understand. In today’s world, organizations cannot afford to have silos of applications that do not interact well with each other. There is no such thing anymore as a stand-alone CRM application: the business process that starts with the identification of a prospect needs to work its way through a multitude of applications seamlessly – from lead generation to contract closure to order management to production planning to procurement and supply chain management to shipping and service management – and in the background, interact with financial systems, human resource management systems and so on. Selecting one or more of these business applications to be bought in a SaaS mode creates a complex integration and change management project that must be efficiently executed if SaaS is to succeed. That is the biggest challenge in wider adoption of SaaS.

Myth 3: SaaS is for Small and Medium Businesses
The source of this myth is in many ways linked to the perception that SaaS is cheaper, that smaller businesses do not need sophisticated functionality, and that they can live with lack of customizations.
The facts are to the contrary: SaaS is not necessarily cheap (as borne out by the Forrester survey mentioned above), and SaaS does not necessarily imply inferior functionality.
Moreover, an examination of SaaS usage by large enterprises reveals that as many as 25% of the large enterprises in North America and Europe are already using the SaaS model somewhere in their application portfolio. Merrill Lynch reportedly has 25,000 of its employees using Salesforce.com, while Procuri as a SaaS SCM solution is being used by the likes of ConAgra Foods and Toyota Motor.

The next frontier of SaaS
The motivations for an enterprise to consider SaaS are obvious: reduce large capital expenditure, reduce waiting time for large development projects (which more often overrun than not) or large ERP implementation projects to complete access to new functionality, and make operating expenses variable and proportionate to business growth. The biggest challenge in large-scale adoption of SaaS is integration of functionality bought as a service with applications owned and managed in-house as products. A hidden challenge – and something that has not received enough attention – is managing the change that is inevitable due to SaaS adoption. Change management is not just a technology issue; it will involve business process reengineering, re-training and re-orienting users, overcoming inertia and resistance to change within the enterprise, and so on. To determine whether SaaS is cost-effective, therefore, is not simply a matter of understanding the pricing models that the vendors are proposing. It will require an assessment of integration and change management costs, with the latter seldom being a simple exercise.
On the positive side, however, the evolution of technologies, especially Service-Oriented Architecture (SOA) and the ecosystem that has grown around SOA, has provided answers to many of the problems that dogged the old ASPs – anywhere, anytime access, quality of service, ease of integration, and aggregation of diverse applications, data security, etc.
This new wine in old bottle may well be the toast of corporate buyers!