Software-as-a-Service (SaaS) is the most popular manifestation
of the move towards an on-demand enterprise IT strategy. Simply speaking, SaaS
is an arrangement where the functionalities of software are provided to the user
over a network, usually the Internet. The user, instead of paying a license fee,
pays as he uses either a flat price on a periodic basis or his actual usage.
While that straightaway turns a large portion of the Capex into Opex, possibly
the balance sheet numbers, the real benefits are far more. For one, it frees the
IT manager is free from the nuts-and-bolts- planning for hardware on which
software is hosted. That becomes the responsibility of the SaaS provider.

Though similar to the earlier application service provider (ASP)
model, SaaS seems to be succeeding where ASP failed. There are a few reasons.

• An ASP was a guy whose expertise was in managing servers. He
  knew little, if at all, about the application being hosted. SaaS, on the
  other hand, involves, in most cases, the maker of the software itself, or
  vendors who have excellent integration capabilities. They understand the
  software thoroughly.

• ASPs wanted to build a business around the existing
  client-server software and expected that to work fine when delivered on the
  Net. Most of the SaaS applications, on the other hand, are net-native,
  meaning they are written specifically for the Internet in what is often
  referred to as a multi-tenant (one provider, many customers) architecture.

• And finally, lest we forget, the Internet is not what it
  used to be ten years back. The reliability has gone up manifold, while the
  cost has come down by half. That betters the reliability and improves the
  economics of SaaS.

Sizing up SaaS
Like any new market, there is a considerable amount of confusion over how
SaaS implementations and revenues should be measured. There are two prime
reasons. Firstly, most of SaaS, and related purchases, do not happen in central
IT departments but are made by line managers in business units, making it
difficult to get the information. And secondly, there exists a certain lack of
clarity on the definition part. For instance, some prefer to include older
hosted applications, while others do not.

Anyhow, going by some initial estimates that are available, the
scenario looks quite optimistic. According to a 2006 study by Saugatuck
Technology, a research and advisory firm, about 4% of new software spend by
organizations in 2004 was attributed to SaaS. That’s not a bad beginning. More
impressive is the forecast, that by 2010, SaaS share will rise to 12 per cent.
In absolute terms, it means a growth from $4.2 bn in 2004 to an estimated $13 bn
in 2010, a CAGR of 20.7% over the six-year period.

In McKinsey’s annual IT executives’ survey, 38% senior IT
executives in 2005 said they were keen on buying SaaS. That number went up to
61% in 2006.

The SaaS market till date has been dominated by the pure-play
SaaS firms; the likes of Salesforce.com, WebEx Communications and Rightnow
Technologies. But the big guys are catching up. FY ’07 saw biggies like
Microsoft, SAP and Oracle visibly step up their SaaS activity.

Rajneesh De
rajneeshd@cybermedia.co.in