Unlike ASPs, SaaS is Hotter than it Looks

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Thursday March 2, 2006

I think SaaS (Software as a Service) is potentially the biggest issue facing software firms today. This formerly “ASP” (application service provider) model blipped back in ‘97-‘00. And it seemed to fail. But, in fact, I think the issue was simply that the hype of the dot-com era exceeded reality, not that the idea was a dud.

Buyers both in larger enterprise and smaller businesses are thinking about it again. If they’re not, I think they should be. I can see two reasons why.

Money. Now we can predict companies expect to save money on things like servers and networking equipment…but likely they will spend more on services than they currently spend on software. They will really benefit because they will not need to buy the related boatload of hardware, data center space, maintenance, and yada-yada.

The other reason? Globally, businesses don’t work the same way anymore. With the ability to take R&D abroad through global outsourcing, or change the speed and flow of product lifecycle management, or use the varied workforce by engaging older and part-time workers, the work world has changed. As a result, no company wants to hooked into a pre-defined and possibility obsolete model of buying software and taking 1 year to deploy it. Companies want and need flexibility. And companies also want (and, I would argue, need) to focus on their core assets: customer engagement, product design, and/or services delivery. But they don’t want to focus on the software that enables the background exchange of ideas, exchange of information. That is best done by someone else innovating on what they do best. It’s this fundamental optimization of businesses doing what they do best that will cause SaaS to take off and light a fire in the software industry.

For some companies, SaaS won’t make a big indent at the beginning, but I do think that this emerging business model will impact 90% of most software companies. For those that aren’t paying attention to it today, I hope they change their mind.

Categories: Emerging Business Models

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1 Comments

On March 3, 2006 Mike Rohde said:

Nilofer, SaaS seems a natural next step, as already so many people in daily life accept these ideas: gmail and yahoo accounts, using web services to store photos (Flickr) or links (del.icio.us) or even management of tasks and projects (TaDaList and Backpack). The prevelance of mobile phones which rely on external services and often manage their “software” on the network also have provided an example to us, why SaaS can indeed be very convenient.

Now what you’re talking about is probably a bit different than “web services” but I think the concept is similar — someone else is managing your software and data for you.

Of course, while convenient, users are also placing quite a bit of trust in those services. Incidents like outages at Salesforce.com and other online services are reminders that while someone else handling your software and data has upsides, there are downsides to consider as well.

I would be very interesting in hearing what you think the SaaS business would look like going forward: what should they be offering and how can they deal with businesses concerns about service uptime, data integrity and security.

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Thursday March 2, 2006