SaaS Myths Debunked – Laboratories and Scientific Industries Reap the Benefits of SaaS

I’m using this post to comment on the most popular Software as a Service (SaaS) myths which seem to be circulating the Web in what I believe is a feverish pitch and last ditch effort by non-SaaS software companies trying to inject FUD (fear, uncertainty and doubt) to slow the most impressive industry movement and technology disruption we have witnessed in at least the last 20 years.

Myth #1: SaaS Is Still Relatively New and Untested.

On-demand Customer relationship management software vendors such as Salesforce.com and NetSuite have been in business over six years, are publicly traded and have a market following. Salesforce.com has more than 1 million subscribers worldwide and continues high double digit growth every year. The oldest and largest SaaS purveyor? ADP — the world’s biggest payroll application outsourcer — has been in business for nearly 60 years and served about 600,000 customers worldwide. For the year ended 2008, the SaaS industry is currently $6B USD and growing at about 32% CAGR. The combined market cap of publicly traded SaaS vendors is over $17B USD.

Myth #2: SaaS Is Just an Evolved Version of the Application Service Provider (ASP) Hosting Model that Failed in the Dot Com Era.

While on-demand software isn’t a new idea, the economic and management concepts of subscription pricing, hosted delivery and outsourced administration have combined to make current SaaS providers and solutions more successful than prior era models. The ASPs and hosting companies of the dot com era failed for two reasons. First, they did not fundamentally change the architecture of their software applications, but simply resold legacy applications to organizations that didn’t want to house them on their own systems. The up-front capital expenditure and recurring costs of hosting legacy applications proved to be too much for the ASP customers to withstand. Today, both the technology and the corporate mind set have advanced. Most companies now consider various IT functions and business applications commodities and not core competencies. This has made SaaS, essentially an outsourced application management business and far more attractive and efficient than the prior year ASPs.

Myth #3: SaaS Only Relieves Companies of the Up-front Costs of Traditional Software Licenses and Does Not Lower Total IT Costs.

SaaS not only removed the capital expenditure investment for traditional perpetual licensing but also reduces the need for IT infrastructure investments and IT labor needed to administer and support enterprise business applications. Several analyst studies have demonstrated that for most business software types, SaaS TCO (total cost of ownership) remains lower than on premise software. Further, shelfware software and excess hardware or software capacity just in case you need it are eliminated.  One such study result said:

We investigated how 241 technology companies  (now SaaS customers) previously maintained open source version control and issue tracking tools in-house. Amazingly, the average surveyed technology company spent 3,000 hours or $160,000 in direct costs on Software Change Management (SCM) each year. Enterprises easily spend five or ten times that.

In contrast, SaaS solutions are specialized and feature-rich, are regularly backed up, sell for less than $1,000 per year, and allow customers to focus on more valuable activities. ” (See Is Subversion Hosting (SaaS) Cheaper Than Doing It Yourself?)

Myth #4: SaaS Is Only for the Small and Midsize Business (SMB) Market and Will Not Be Accepted by Large-scale Companies.

Organizations of all sizes and types are adopting SaaS business software systems and realizing the benefits. SaaS solutions deliver scalability, reliability and performance which meet or exceed on-premise systems for even the largest companies. In fact, its quick and easy scalability – both horizontal AND vertical) is one of its most attractive features. The massive time and effort spent by large companies when upgrading software – an included and automatic service with most SaaS providers – as well as maintaining and optimizing, is a huge overhead item that most sensible corporations would love to shed.

But we may be missing the point here anyway. It is precisely this empowering and enablement for small and medium businesses that is an enormous factor in driving its success. Only the most astute large corporations will see the benefits and adopt them, while most tend towards lethargy (the principle that changing the course of a big ship is a much slower process than steering a speedboat). This promotes competition on merit rather than incumbency. Yet, as we noted, the benefits are there for enterprises of all sizes.

Myth #5: SaaS Only Works Well with Front Office Applications Such As Customer Relationship Management (CRM) or Salesforce Automation (SFA).

While SaaS certainly makes sense for several types of customer facing business processes, SaaS solutions are gaining steady penetration in the back office and other types of business software systems. These range from accounting software and financial applications to supply chain management (SCM) and channel management systems. On-demand supply chain management vendor Click Commerce boasts Arrow Electronics, Delta Airlines, Tyco and Volvo as hosted customers. On-demand Enterprise Resource Planning (ERP) software vendor Aplicor retains the Department of Commerce, Tyco, France Telecom and Ford while hosted accounting software vendors Intacct and NetSuite boast thousands of back office customers.

Myth #6: SaaS solutions will only have a slight impact on the software industry and will degrade over time.
SaaS has already had a massive impact on the software industry, and the trend is definitely an upwards one. Do a Google search on the term and you’ll get 27.5 million results. Wikipedia’s entry is large and dynamic. And the notion that it will degrade over time would seem to be not shared by the largest and most high profile industry leaders. Companies clamoring to dominate this technology include Amazon, Cisco, Google, Yahoo and of course Microsoft, who recently hooked up with Yahoo to accelerate their efforts.

As long as the quality and reliability of SaaS solutions continues to improve, the business value proposition of faster time to market, lower TCO and the delegation of non-core competencies will never lose appeal. The concept of buying software that you install and maintain yourself may well soon be a quaint historical artifact as users embrace portability and dynamic functionality.

Myth #7: It Will Be Simple for the Established Software Giants to Engineer SaaS Systems and then Dominate this Market.

The on-demand software industry is a fragmented market. The top 10 SaaS players own less than 50% of the hosted market – and these are big players like Cisco/WebEx, Microsoft, Salesforce, NetSuite, Citrix and Omniture. The technology, cultural and revenue business model changes required of SaaS are no small undertaking for established software companies. Existing software companies have to re-architect and re-develop their legacy systems for thin-client delivery over the Internet. They then have to redesign their sales and financial models to accommodate the pay-as-you-go subscription pricing model. They have to rebuild their corporate cultures to achieve a more service-oriented rather than product-centric model. They also have to reset Wall Street and investor expectations that the days of very large up front cash generation are being replaced by much smaller, but long term, annuity revenue streams.

Myth #8: Data and Infrastructure Are More Secure Onsite.

The truth is that serious, reputable SaaS providers use state-of-the-art data centers that are custom designed and purpose-built for one thing: to provide reliable, secure data management. This is their core business, and it is very few, if any, companies that can claim the same level of security and reliability in their in-house systems. Does your in-house system give you a guarantee of 99.9% uptime? And the use of SSL encryption and professionally-configured password controlled access, as well as multi-layer physical access security (think armed guards, razor wire and bioscan technology) make any argument about security shrivel and skulk away quietly mumbling to itself…

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