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04 Jul 08
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The concept is simple and attractive: rather than buying a software license for an application such as enterprise resource planning (ERP) or customer relationship management (CRM) and installing this software on individual machines, a business signs up to use the application hosted by the company that develops and sells the software, giving the buyer more flexibility to switch vendors and perhaps fewer headaches in maintaining the software.
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IDC report1 projects that 10 percent of the market for enterprise software will migrate to a pure software-as-a-service model by 2009.
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companies whose main business is delivering software as a service saw their revenues rise from $295 million in 2002 to $485 million in 2005, an 18 percent increase.
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New software design and delivery models allow many more instances of an application to run at once in a common environment, so providers can now share one application cost effectively across hundreds of companies—a vast improvement on the old client-server model. Bandwidth costs continue to drop, making it affordable for companies to purchase the level of connectivity that allows online applications to perform gracefully.
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frustrated by the traditional cycle of buying a software license, paying for a maintenance contract, and then having to go through time-consuming and expensive upgrades
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more control over the relationship if they simply paid monthly fees that could be switched to another vendor if the first failed to perform
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he successes of early leaders, such as salesforce.com and WebEx, have demonstrated the viability and value proposition of this model.
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Although software-as-a-service vendors are less profitable than some traditional software vendors today, this gap is primarily caused by a lack of scale
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The first wave of adoption for software as a service has been under way for several years. Companies are eager to acquire the technology for human-resources applications such as CRM and payroll and for collaboration tools that aren’t mission critical, involve relatively low data security and privacy concerns, have a distributed user base, and require little integration with on-premise applications and little customization.
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All three waves mostly aim to replicate the functionality of applications that have been sold as packaged software and hosted on the customer’s site. The next frontier—we might call it software as a service 2.0—will include new classes of applications which are actually better suited for online delivery and seamlessly integrate with on-premise applications
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Software as a service offers several advantages to IT buyers, including more frequent (and potentially less painful) upgrades, a lower cost of ownership (up to 30 percent less for a CRM implementation, as the exhibit shows), and a higher level of service from vendors that must become more responsive to customer needs or risk losing subscription revenues. Countering these benefits are the acknowledged risks of reliability (how can IT departments ensure that the business can access its applications?) and security (how can it guarantee data privacy in line with regulations?). In addition to these broad concerns, CIOs and other IT managers must make changes in their architectural, managerial, and governance models to capture the full value of this new model.
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Since most IT systems have been designed as closed systems with a few controlled links to the outside world, CIOs will have to shift their thinking about architecture to a hybrid model of closed and open systems
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Second, the move to software as a service is frequently justified not only by the lower cost to own but also, and more important, by its promise to deliver better service than licensed software can with a maintenance contract.
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Third, IT managers will need to work closely with their business colleagues to refine IT governance mechanisms to capture the best business value from online delivery.
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Taken together, all of these changes signal that IT leaders will need to do more than simply plug in new hosted applications; they must revisit the foundations of the IT organization in order to ensure a smooth and fruitful transition to the new model.
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