Software as a Service: A Transformative Way to Deliver Applications

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1 I D C E X E C U T I V E B R I E F Software as a Service: A Transformative Way to Deliver Global Headquarters: 5 Speen Street Framingham, MA USA P F October 2010 Adapted from Worldwide Software as a Service Forecast: Software Will Never Be the Same by Robert P. Mahowald, IDC # Sponsored by SAP This is the first paper in a six-part series about software as a service (SaaS). Introduction Software as a service is fast becoming a mainstream method for delivering applications to business. SaaS has its roots in time sharing and in hosted application management. However, the unique architectural and business model characteristics of SaaS allow for a richer set of benefits that make SaaS-based delivery attractive to companies of all sizes. IDC believes that SaaS adoption will continue to expand rapidly. According to IDC's most recent forecast, SaaS revenue is expected to grow at over five times the rate for traditional packaged software from 2010 to A recent IDC survey indicates that 82% of U.S. organizations use at least one SaaS service. Definitions Conventional software refers to applications purchased through a traditional perpetual license and deployed on the user's premises using the company's IT infrastructure. In recent years, this definition has been expanded to include software purchased by a customer but deployed, maintained, and hosted by a partner. Software as a Service SaaS is a service delivery model characterized by a utility computing environment in which unrelated customers share a common application and infrastructure hosted and managed by an independent software vendor (ISV) or a third-party service provider. Customers also share the software code (i.e., multiple customers access the same software application), which is typically owned by the SaaS ISV. The SaaS model provides access to and consumption IDC_1022

2 of the hosted software functionality, which is built specifically for network delivery to multiple users and which is provisioned and accessed by users over the Internet. SaaS by definition consists of turnkey services, with application, presentation, and data tiers, and all associated capabilities, in a single offering that can be accessed and provisioned over the Internet. The open business model and modular composition of SaaS allow that while users may access a composite service, the service may be composed from several physical locations, using capabilities (e.g., storage, hosting, application quality and life cycle, management, billing, and revenue management) procured from one or more vendors. XaaS and Services In addition to SaaS, several other "as a service" technology offerings share many of the underlying fundamentals of SaaS, including network delivery and pay per use. However, they all differ in terms of the key element offered. While SaaS is primarily associated with the service delivery of application software, it also includes the service enablement of all software. Two other popular XaaS options differ as follows: Infrastructure as a service (IaaS) provides the ability to access processing, storage, and networking resources. Platform as a service (PaaS) delivers the ability to access application development and deployment resources. SaaS includes PaaS and IaaS, since PaaS and IaaS are software services that map to software functional categories such as storage, security, database, middleware, and so on. That's why SaaS represents approximately 70% of public cloud revenue. " services" is an umbrella term increasingly used to describe many of the categories discussed above that undertake the delivery of technology resources in a way that is similar to how SaaS is delivered. As shown in Figure 1, SaaS makes up the largest category of cloud services IDC

3 Figure 1 IDC's IT Services Segments (Software as a Service) Corresponding Primary Market IDC IT Product Taxonomy App Dev & Deployment Systems Infrastructure Software Systems Storage IT Services (Apps as a service) (Application) Platforms (Platform as a Service) App Dev/Test App Deploy Infrastructure (Infrastructure as a Service) Collaborative Content Enterprise Resource Management Supply Chain Management Operations and Manufacturing Engineering Customer Relationship Management Application Development Software Application Server Middleware Data Access, Analysis, and Delivery Information & Data Management Integration & Process Automation Middleware Other Application Dev and Deployment Quality & Life-Cycle Tools Enterprise Portals System and Network Management Software Security Software Storage Software System Software Servers Storage Networks Clients Source: IDC, 2010 Benefits of SaaS Application software delivered via SaaS can provide tremendous additional benefits of scale and efficiency, lower cost, and better consumption of SaaS-derived data sources. In fact, SaaS is already changing the way businesses license, deploy, and utilize missioncritical applications. Some benefits of SaaS are as follows: Faster time to value for a quicker return on investment. Given the application's deployment mode (i.e., no software to install and configure onsite), architecture, and service characteristics, SaaS implementations are generally quicker and less expensive than those for conventional solutions. It is important to note that vendors offering SaaS cannot book revenue until the implementation is complete and therefore buyer and seller are equally incented to decrease "time to value." Lower ongoing costs. SaaS vendors charge a subscription fee, which provides an "all-in" cost for the right to use the application service, maintenance (upgrade path), and support. This subscription is typically based on the number of users who will interact with the system, in addition to a support plan. Most SaaS 2010 IDC 3

4 vendors bundle core support (connectivity, basic user-level support) into the basic subscription. In general, for most organizations, the cost to deploy a SaaS solution based on subscription licensing will be lower than the cost of buying a conventional on-premise solution. Streamlined architecture, with zero infrastructure. SaaSbased applications are hosted by a service provider in an optimized datacenter. Therefore, customers do not need to maintain their own hardware and databases onsite. In addition, users access the application though a secure Internet connection, so there is no client software to install. Finally, SaaS customers are assured of running the most recent version of the software because the applications are updated and upgraded for them on an ongoing basis. Security. SaaS applications are run in a hosting facility by providers that offer multilayer security that is typically above and beyond what an enterprise would have in its own datacenter. Most SaaS providers back up client data with multiple, mirrored servers for optimal availability. In addition, due to economies of scale, state-of-the-art security technology and processes can be offered to SaaS clients at a fraction of the cost of building their own equivalent environment. Capital expense versus operating expense. As opposed to the up-front capital expense of licensing on-premise software, a SaaS subscription is considered an operating expense. This difference can be attractive to organizations whose capital budgets are constrained or frozen. It also allows individual departments to tap their operating budgets and get access to the application functionality they need without having to procure or maintain the infrastructure to support it. Easy to scale up and down. The annual subscription contract for SaaS services typically has more flexibility than conventional software license agreements. Contracts can be adjusted as a customer's needs change, helping to ensure a "rightsized" application environment over time and to eliminate the "shelfware" often associated with conventional software. (Shelfware represents software that has been paid for but is not being used.) Considerations While SaaS can offer many key benefits, it may not be the best approach in all situations or for all customers. Key concerns cited by SaaS customers include limited customization, security/privacy issues, and conflicts with previous investments in and installations of legacy on-premise applications. IDC advises enterprises to evaluate their application needs today and over time and to understand that their IT environment may need to include a mix of on-premise and SaaS-delivered applications IDC

5 Conclusion SaaS is a service delivery model for software characterized by an on-demand computing environment. SaaS can offer many key benefits, including cost savings as well as faster and improved access to continually updated, upgraded application software. COPYRIGHT NOTICE The analyst opinion, analysis, and research results presented in this IDC Executive Brief are drawn directly from the more detailed studies published in IDC Continuous Intelligence Services. Any IDC information that is to be used in advertising, press releases, or promotional materials requires prior written approval from IDC. Contact IDC Go-to-Market Services at [email protected] or the GMS information line at to request permission to quote or source IDC or for more information on IDC Executive Briefs. Visit to learn more about IDC subscription and consulting services or to learn more about IDC Go-to-Market Services. Copyright 2010 IDC. Reproduction is forbidden unless authorized IDC 5