What Can Software as a Service Do for Your Business?

I D C E X E C U T I V E B R I E F What Can Software as a Service Do for Your Business? November 2010 Global Headquarters: 5 Speen Street Framingham, MA 01701 USA P.508.872.8200 F.508.935.4015 www.idc.com Adapted from Worldwide Software as a Service 2010 2014 Forecast: Software Will Never Be the Same by Robert P. Mahowald, IDC #223628 Sponsored by SAP This is the second paper in a six-part series about software as a service (SaaS). Introduction Software as a service is a service delivery model for software characterized by a utility computing environment. In a SaaS model, 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 provider. Application software delivered via SaaS can provide tremendous benefits to customers in terms of scale and efficiency. In addition, SaaS can result in lower cost as well as improved consumption of SaaS-derived data sources. Benefits of SaaS Traditional packaged software applications typically require the provisioning of hardware and onsite implementation and configuration services. SaaS on the other hand can be deployed more quickly and therefore can provide organizations with a number of advantages and benefits. Faster Time to Value There are several characteristics of SaaS-based services that can lead to faster time to value for customers. The most obvious reason for this is that implementation times for SaaS are generally shorter than those for on-premise applications. This is because: There is no software to install and configure onsite. All customers need is a network connection and a client device to access the SaaS service. In addition, SaaS applications are typically easy to IDC_1037

use out of the gate. Some training may be required, but SaaS applications are designed to be user intuitive and work the way a business person expects that they should. SaaS providers run a single instance of the application that they make available to all customers. Some SaaS providers offer dedicated databases, and some share databases across customers, using security technologies to ensure that data is protected. This means that the provider is not doing a new application installation for every customer. SaaS applications are configured rather than customized. The applications are developed so that an organization's unique needs can be met without writing custom code. SaaS revenue is not recognized until implementation is complete, so SaaS providers are strongly incented to help customers get up and running quickly. In addition, SaaS providers want to make sure that customers have access to the software that they paid for and are actually using that software. Since SaaS is a subscription model, providers have to constantly make sure customers are getting value by using the software their renewals depend on it. Subscription Pricing Model SaaS providers charge a subscription fee, which consists of 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. Most SaaS providers bundle core support (connectivity and basic user-level support) into the basic subscription. This pricing model is attractive to customers for a number of reasons: Subscriptions are considered an operating expense. Capital budgets have been hit hard by the worldwide economic crisis, and the ability to access software functionality without the capital expense of on-premise software software license plus the expense of supporting infrastructure is an attractive feature of SaaS. The start-up costs for SaaS applications are much lower than those for on-premise applications. Since there is no license to buy, no hardware to procure, and no lengthy implementation to endure, SaaS customers can get up and running at a fraction of the cost of on-premise applications. The per-unit costs of a SaaS subscription license are typically much lower for an equivalent license plus maintenance purchase. That said, over time, SaaS applications could cost more than on-premise applications, especially if the customer does not need to pay maintenance to support the on-premise product. However, when other considerations such as reduced infrastructure requirements are factored in, the total cost of ownership of SaaS applications is typically substantially lower for customers than that of on-premise applications. 2 2010 IDC

Reduced Infrastructure Requirements SaaS 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. Besides the quantitative cost savings to customers of this approach compared with on-premise software, there are numerous qualitative benefits: By taking the focus of an application deployment away from the supporting infrastructure, SaaS enables customers to focus on their core competency. The competitive advantage that customers derive from applications software is a result of using the software, not of maintaining an internal database or running a server. Adopters of SaaS applications are often line-of-business organizations that are looking for solutions to their business process problems. These departments don't have capital budgets for software, nor do they have the technical capacity or desire to run in-house software. This allows the business people who can really benefit from using the applications to source and quickly access the software they need. SaaS providers are able to achieve economies of scale far beyond the capacity of a typical organization. This means that the level of sophistication of the service providers' entire environment including security, reliability, and availability exceeds what many customers could afford to purchase and maintain on their own. Other benefits of SaaS are difficult to categorize, yet they are often identified by customers as some of the most significant. For example, SaaS customers frequently cite peace of mind and a better work environment as equally valuable benefits of working with a SaaS applications provider. In addition, customers often feel that their relationships with SaaS vendors are much more transparent, and much more of a partnership, than their relationships with suppliers of on-premise software. This could be attributed to the subscription model, which holds providers accountable for ensuring that each customer is receiving value from the software for as long as it continues to pay for the service. Considerations SaaS adopters hail from every company size, every industry, and every geography. IDC has done numerous ROI studies over the years to determine the quantitative benefits of SaaS and has seen a wide range of business benefits. 2010 IDC 3

IDC has also observed that, when deploying technology, most organizations are very astute at identifying and managing incremental costs but not nearly as adept at managing and measuring incremental benefits. In fact, many organizations do not measure incremental benefits at all. For many, the initial cost savings attract them to a SaaS offering and the intangible benefits are discovered and recognized afterwards. From a SaaS perspective, this means that IT cost-based measures are insufficient to truly understand the financial impact. Business productivity enhancements and business process benefits should also be considered. However, simply purchasing SaaS does not guarantee results. IDC research has found that the most successful SaaS customers are those that focus on aligning organizational requirements and IT assets by addressing productivity and process change in their businesses. For example, if SaaS makes it possible to redeploy resources or change a process, cost savings and/or revenue generation benefits will be achieved only if these actions are taken. Other strategies that customers can adopt in order to "get the most bang for the SaaS buck" include: Communicate. Keeping an open dialogue with your SaaS provider can help ensure that you are getting value out of your applications today and in the future. SaaS providers typically offer a forum where SaaS providers and customers can openly discuss issues that interest both parties. They also offer easy-toobtain and easy-to-use online training to help customers adopt their applications. In addition to encouraging open communication, exemplary SaaS providers incorporate customer views of value into their development process. Optimize usage. Because of the nature of how SaaS applications are provisioned, customer usage data is available in near real time, at meaningful levels of granularity. SaaS providers typically offer customers a monthly usage report, which customers can use to help drive adoption as well as future purchase decisions. The best SaaS vendors see this usage data in aggregate, with customer names removed, so that it can be used to direct product management but not drive sales behavior with individual accounts. Make a commitment. The average SaaS contract length is one year. Customers that commit for a longer term, such as three years, will typically be rewarded by a lower per-unit cost. In addition, customers signing longer-term contracts reduce their exposure to the potential price increases that could impact their SaaS subscription rate if they were on an annual contract. While SaaS has some compelling benefits, IDC believes that on-premise, perpetually licensed software will be the preferred approach in some situations. In general, the uptake for SaaS applications that address highly customized business processes, such as supply chain, has been slower than that of applications requiring 4 2010 IDC

less customization or configuration. In addition, applications that need to pull from multiple data sources, such as analytical software, have not been adopted as widely as other SaaS applications. Another factor to consider is, What will happen when the economy improves? Since many customers are turning to SaaS because capital budgets are constrained, does that mean they will go back to perpetually licensed on-premise software once these budgets open up? IDC believes that some will go back to on premise, and some won't. One could draw an analogy to the gas crisis in the United States in the 1970s, when fuel-efficient cars gained favor with American drivers. Shortly after, as gas prices declined again in the 1980s and 1990s, gas-guzzling SUVs gained in popularity. Are software consumers as fickle as American drivers? IDC believes that as long as the benefits of SaaS outweigh the trade-offs, customers will continue to seek this approach long after the current economic crisis is over. Conclusion SaaS applications and on-premise software typically follow different adoption patterns. The perpetual license model encourages customers to purchase as much as they possibly can up front in order to get the best volume discount. The subscription model makes scaling up, and down, much easier. With SaaS, an incremental approach might make the most sense. Customers often start with a small application footprint which might mean a departmental or regional purchase and expand that over time. Another factor to consider is that the development cycle for SaaS applications is typically much shorter than the development cycle for traditional on-premise software, meaning that SaaS applications evolve quickly. A specific SaaS application may not have all the functionality needed to support a customer's enterprise needs initially, but over time those features may become a core part of the offering. In a sense, the application can grow with the customer. This is not an overstatement customer feedback has a direct impact on the evolution of the SaaS application. 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 gms@idc.com or the GMS information line at 508-988-7610 to request permission to quote or source IDC or for more information on IDC Executive Briefs. Visit www.idc.com to learn more about IDC subscription and consulting services or www.idc.com/gms to learn more about IDC Go-to-Market Services. Copyright 2010 IDC. Reproduction is forbidden unless authorized. 2010 IDC 5