This article appeared in the October 2005 issue of Web Host Industry Review magazine. Click here to sign up for free.
October 17, 2005 -- (WEB HOST INDUSTRY REVIEW) -- One of the fastest growing segments of the information technology industry is software as a service - a new generation of hosted software services that has become popular by offering organizations turn-key applications that can be implemented quickly and without the infrastructure costs and ongoing administrative resources that traditional on-premise applications require.
SaaS is typically described as a software solution hosted and supported by an application provider as a service, which is accessed by users via the Internet, without the need to deploy and maintain an on-site IT infrastructure. SaaS also permits flexible pay-as-you-go subscription pricing on either a per-user, per-device or annual or perpetual licensing basis.
The concept of SaaS is not new. In fact, it is a direct descendent of the dot-com era innovation of the application service provider. Many industry observers and enterprise decision-makers believed the ASP was a casualty of the dot-com demise. But SaaS has rekindled industry attention and customer interest because it offers an attractive means of deploying such essential business applications as customer relationship management, e-commerce, enterprise spend management, sales force automation and workforce performance management.
Despite the fact that large companies have become more reliant on sophisticated software applications to run their businesses, many enterprises have been dissatisfied with the return on their investments. Deploying new business applications - and keeping them up and running ? has taken them more time, effort and money than they had anticipated.
Nicholas Carr captured this corporate dissatisfaction in his 2003 Harvard Business Review article entitled "IT Doesn't Matter" and follow-up book Does IT Matter?, in which he challenged the strategic value of traditional on-premise systems. In his latest commentary in the MIT Sloane Management Review, Carr advocates that large enterprises leverage a growing array of on-demand services in order to meet their corporate objectives and gain competitive advantage, rather than invest in on-premise technology and applications. While many IT professionals have been offended by Carr's suggestion that IT isn't strategic, many corporate executives agree with his views and are seeking alternative ways to satisfy their IT needs.
SaaS has become a prime example of the on-demand services Carr advocates. By eliminating the capital expense typically associated with new application deployments, SaaS also accelerates the project approval process because it simplifies the corporate review process.
SaaS not only eliminates the need for additional IT infrastructure investments - it substantially increases application reliability and scaleability. Instead of dedicating internal staff to support sophisticated applications, enterprises can rely on their SaaS vendors to perform upgrades and updates. They can avoid the dangers of system failures by relying on SaaS backups and redundant hosting facilities to reduce the risk of downtime or lost data. These SaaS advantages enable enterprises to direct their limited in-house IT resources toward more strategic initiatives rather than reacting to application availability, maintenance and support issues.
The benefits of SaaS are not just theoretical. A growing number of customer success stories from major, brand name companies clearly illustrate the tangible and measurable business benefits enterprises are gaining from SaaS. These endorsements are giving other public and private enterprises greater confidence that SaaS is a viable alternative to traditional on-premise software applications.
Market research verifies the rapid escalation in enterprise demand for SaaS. In May 2004, Summit Strategies found 31 percent of large companies with more than 1,000 employees were using SaaS, and an additional 11 percent were in the process of evaluating SaaS offerings. During May of 2005, AMR found that 40 percent of all companies use hosted applications, and 49 percent will use them within the next 12 months. Gartner forecasts large companies will fulfill 25 percent of their application demands with hosted software by 2010.
Forrester Research predicts the market for traditional on-premise enterprise applications will only grow 4 percent through 2008. By comparison, IDC predicts the SaaS market will grow at a 21 percent compound annual growth rate during the next four years, reaching $10.7 billion worldwide in 2009.
The statistical indication is clearly that SaaS is becoming a major trend in enterprise applications, and is by extension nurturing a large and demanding market for complex hosting services.
As SaaS enters the mainstream, hosting companies have a greater opportunity to penetrate the enterprise market, either by adding new hosted applications to their services, or by providing hosting to large application developers seeking to deliver their own software as a service.
