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Friday, May 06, 2005

Software As A Service : Overhyped & Difficult To Take Off

We recently wrote its not too easy for enterprises to embrace SaaS model of delivery. We wrote therein that the trend to offer software as a service with payments over time and based on usage is emerging. The big spenders like Telco’s, Banking and Financial Services, Healthcare, Transportation players may not find hosted solution a natural fit. The business drivers force them to get cutting edge solutions that would improve competitiveness and not necessarily something that looks to have good architecture and seems logical or fashionable. It will take more time to see what percentage of customers will find the software as service offerings attractive, change their buying habits and move to annuity contracts.The application architecture, schema, the business model including dealing with channel partners and switching costs for existing customers are major impediments. Overwhelming organizational changes would have to be managed in the transition to on demand model- It is highly unlikely that existing software vendors could manage the transition smoothly. It is also too early to make a conclusive call on whether the software vendors are going be more comfortable with annuity revenue stream not to speak about the hit professional service firms may be forced to take – In all, not a very easy path lay to embrace Software-as-a-Service model.

Rajesh points to Stephen O'Grady's article on SaaS- Overhyped. Stephen writes, the recent history of Software-as-a-Service (SaaS) serves in some capacity as a cautionary tale of the burden of hype. Even for more open minded enterprises, however, that could accept those limitations or weren't bound by them, there were two major concerns:

1. Allowing mission critical, highly sensitive data to be stored and accessed on systems outside the firewall
2. The inability to customize the application

It now seems that SaaS may have been overhyped, but undervalued. Salesforce.com is growing apace, and we're seeing the expansion of the model into new traditional application categories like ERP. Enterprises love to customize their applications. Live for it, in fact. Despite dire warnings of the difficulty in maintaining or upgraded heavily tweaked applications down the line, the committee/consensus based approach used by just about every management or systems consultant virtually guarantees that an enterprise will bend the software to its unique needs rather than adhere as closely as possible to standard workflows and processes.

The difficulty lies in the approach: the SaaS approach is predicated on economies of scale, in that you design an application and deliver it via the network to many customers. Every customer, in theory, works off the same version, just with a different dataset. It has inherent advantages in feature rollout and ongoing maintenance, but typically offers little in the way of customization. For enterprise buyers long accustomed to having their packaged applications behave the way they want them to, rather than one size fits all, this is a negative.

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