SaaS Vendors Bucking IT Spending Trend

But the show was also notable in that it drove home the fact that, for SaaS vendors, partners and customers are often other SaaS vendors. The industry is far more tightly integrated than, for example, traditional independent software vendors (ISVs). Almost every SaaS vendor depends on other service providers to deliver some portion of their own product, whether it is hosting, billing, or product integration. OpSource’s business software, for example, is used by many other SaaS vendors for their own on-demand billing. This interdependency should be reassuring for prospective IT customers, since it means that these services have been “hardened” by use in commercial environments by companies depending on SaaS services to serve their own customers.

Other factors driving SaaS growth include:

Flexibility: Seasonal businesses or those with highly variable demand for technology services—such as software companies whose demand peaks during product testing cycles—no longer have to over-provision for peak periods. SaaS provides a short-term option for meeting high-demand requirements. As a matter of fact, HP recently announced a software testing service, HP Quality Center as a Service, which specifically addresses this problem and includes 24 X 7 operational support.

Overall Cost: Low cost is often cited as a benefit of SaaS adoption, but the real numbers vary widely. Some SaaS vendors have been able to drive down costs to the point where their platform costs are negligible. Depending on how much of this is passed on to customers, however, estimates of total cost of ownership (TCO) vary from 10% of on-site hosting to 100%+. Actual costs depend upon multiple factors including service level expectations, number of users, degree of customization, amount of support required, etc. However, given that the typical IT organization has relatively fixed costs of 60%-80%, it’s hard to imagine that sharing the costs of centralized delivery can’t significantly drive down overall delivery costs.

Payment Structure: For many companies, SaaS vs. on-site decisions are similar to lease vs. buy decisions. Paying monthly tends to be easier than paying in one large payment, and also helps companies that are limiting capital expenditures in favor of “pay as you go” services. SaaS vendors not typically requiring long-term contracts is an additional incentive.

Security and Governance: Although one of the primary objections to SaaS is from the security standpoint, Treb Ryan, CEO of OpSource, said SaaS vendors have made major investments in security and compliance, with particular attention paid to industry standards such as Payment Card Industry (PCI) standards, Health Insurance Portability and Accountability Act (HIPAA), and Statement on Auditing Standards for Service Organizations (SAS 70).

Regarding the future of SaaS, there is one idea from the SaaS Summit that particularly struck me. In Don Tapscott’s presentation, he talked about a generation that equals the “baby boom” generation in size and has grown up with mouse in hand. Their view of an application is similar to our view of electricity—it’s just there. This generation didn’t have to write a program to access FaceBook— they went to the FaceBook site and the application was waiting. Same with texting on cell phones and using as a source for research papers. They didn’t have to do the technical work to provision or support these services— and don’t even pay to use many of them. In another 15 years, these kids will become decision-makers in companies worldwide. And you have to ask yourself the question: “Will this new generation of CIOs see business value in the time, money, and effort we are currently expending to deliver IT services?”

Call me crazy, but I don’t believe they will.

Julie Craig is a senior analyst with Boulder, Colo.-based Enterprise Management Associates, an industry research firm focused on IT management. Julie can reached at [email protected]. Additional research into autonomic computing is available at EMA’s site at In addition, EMA is in the process of creating a new, End-to-End Application Management Online Guide, which will be available by the end of Q1, 2009. Continue to check EMA’s site for this Guide, which will feature detailed profiles of multiple application management products and be free of charge.