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The SaaS ramp

March 06, 2006

Dan Farber reports that Salesforce.com will today roll out an expanded version of its subscription service - called, a little ambitiously, Unlimited Edition - that will allow customers to use its software platform to fulfill more of their computing requirements:

George Hu, senior vice president of applications at Salesforce.com, told me that Unlimited Edition is a step along the path in which the company is broadening its platform beyond the CRM database core. “Over time, we will see the nature of applications shift and we’ll attack more of the packaged applications,” Hu said. “We are evolving from data to content, process and transaction management—giving customers the raw tools to go deeper.”

Hu wouldn’t say when those raw tools would become available. But there is no doubt that Salesforce.com will develop engines for content management, business process management and transaction-based applications, and in combination with its software ecosystem build ‘packaged’ applications to further its vision of on demand everywhere. Microsoft, Oracle, SAP and others generating billions in revenue from enterprise software aren't quaking in their boots. Salesforce.com has a lot of engineering ahead ...

Farber's probably right to say that the old-line enterprise-software giants aren't yet "quaking in their boots" about the threat posed by pure-play SaaS providers, but it's safe to say they're not entirely sanguine, either. They know that the big question has yet to be answered: How large a role will the SaaS model end up playing in enterprise computing? Will SaaS thrive on the periphery, limited to either smaller companies or a few well-defined applications like salesforce automation or call-center management, or will it move into the mainstream, displacing the old on-premises model entirely? For the moment, SAP and Microsoft seem to be betting on the former (while Oracle seems more agnostic, happy to buy its way to dominance no matter what the future brings).

SAP and Microsoft have both dipped their toes into the SaaS pool, but, to horribly mix metaphors, they appear to be taking the view that SaaS is basically an "on-ramp" to big, traditional software implementations. It's a well-contained, manageable supplement to their traditional enterprise products, not a big, hairy cannibal that's going to feed off those old products. Microsoft's Live services are aimed squarely at very small businesses - the ones that can't afford to buy their own servers or hire their own IT staffs. If those businesses stay small, they'll stick with the subscription-based or ad-supported Live services. If they grow, Microsoft will be able, it hopes, to lead them to more traditional products. SAP, for its part, is introducing a SaaS version of its own CRM system, but, as Business Week reported, "SAP says it believes most large corporations that buy CRM as a service will use it only temporarily and eventually move the applications on-premises."

So which way will the SaaS ramp go? Will it be just another on-ramp to traditional corporate software, as SAP hopes, or will it be an off-ramp to a purely on-demand future, as Salesforce.com assumes? We don't know yet, but there are some tea leaves worth reading. Another CRM provider, RightNow Technologies, has long offered both an on-premises and a SaaS version of its application. I recently asked RightNow's chief executive, Greg Gianforte, if he'd noticed any trends in which form of the application customers are opting for. He said that five years ago 50% of customers were using the SaaS version but that today the percentage using SaaS is up to 87% - and still rising. And an increasing percentage of the SaaS customers are big companies with more than a billion dollars in revenues. For RightNow, in other words, the ramp is leading away from on-premises installations.

That makes intuitive sense. If you're happy with a SaaS setup, what are the odds of waking up one day and saying, "Well, that worked well, but now it's time to go out and buy a lot of hardware, expand our data center, hire a bunch of new IT specialists, and pay a lot of money to have the same software installed on our own machines"? Pretty low, I'd say. That doesn't change the fact that, as Farber says, there's "a lot of engineering ahead." But if you assume that the engineering will get done, it's hard to look into the future and see SaaS as being just an on-ramp to an old highway with high tolls.

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» To SaaS or not to SaaS? from Nitin's Blog
In view of the differences of opinions about the perceived SaaS advantages, my post lists some items that are not so commonly perceived to be associated with SaaS. [Read More]

Tracked on March 9, 2006 11:28 PM

Comments

Pendulums do swing. Intuitively I agree with you but I have seen outsourced functions brought back in house. I have seen CIOs start to custom build more as the TCO of packaged software (SAP, Oracle - license plus maintenance plus systems integration partners plus perimum salaries for those skills) has grown...it depends on vendor performance and pricing and market evolution...right now SaaS vendors are eager to please but when they grow to Oracle or IBM sizes, who knows how they will behave?

Posted by: vinnie mirchandani at March 6, 2006 11:50 AM

If you're happy with a SaaS setup, what are the odds of waking up one day and saying, "Well, that worked well, but now it's time to go out and buy a lot of hardware, expand our data center, hire a bunch of new IT specialists, and pay a lot of money to have the same software installed on our own machines"?

This is probably the most convincing argument pro-Saas I have heard so far, at least about its staying power.

Posted by: Filip Verhaeghe at March 6, 2006 12:28 PM

... right now SaaS vendors are eager to please but when they grow to Oracle or IBM sizes, who knows how they will behave?

Valid question, Vinnie. I guess we'll fall off that bridge when we get to it.

Posted by: Nick at March 6, 2006 01:27 PM

sorry I missed saying get to Oracle or IBm sizes or get acquired by them...latter bridge could come up sooner than we think...

Posted by: vinnie mirchandani at March 6, 2006 01:44 PM

I think the pendulum will definitely swing back because this statement is inaccurate: "now it's time to go out and buy a lot of hardware, expand our data center, hire a bunch of new IT specialists, and pay a lot of money to have the same software installed on our own machines"

Fact is, setting up and running SugarCRM, for example, is easy and cheap. I think it will be pretty common for companies large and small to have a basic LAMP stack and experise on premise or via a low cost provider that will host apps like this. Companies will not put up with the recurring costs of SaaS.

Posted by: pwb at March 6, 2006 01:58 PM

pwb: There will always be recurring costs of one sort or another, but you're right to point out that there are more scenarios than the two I describe. Thanks.

Posted by: Nick at March 6, 2006 02:16 PM

Hi, Nick.

There would be two kinds of the business economies. One is the "Commodities" targetted cost-performance, and another one is "Customeized" targetted originalities.
"SaaS" might be near the former.
The tactical CIO like to choose the latter,"Customeized" included "Professional Services", I mean.

Posted by: Makio Yamazaki at March 6, 2006 04:25 PM

My last company developed software for the electric utility industry, and there was one product that we only offered as a service. About half of our potential customers thought they wanted to host it themselves. And we always said the same thing: "Let's do the initial implementation at our hosting facility; after we've got all the kinks worked out, we can move to yours if it still seems like a good idea."

No one ever did. SaaS worked great for that product--it was clean and simple.

Posted by: Dan Ciruli at March 6, 2006 06:48 PM

Sure there are likely to always be some recurring costs but I'm talking about $25/month LAMP hosting vs. $65 per head per month. Big difference.

Posted by: pwb at March 7, 2006 03:20 AM

pwb: I heard installing sharepoint is even easier. But apparently you need 1 dedicated administrator for every 4 sharepoint instances. Moral: Outsourced administration tends to win in the long run.

Nick: The most interesting aspect of SaaS is that off-the-shelve is being legitimized as enterprise-ware.

I recall it was not too long ago when DoD had their own wordprocessor. Or every business had a byo payroll system (larger businesses still do!). That type of approach is seen as anathema.

SaaS has sufficient leverage in audience-size to build a complete suite of software without relying on too much site customization.

Any CIO who has seen bad ERP customizations will have to think twice whether their business is really that unique that no one else in the globe has a similar model. ERP rollouts usually get businesses to "adapt" to the software under the guise of Business Process Reengineering anyway <wink>!

Posted by: Chui at March 9, 2006 06:07 PM

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