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April 13, 2006

The much-ballyhooed world of on-demand software has arrived, and the question is not if, but when and where software-as-a-service (SaaS) will replace on-premise as the dominant application software model.

Ever since the emergence of salesforce.com as a major player in customer relationship management (CRM), it has become obvious that SaaS is fast becoming an important business technology.

But equally well-publicized failures at salesforce.com also revealed potential vulnerabilities to this model, and reinforced a common assumption; most observers still believe that SaaS will remain quietly in its corner, targeting the small and medium sized business (SMB) market with point applications such as CRM, supply chain management (SCM), and product lifecycle management (PLM).

Some, however, see the potential for a much larger encroachment by SaaS, and, ultimately, the demise of the on-premise license model.

"On-demand will replace on-premise," Michael Topolovac, CEO of on-demand PLM provider Arena Solutions, flatly predicts.

"Customers will continue to have on-premise for a number of years still, not because it solves problems better, but because of the cost of replacing legacy systems," he told internetnews.com.

If proof were needed that SaaS is here to stay, even on-premise powerhouse SAP launched an on-demand version of its CRM product, mySAP, this year.

Stefan Haenisch, VP of CRM Application Solution Marketing at SAP, told internetnews.com the company's decision was driven by "customer demand and pressure."

Haenisch noted that SAP is not targeting the SMB market, but is going after large mid-sized companies and divisions of enterprise-level clients.

Ultimately, however, SAP hopes to migrate those users to a more lucrative on-premise type solution.

Even those who disparage SaaS recognize its merits. It's easy to install, it allows companies to get up and running quickly without having to lay out large up-front fees, and customers benefit from more frequent upgrades and better support than they can expect from traditional license-and-install software vendors.

Experts are just as quick to lay out its deficiencies: customers shouldn't expect any significant customization, it requires significant bandwidth to run efficiently, performance in multi-tenant situations is affected by other users during peak times, and it can end up costing more than on-premise solutions over time.

"It has to fit your business model for you to get value out of it," cautions Liz Herbert, a SaaS expert with Forrester Research.

Offsetting the higher levels of support that customers can get from SaaS, the product you see during the demo is pretty much the product you get, notes Adrian Gonzalez, a director at ARC Advisory.

For SaaS to be a viable option, a company should be able "to leverage 80 to 90 percent of what there is," he adds.

Haenisch notes that SAP has tried to circumvent the performance issue by using something he called "isolated tenancy."

Multi-tenancy brings down hardware costs, but impacts performance. On the other hand, maintaining a single server for each customer would be prohibitively expensive.

Haenisch says that isolated tenancy provides the performance benefits of single tenancy with the cost advantages of multi-tenancy.

"Each customer has a dedicated instance of the software and database," he says.

A similar software delivery mechanism, ASP, had its heyday and then crashed earlier in the decade. But ASP 2.0, as SaaS is sometimes called, has avoided the pitfalls of its maligned predecessor.

Most importantly, SaaS is not an attempt to deliver on-premise code via the Internet. SaaS solutions are designed specifically for online delivery.

"Vision and architecture are now better aligned," notes ARC's Gonzalez.

SaaS providers have begun springing up in all areas — even ERP, which heretofore has been the province of on-premise providers such as SAP and Oracle. According to JMP Securities, ERP represents just 3% of the total on-demand market, but is projected to grow at a 48 percent clip through 2009.

Microsoft CEO Bill Gates raised eyebrows when he doffed his cap to the emerging technology during Microsoft's Convergence conference in March, saying that SaaS is something that the software giant "believes in a lot."

But in the same breath, Gates drew clear boundaries for what he saw as its potential.

"As you get smaller in size, maybe the off-premise becomes relatively more attractive."

In other words, SaaS vendors, pick on people your own size.

Others, however, might argue that Microsoft is no longer in a position to dictate terms.

Treb Ryan, chief executive officer of OpSource, which provides infrastructure and consulting support for on-demand software vendors, believes the acquisition of Great Plains demonstrates Microsoft's miscalculation of where the market is going.

"It was a major mistake by Microsoft," he told internetnews.com. "They made the acquisition and then they found that the mid-market is already being taken over by salesforce.com."

And he offered a veiled warning: "Any time there's a change in delivery models and how people use technology, some people will make the transition and other companies will be stymied," he said.

Story adapted from internetnews.com.