With software-as-a-service (SaaS), software is delivered over the internet in return for a fixed fee, usually a monthly subscription amount. Unlike the traditional software licensing model, up-front fees are minimal.
The business case for SaaS is strong:
- Saves money. A Yankee Group study found the total cost of operating an on-demand software package is less than half that for software bought traditionally.
- Speed. With SaaS, software can be deployed in days and weeks, rather than the three to 12 months common for traditional license-and-install software.
- Minimal maintenance. The SaaS vendor, not the customer, invests in the technology, hardware, and ongoing suport services.
- Lower risk. SaaS lowers integration risk, but does increase dependency on the vendor or deepen the relationship, depending on your point of view.
- Superior economics. Traditional software is often underused, which means wasted investment. An IDC survey of 250 IT executives found that they used just 16% of the software they buy. Good SaaS software focuses on the most critical and common features its customers need.
- Healthy relationships. The SaaS provider earns its returns over the term of the relationship, rather than front-loading with a license sale. Sales shifts to helping the customer receive the ROI forecast in the business case, rather than the heavy pre-sale promises of the traditional enterprise software sale, which are often quickly forgotten.
In summary, SaaS works well for small and medium sized businesses. For large businesses, it's a good fit for commodity or common processes tasks, but less well for processes which differentiate a business or require unassailable security and privacy. Ultimately, the business software market will bifurcate: SaaS for most of the market, with on-site software concentrated in the Fortune 500. Companies like Salesforce are testing the boundaries of this market division aggressively.
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