Is there a future for software as a service?

What factors affect the adoption of software as a service for core business applications, such as accounting, human resources and...

What factors affect the adoption of software as a service for core business applications, such as accounting, human resources and payroll? What is the long-term outlook for this software deployment model?

Software as a service - renting hosted business applications to customers, usually via the Internet - once appeared to be on the verge of becoming a common method for deploying software. Recently, amid the IT and economic slump, support for software as a service has lost momentum and questions remain regarding the viability of this software deployment model.

Software as a service will probably eventually re-emerge in a more refined form that will be successful for certain applications and customer types. However widespread adoption of this model will not materialise for at least three years.

One of the issues discouraging adoption of hosted applications in general has been the crumbling viability of application service providers (ASPs).

However, for common business applications, such as accounting, expenses and HR/payroll, much of the rental activity has not involved third-party ASPs (at least not directly), since many software vendors provide the hosted service directly to the customer. Established vendors, such as Oracle and PeopleSoft, offer their own applications as a hosted service through their ASPs.

Specialist Internet application providers, such as NetLedger and Employease, offer software as a rental service only, delivered using a multi-tenant application model. The business viability of many of these smaller Internet application providers continues to be an issue.

Beyond vendor viability, the issues limiting adoption of
"Software as a service will probably eventually re-emerge in a more refined form that will be successful for certain applications and customer types"
Paul Hamerman
rental applications include solution flexibility, control of sensitive data and cost-effectiveness. Larger companies tend to have more complex requirements, making them less suitable candidates for hosted software solutions. Not surprisingly, most of the adoption has occurred in the small to mid-market, where solution flexibility is less of an issue.

Companies may also be concerned about data confidentiality in the context of maintaining sensitive financial and personnel records off-site via Internet applications. This is perhaps more of a perceived than an actual risk, but a potential issue nonetheless. Finally, the cost-effectiveness of hosted rental applications versus on-site installations of licensed applications has not been convincing. In many cases, the arrangement has offered no savings or even proved more expensive. The specialist Internet application providers offer a potentially more promising cost structure, where software and infrastructure costs are spread across multiple customers using the multi-tenant model.

Some change has occurred in certain application areas. Concur Technologies, an expense management software vendor, has seen a rapid increase in customer adoption of its ASP offering to the point that hosted customers now account for more than half of its customer base of 800 companies.

Employease has approximately 1,300 customers (small to medium-sized companies) renting its human resources application. In general, however, many specialist rental software providers are struggling for survival and some, such as small-business accounting vendor eLedger, have folded. Whereas eLedger was unable to obtain funding to stay in business, NetLedger was recently propped up by Oracle's $30m (£20.7m) cash infusion and rebranding as an Oracle Small Business.

Traditional licensed software providers are also experiencing soft demand for hosted solutions. The future promise of software as a service was a major factor in Microsoft's acquisition of Great Plains.

However, the company is sticking with a traditional licensed, on-site software delivery model for existing products and its new offering, Small Business Manager. Microsoft Great Plains indicated to Giga that the software as a service model is not a priority for it right now, but the company is redesigning its applications for Internet deployment via .Net and still believes that this model will be viable eventually. Oracle's E-Business Suite Online hosted offering has approximately 125 customers currently, but it has experienced slower growth than expected, despite aggressive promotional efforts. Similarly, PeopleSoft's eCenter hosting business has also been slow.

Although the software as a service delivery model for common business applications has not lived up to expectations, it still holds promise for the future. The potential is stronger in the small to mid-market sector, where flexibility is less of an issue and internal IT resources are limited. The benefits of quicker software deployment, lower up-front costs and outsourced maintenance and support appeal to many companies.

Solutions that were designed for Internet deployment and multi-tenant hosting are more likely to be cost-effective and solution flexibility and functionality will probably improve. As the general application software market and economy as a whole recovers and rental solutions mature, software as a service will regain its lost momentum, reaching mainstream levels of adoption in three to five years.

Clients should consider the software as a service model if both the solution and deployment model meet their specific needs and if vendor viability is a manageable and acceptable risk for them.

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