The internet revolution: software as a service

Is the browser the new operating system? It is by no means a new question, but it is certainly one that has gained in credibility in recent years. That is...

Is the browser the new operating system? It is by no means a new question, but it is certainly one that has gained in credibility in recent years. That is down to an abundance of internet bandwidth and a bewildering range of enterprise software applications made available over the internet to end-user organisations by software...

as a service (SaaS) providers.

The argument in favour of SaaS goes something like this: if employees are accessing software applications over the internet from remote locations where they are managed and maintained by third-party specialists, then in-house IT teams are relieved of the time and cost burdens traditionally associated with keeping software up and running on their own premises - along with the infrastructure that underpins them.

"We have been told, or brainwashed, or hypnotised - you pick the word which is right for you - to go down the infrastructure route," said Marc Benioff, CEO of SaaS market leader Salesforce.com at the company's recent European user conference in London. "Those days are over. The world has changed," he said.

Given that his audience was largely made up of representatives from companies who have already made some commitment to SaaS, that message was bound to play well.

But bearing in mind the relative novelty of SaaS - in any mature form, at least - it is likely that a substantial proportion of those conference attendees continue to devote at least some of their time to keeping in-house operating systems and hardware up and running in order to support areas of their businesses that have not migrated to the SaaS model. In short, the death of infrastructure is less imminent than SaaS suppliers would have prospective customers believe.

Nevertheless, in the face of fears about the global economic climate, SaaS may look like a convincing proposition to those companies that have still to test the model. Going down this path eliminates the large upfront costs of new software deployment - particularly in terms of OS licences and hardware expenditure - and provides the opportunity to maintain applications without having to necessarily increase IT headcount.

However, the SaaS market is unlikely be immune to closer scrutiny of IT budgets, say many industy watchers. For example, at Forrester Research, analyst Andrew Bartels says that SaaS is "not necessarily a fitting remedy during a recession".

Although SaaS suppliers relentlessly tout the cost savings their offerings can provide, it would cost businesses a lot more to rip and replace legacy assets running on in-house operating systems and hardware with SaaS products, Bartels says. However, he does concede that investing in SaaS might offer lower upfront costs for a new technology, where IT budgets allow for it.

Longer-range forecasts of the market for SaaS are more optimistic. In a recent poll conducted by business communications provider Colt Telecom, 88% of UK IT directors expect to increase their use of SaaS by 2009. Analyst Gartner, meanwhile, predicts the worldwide market for SaaS to grow from £3.2bn in 2006 to £9.7bn in 2011, when a quarter of all new software bought will be delivered as a service.

Such figures suggest that sales of operating system licences and new server hardware are bound to be impacted as companies increasingly look to "the cloud" to deliver key elements of their IT infrastructure.

Already, there's plenty of evidence to suggest that the trend towards SaaS is impacting procurement behaviour in IT departments. At hotel chain Malmaison and Hotel du Vin, for example, rapid growth means that the IT director, Mark Jelley, is under immense pressure to get new IT infrastructure up and running whenever the company announces plans to open new premises.

Requests are arriving on his desk thick and fast. In 2007, the company opened four new hotels within a 14-week period. This year, expansion plans will continue at a similarly break-neck pace. "What I need, ideally, is a 'hotel in a box' IT system," Jelley jokes.

SaaS provides the closest viable alternative to that ideal, he says. "We use the SaaS model for many of our key applications: staff appraisal, property management and stock control, for example," he says. "If you can get a good SaaS partner, they are doing all the hard work on your behalf when it comes to keeping infrastructure such as hardware and operating systems up and running," he says.

That said, there are still areas of the business that the company is not prepared to place in the hands of a third party. An example is the company's financial accounting system. "To my mind, that is too dangerous. It is an area that we want to keep close and that means keeping it in-house," says Jelley. But as and when other new applications are needed by the company, he says, he will certainly consider the SaaS model. "It makes absolute sense to me to do so."

Meanwhile, at Rococo Chocolates, a London-based manufacturer of luxury chocolates, finance controller Gerry Kerins is only too happy to delegate responsibility for managing the company's accounting systems to a SaaS provider - in this case, NetSuite.

For many years, he struggled to manage the company's accounts using software from provider Sage based on a single PC in his office. "Outside my office, the queues of people wanting access to business-critical data were often longer than the huge queues for our chocolates during the Easter rush," he says. "But the only products offering the sophistication we required seemed to be server-based, in-house systems, until we considered SaaS," he says.

Having signed up for NetSuite, Rococo Chocolates has circumnavigated the need to buy a server, operating system and a new accounting package, he says - as well as the need to bring in specialist IT help to manage and maintain them. "Why would I want to be tinkering with IT equipment or paying someone else to come to our offices and do it for us? SaaS gives us access to skills that would otherwise be way beyond our reach," he says.

And another major worry has been alleviated at Rococo - the back-up of vital data on a regular basis. "With our PC-based system, backing up data was down to me. Now it is in the hands of the professionals at NetSuite, who I am confident do a far more reliable job," says Kerins. "I am probably happier with the situation now because I do not have to worry. If I go on holiday, the data is still there, being well looked after in the US and available to our staff, whether I am there or not," he says.

Xhead: Punching above weight

For both Jelley and Kerins, SaaS is a way to outsource mundane infrastructure maintenance in order to focus on addressing the strategic needs of their business users.

It may also enable them to compete against much larger rivals in their respective industries. Although small but fast-growing companies often have IT requirements that are just as sophisticated as larger rivals, say analysts, they have no desire to match the huge investments in IT infrastructure typically associated with the operations of high-end companies.

The viability of applications and systems capabilities delivered over high-bandwidth internet connections, however, enables them to go after the same business outcome that might be expected from a high-end SAP or Oracle implementation.

By running these applications over the web - without the maintenance, the installation, the licensing issues, the scaling issues of ramping up and down user numbers - SMBs can get to that outcome without the upfront costs. In short, they can punch above their weight.

That shift in thinking is also taking hold at much larger firms. Large enterprise adoption of SaaS has increased by a third over the past year, according to a recent survey by analyst firm Forrester Research, which calculated that SaaS adoption in large enterprises now stands at 16%, up a third on the previous year's 12%.

SaaS providers are working hard to sustain the momentum and broaden the model's appeal to reach a wider audience. Their thinking seems to be that the very same infrastructure that supports their own applications and delivers them to users is well-equipped to do the same for other applications too. As a result, some are opening up their infrastructures to independent software suppliers to build applications that are more tailored than their own offerings, but that also complement them.

This model - in which developers are given access to a complete hosted infrastructure for the building, testing and deployment of custom applications - is increasingly referred to as "platform as a service" or PaaS. Salesforce.com has its force.com platform and Netsuite recently unveiled the Netsuite Business Operating System or NS-BOS to compete in this space. Smaller rivals such as Bungee Technology and Coghead, meanwhile, are extending PaaS capabilities to software developers working in internal IT departments, too.

Elsewhere in the industry, giants such as Google, Microsoft, IBM, Oracle and SAP are all scrambling to build and deploy application delivery platforms in order to deliver more of their software to users over the internet without the need for end-users to host operating systems and related infrastructure internally.

This all points to a fundamental shift in the way that organisations view internal IT requirements, says respected IT market analyst Nicholas Carr in his latest book, The Big Switch.

"Thanks to all the fibre-optic cable laid by communications companies during the dot-com boom, internet bandwidth has become not only abundant but also abundantly cheap. It does not matter whether the server running your program is in the datacentre down the hall or in somebody else's datacentre on the other side of the world - all the machines are now connected and shared," he says. "What companies used to have no choice but to supply themselves, they can now purchase as a service for a simple fee."




This was last published in May 2008

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