SaaS: the Death Knell for Corporate IT?

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The Enterprise Irregulars clubhouse is all abuzz these days about SaaS (Software as a Service, aka on-demand, utility, cloud, utility/cloud computing in a multitenant environment, whatever) and whether it will put an end to enterprise computing as we know it.

The consensus among the heavyweight software gurus who gather there is that is that it will, it won’t, and it might. The one thing they all seem to agree on is that SaaS is becoming an increasing popular alternative to building a massive in-house IT infrastructure and staffing it with highly-paid propeller heads.

Nick Carr cited a new, not-yet-released survey by McKinsey & Company which found that 61% of North American companies with sales over $1 billion plan to adopt one or more SaaS applications over the next year, a dramatic increase from the 38% who were planning to install SaaS applications in 2005. Carr’s McKinsey handlers cite such factors as lower up-front costs, lower total ownership costs, faster implementation than traditional licensed software and more vendor accountability as the major driving forces.

SaaS has proven to be an enormous success in the Customer Relationship Management (CRM) software marketplace with Salesforce.com’s on-demand offering becoming a runaway bestseller. And, gurus with longer memories point out that ADP, the payroll processing giant, has been doing SaaS since the 1950s so the concept itself is not new. In general, on-demand ERP applications have been slower to develop.

To the major providers of on-premise enterprise software like SAP, IBM, Oracle and Microsoft, and the systems integration firms like Accenture who make all these things work together, SaaS will be-depending upon which guru you ask-disruptive, no big deal, or possibly a big deal.

In other words, nobody knows for sure at this point exactly how SaaS is going to shake out but all of the big apps and SIs are gingerly poking their fingers into the cloud. The is-SaaS-really-cheaper-over-the-long-run argument will be a key factor.

In its latest Comparing The ROI Of SaaS Versus On-Premise report Forrester says that (based on 10-year ROI) in general, on-premise models increase in financial attractiveness as the number of users increases. That suggests that SaaS is currently more attractive for small and mid-sized companies with relatively few users and less attractive for large enterprises with many centralized users. However, Forrester adds that enterprises operating in multiple geographies with 25% or more users in remote locations benefit more from SaaS options.

Fellow Enterprise Irregular Vinnie Mirchandani says Forrester’s numbers are all wet:

At 500+ users, after volume discounts, SaaS pricing for horizontal ERP and CRM functionality could be at $ 60 a user a month. After 6 years, the point where Forrester believes on-premise becomes more competitive, the total SaaS cost is around $ 4,500 per user. I challenge any on-premise vendor combined with an outsourcer to deliver license, maintenance at 17 to 22% a year, hosting, application help desk, maintenance/tuning, upgrades etc at that price for 6 years.

Vinnie also believes that McKinsey’s is being overly optimistic when it says that SaaS use in large enterprises is about to explode.

A second key factor in adoption is cultural as some companies believe their IT customization prowess is so great that they are getting a competitive advantage from their various tweakings that would be diminished by adopting a SaaS best practice model. Somewhere, I’m sure, there are still firms that make their own electricity because they believe they can do it better than the local power company.

So, what are the near-term prospects for SaaS? On this point, there really is a consensus and that is: one from Column A and one from Column B. What we are likely to see emerge is a “hybrid” model that combines components maintained internally with components hosted or otherwise supplied by outside vendors.

Nobody has yet gone broke overestimating the ability of the SAPs and IBMs and Accentures to figure out where the big money is headed and getting there first. SaaS doesn’t change everything but it’s not going away either. SAP is said to be working on a new mid-market product featuring “alternative deployment models” that will be released in January or February.

Gee, I wonder what those alternative models could be.


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Jerry Bowles has more than 30 years of varied experience as a writer, editor, marketing consultant, corporate communications director and blogger. For the past 20 years, he has produced and written special supplements on new technologies for a number of magazines, including Forbes, Fortune and Newsweek.


SaaS: the Death Knell for Corporate IT?
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