The Business Value of SaaS

Phil Wainewright in his ZDNet "Software as Services" blog has apparently hit a nerve by asserting that IT departments are "afraid" of SaaS, and followed it up with a summary of the resulting 'feeding frenzy' of comments on his blog.

As sometimes happens in an IT-focused conversation, somewhat lost in the comments is what the business wants out of the software.  We at IQNavigator sell primarily to business buyers, and in our experience there are five factors that dominate the business-focused decision process for application software: process improvement, total cost, speed to value, risk, and agility.

Fundamentally, the reason SaaS is a much better way to build and deliver software is that it delivers much better on each of these dimensions, in many cases by an order of magnitude:

• Process Improvement:  Buyers care most about the effect that the whole program has on the newly-automated business process - cost savings, process speed and accuracy and visibility, better process results - which includes far more than the software functionality.  SaaS providers, since they derive revenue from system adoption, usage volume and customer retention, provide everything needed to be successful with the software - configuration services, change management assistance, system integration creation, and best-practices to ensure that the customer gains the benefits from automating the business process.  By contrast, on-premise software vendors typically give you a CD of software to install, the phone numbers of implementation & customization consultants, and a hearty "Good luck!" as the salesperson takes his 10% commission from the software license fees and heads to sales club. 
• Speed to Value:  Aberdeen has done some research into On-Demand (SaaS) Supply Management buying factors, and found that the top factor driving businesses to consider SaaS was speed to value.  Business buyers are held to quarterly objectives of continual improvement, and as a result, waiting 6-12 months for IT to install, assemble, customize, and learn to operate an on-premise software solution is simply untenable when there's a SaaS alternative.  We are sometimes asked by IT if we can install on-premise, and obviously we can - we have automated installs adn upgrades internally for about a dozen different environments (whereas it takes substantial rearchitecting for an on-premise solution to become an automatically-upgraded single-version multi-tenant SaaS solution).  But eventually the business buyer is faced with a choice - either 1) our implementation team logs in today to our hosted test environment to start the implementation process, or 2) let us know when IT has finished making an environment ready with multiple servers, the Oracle database, an application server, a half-dozen ancillary setups (e.g., an inbound email box for notification responses), and Internet browser access for your business partners.  The wait for option 2 is usually 3-6 months (assuming the business buyer can prioritize the project high enough for IT's involvement and mid-six-figure investment), so inevitably the business buyer chooses the hosted approach because it delivers value much faster than on-premise.
• Total Cost:  Making an apples-to-apples comparison between SaaS and on-premise software is difficult, primarily because of on-premise's many hidden an unaccounted-for costs, and because on-premise simply cannot deliver the level of support and value that SaaS inherently does.  I will address a cost comparison in a separate post, suffice it to say for now that for the same volume of usage, the total cost of true SaaS software is about one-tenth the cost of on-premise software.
• RIsk:  Little addressed in most SaaS debates, risk is top-of-mind for business buyers - risk of delay or the software never going live, the program not delivering process improvement, higher costs than budgeted, or unforseen upgrade costs or obsolesence.  Risk of IT project failure is a huge concern for many business buyers, and the large number of multi-year on-premise implementation projects and high degree of on-premise "shelfware" (unused licenses) are both legacies that make business buyers not want to buy any software, SaaS or on-premise.  Any software implementation can be delayed or not reach expectations (though industry observations of SaaS so far show a much higher rate of success), the difference is that if a bad surprise is discovered six months into a program, the SaaS buyer has invested very little and can easily switch providers, whereas the on-premise buyer has already spent millions of dollars for licenses and infrastructure and consultants.
• Agility:  Finally, business needs evolve over time, and SaaS has several advantages in evolving with the customer's process requirements: 1) SaaS is designed to be inherently configurable, with switches to alter functionality for a single customer in real-time, 2) because SaaS operates on one code base and releases new capabilities every few months, new software features and innovations are quickly available to every customer (without the multi-year product cycles or upgrade delays of on-premise software), and 3) in many cases, customizations can be added within a product cycle or two (3-6 months) for customers that require functionality specific to them.  We have dozens of examples in our customer base where the customer's business needs changed and required changes to the software, and we delivered them in a few months - and the vendor's internal developers are the best on the planet at delivering new functionality on their own platform most quickly, efficiently, and cost-effectively.  Also, SaaS vendor-created customizations are part of the code base so are inherently upgraded and supported as part of the base product - another way SaaS delivers more value.

The key factor to keep in mind is that with most business processes, how the process is operated by the business determines the process's value and even competitive advantage, rather than unique features in the software.

We see business buyers understanding this more and more, and it can be demonstrated across just about every business process, such as: Is it a competitive advantage to have a specific payroll system feature or to have a well-designed incentive program that aligns motivation? Is it a competitive advantage to have a better resume search feature or to interview more effectively to identify the best talent for your enterprise?

The business value derived from a software-automated business process depends on the process design and operational execution, and SaaS enables implementing an automated process and operating it well far better, from a business-factor point of view, than on-premise software.