SaaS Changing Software’s Rules – and Opportunities

Software as a Service is emerging as a new paradigm for software, signifying a major change in the tech world.

By Chandler Harris | April 2008


If jobs follow money, consider this indicator: In 2006, venture capital flowed into Silicon Valley for companies that develop and sell Software as a Service, while funding for traditional software firms dropped to its lowest level in ten years, according to the MoneyTree Report compiled by PricewaterhouseCoopers and the National Venture Capital Association. Says Ben Pring, an analyst for research firm Gartner: “Trying to get funding for client/server, CD-Rom-based software is next to impossible these days.”

On top of that, Gartner expects SaaS to account for 25 percent of business software revenue by 2011, compared to 5 percent in 2005.

Software as a Service is emerging as a new paradigm for software, signifying a major change in the tech world. According to an industry analysis by Triple Tree, a Minneapolis investment bank, SaaS represents a bigger shift in the landscape than did distributed computing, desktop productivity or even the Internet revolution.

Generally, SaaS refers to software applications for which companies or consumers pay monthly fees to run from the Web, rather than purchase programs upfront and install them on their local computers or networks. To many businesses, especially smaller ones, SaaS solutions are appealing because of their lower acquisition costs, savings from avoiding outside vendor fees to host and manage the software, shorter implementation times, and easier upgrade and procurement paths, says Scott Donahue, an analyst for Triple Tree.

While in the past privacy and sustainability concerns made companies hesitant to use SaaS, the platform is now being embraced more than ever. “The software industry is evolving fairly rapidly toward acceptance of SaaS software,” says Donahue. “The model has proven to be robust and sustainable and attractive.”

Who’s Playing

Tech leaders such as Microsoft, IBM and Cisco have been integrating SaaS models while smaller vendors have been capitalizing on the new format to compete with bigger players. Microsoft’s dominance of office software is being challenged by Google’s free and premium Docs service, which provides word-processing and spreadsheet applications online. Cisco made the jump into SaaS services in May 2007 by acquiring WebEx, a Web-conferencing and collaboration company for $3.2 billion. Oracle’s purchase of Siebel resulted from its inability to transition to SaaS, according to Triple Tree’s industry analysis.

Some observers expect SaaS solutions to spur innovation in Silicon Valley and beyond, since smaller companies with limited budgets can grow more quickly in shorter amounts of time, says James Miacco, chief executive of Klir Technologies, a company that helps businesses implement IT management solutions. “I think the next generation of technology is what this means for businesses,” Miacco says. “(SaaS) dramatically changes how people buy and build a company.”

Put another way, all software companies are being impacted by SaaS. “Traditional software will have its place, but looking ahead we’ll see a lot more SaaS in the marketplace,” Donahue says. “I wouldn’t be surprised to see a majority of software (use) the SaaS model.”

Chandler Harris is a business writer in California.

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