Is SaaS The Way Forward For All Enterprise Applications?
In this age of continuous technology evolution and high-speed internet, Software-as-a-Service is now an option provided by most enterprise software vendors. The question that remains is if this is just a trend or eventually all software we consume will move to this model. To answer this question, we need to demystify SaaS and understand the underlying economics and the needs it addresses. The genesis and success of SaaS can be traced back to 3 factors. One has its roots in Economics 101 or the foundation of economics in our society. The second is a more recent change in the way businesses are run and valued. And, the third is a change in consumption pattern. Let us look at these three in detail.
A household in a remote part of the world that survives on their own would have to do all activities on its own, including farming or hunting for food, cooking, protecting the family, educating children, administering medicine, etc... If you move this household to a complex society in a town or city, it would now have to choose its specialization. It would end up providing that specialized service to many others while relying on other providers for their necessities. This gives rise to organized food companies, schools, police, doctors, and other specialized professions. The roots of ‘as-a-service’ lie here - whether it is food, education, protection, medicine, and others. The same can be extended to a business with multiple functions supporting the core line (specialization) function. Much before SaaS was popularized, there have been 'as-a-service' providers for all major support functions. For example, payroll processing companies, freelance accountants for financial statement creation, external HR consultants, coaches, etc… that are engaged for a specific duration rather than employing them full-time.
In the current times, IT systems have become an integral part of any organization. As a direct consequence of this, it has resulted in the need for teams to manage the IT systems (software and hardware). For small and large companies alike, it raises the question 'Are we better off consuming the software as a service or implementing and maintaining it ourselves?'. The fundamental driver being the underlying economics that includes tradeoffs between cost (talent, latency, downtime, security, etc...) and focus on specialization/ line functions.
The low entry barriers for businesses in the IT and allied sectors have brought in a surge in startups and entrepreneurs (self-funded or by VCs). This has created a significant buzz around buying and selling businesses, that has put a spotlight on company valuations. For a software consumer's valuation, an operational expenditure is easy to understand and account. Unlike a capital expense that has to be shown as an asset and expensed over the year, an operational expense model assigns the right amount of expenses to the revenue for a given year. Also, with newer technologies coming at a fast pace, keeping software license as an asset may not add much value to the balance sheet. This preference towards operational expenditure has created a higher need for SaaS. For a software provider, a SaaS model provides a locked-in customer base with recurring revenue over the years. Although technically one can stop SaaS consumption easily, it is not that easy to stop it once it becomes an integral part of the business function. This provides a stable outlook for the provider's business and increases its valuations.
Hence, for both, the software provider and consumer - this adds to their respective valuations and is propelling the need for SaaS based engagement models. This varies by industries and the focus on operational expense could change over time.
Consumption pattern trend
Most businesses worldwide are moving towards try-before-buy or pay-per-use models. These changing patterns have also impacted software consumption. Applications that use newer untested technologies may have to offer SaaS as the first option because businesses want to explore and co-innovate before deciding to lock-in and buy a perpetual license from any vendor. In price sensitive and emerging markets, as more businesses adopt IT for operations, there is a need to 'try' the software with a quick deployment on a pilot before committing to a large expense. They are more comfortable with an operational expense for the time they use the software than spending time on deployment with expensive IT consultants. The other sub-factor is for applications that are used only once a month/ quarter or year. Businesses looking to rationalize their costs are asking for a 'pay-peruse' pricing model and not buy the license for perpetuity. These changing consumption patterns are also driving the need for SaaS engagement models. So, is this the way forward for all Enterprise Applications? The first factor has always existed and the underlying economics has to make sense, to attract businesses, especially in price sensitive markets. The second and third factors are specific to each one's domain of applications and change over time. Based on these, each application and customer base will need to be individually evaluated to create a roadmap to SaaS engagement model, where required.