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CIOs slowly embracing SaaS

Paul Gillin

Users are already adopting Software as a Service (SaaS), often without the knowledge of their IT organizations. Left unchecked, this could become a huge problem for CIOs. You need to get

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a handle on SaaS before it swamps you.

More on SaaS
The truth about SaaS
SaaS has been one of the hottest -- and most controversial -- topics in IT this year. The idea of getting sophisticated business applications delivered over the Internet and paid for by a credit card resonates with business users, who are fed up with long installation times and disruptive upgrades. With SaaS, much of that hassle is avoided. You set up an account and go. SaaS can trim months off software deployment times.

SaaS: Just another four-letter word?
The basic characteristics of SaaS are straightforward: multi-tenancy at some or all layers of the stack; pay-as-you-go pricing with no up-front fee; vendor responsibility for application management and infrastructure management; and frequent and automatic upgrades. Unlike in application outsourcing, the buyer cannot go in and modify the code.

The SaaS mode of delivery is well-suited for small and medium-sized businesses, but it also is catching on with large firms, said Liz Herbert, senior analyst at Forrester Research Inc. A recent benchmark study from Forrester showed that 30% of large firms are using, piloting or planning to pilot SaaS in the next 12 months, but they aren't necessarily using it enterprise-wide.

The biggest draw to SaaS is probably the low point of entry: the easy payment terms, short-term commitment requirements (ranging from a month to a year) and no upfront costs means the purchase can be done "under the corporate radar screen," Herbert said. In addition, upgrades are frequent and automatic, and dispense with the need for outside consultants. The timing of software upgrades typically is controlled by the application provider, although some vendors allow customers to choose when to upgrade.

Another appeal is the single contract. Unlike in a traditional managed hosting arrangement, the SaaS vendor deals directly with the hosting provider.

What's not to like? Security, privacy and loss of control are legitimate concerns, Herbert said. Your organization's data, after all, is hosted in the same database as the other customers' information. Also, performance quality varies from vendor to vendor, and most SaaS vendors have weak service-level agreements or none at all, according to Herbert.

Application integration and customization are also issues, Herbert said, but increasingly the SaaS vendors are closing the gap with on-premise applications. Third-party vendors are also emerging to help vendors optimize SaaS performance.

Sudi Bindiganavile, director of information services at Primavera Systems Inc. in Bala Cynwyd, Pa., has mixed feelings about SaaS. "I like the fact that it democratizes software and I don't like that it can go under the radar." While he doesn't want to see IT as a "control," he said it is important -- "even if the buying power shifts" -- to have IT review purchases to make sure they do not undermine or endanger the company's systems.

Linda Tucci, Senior News Writer

IT managers are considerably less enthusiastic about SaaS than their users. They fret about availability, reliability and security. They also know that integrating applications from a service provider with their legacy base is no walk in the park. They know that the one-month deployment cycles SaaS vendors advertise are fantasy.

Both sides have valid positions, but it doesn't really matter. Users are already adopting SaaS, often without the knowledge of their IT organizations. Left unchecked, this could become a huge problem for CIOs. You need to get a handle on SaaS before it swamps you.

SaaS is on a track that looks eerily like the one taken by PCs, LANs, personal digital assistants, wireless networks and any number of other disruptive technologies of the last two decades. The pattern is for technology to come in under the radar and spread out of control. It's then up to IT organizations to come in and clean up the mess. By then, the technology is so entrenched in the business that IT's only choice is to figure out how to integrate it. The process is expensive and ungainly. Unfortunately, this scenario plays out again and again.

CIOs have to deal with SaaS because it's the fastest-growing segment of the software market right now. Consider:

  • Boston-based AMR Research Inc. says the hosted segment of the CRM market grew by 60% in 2005. It also estimates that the market for hosted procurement software grew 125% last year.

  • San Francisco-based Salesforce.com Inc. reported a 26% jump in subscribers in the most recent quarter, and its annual revenue should grow 55% in 2007, according to Morningstar Inc.

  • RightNow Technologies Inc. in Bozeman, Mont., just signed up The Procter & Gamble Co. to use its customer-contact software across many of its brands.

  • Software venture capitalist Ann Winblad recently told me that 100% of the business plans she sees for new applications and half of the business plans for new systems software call for hosted delivery. Almost no one is building software for on-premise installation any more, she said.

Clearly, this genie isn't going back in the bottle. So what can you do about it?

First, consider that SaaS might be a good idea for your organization. Nonstrategic applications like human resources management and sales force automation can be expensive to install and maintain, so maybe you should just outsource them to begin with.

If users are shortcutting IT and contracting for SaaS applications, make sure they know they're responsible for their actions. You'll need to enlist top management for support if you plan to take this bad-cop approach.

Perhaps a more desirable avenue is to engage users in a conversation about SaaS. Study up on the topic (two great resources are SaaS Showplace and its sister site, Managed Services Showplace), learn why it appeals to business users, build a preferred provider list and consider how to integrate it into your IT infrastructure. Invite some SaaS providers in to pitch their services to you and tell you how they can work with your legacy base. These companies are mighty keen to make the acquaintance of CIOs these days and the best time to extract concessions is before they've become embedded into your organization.

Paul Gillin is a technology writer and consultant and former editor-in-chief of TechTarget. His Web site is www.gillin.com.


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