SaaS vendors admit they’re still waiting for growth spike

Software-as-a-service is still a relatively small component of the business applications industry, but vendor executives who spoke at a Mass Technology Leadership Council Wednesday are betting that the hosted service model will quickly gain ground on traditional applications deployed and managed by users in-house.

“Software is dead. Dead, dead, dead, dead,” opined Jonathan Bush, chairman and CEO of athenahealth in Massachusetts, which provides Web-based billing services and other practice management tools for doctors’ offices.

Bush asked the audience to imagine Yahoo, which currently offers a free online mapping tool , trying to charge companies US$2,000 a seat for the ability to look up directions.

“There’s an acknowledgement that software in and of itself isn’t that differentiating a thing,” Bush said. “You’ve got to give software, and then you have to sell work.”

The percentage of business and IT executives who use at least one SaaS technology rose from 11 percent to 26 percent in the past year, Saugatuck Technology said in research published last week. While small and medium-sized businesses initially comprised the biggest market for hosted software solutions, Saugatuck says it expects a growth surge in SaaS adoption among large enterprises.

On the whole, Saugatuck states that usage of SaaS is “skyrocketing on all cylinders.”

But SaaS is probably still a few years away from becoming a dominant player in the applications market, a panel of vendors and one venture capitalist said at the Mass Technology Leadership Council event.

“Even , for all its size and market presence, still in the grand scheme of things is a small company,” said Tom Brennan, chief financial officer and vice president of strategic alliances for OpenAir, a vendor of on-demand applications that handle timesheets, expense reports, and project and resource management. “At the bottom line, the SaaS world is quite small,” he also said.

Although customers are sometimes leery of outsourcing operations currently managed in-house, Atlas Venture investor Eric Hjerpe argued that the SaaS model is a healthier dynamic for customers because vendors must satisfy them on an ongoing basis in order to win renewals.

Hjerpe, who moderated the discussion, said one challenge for vendors is switching to the subscription model from perpetual licenses, which provides money up front and can fuel growth.

Hjerpe used to work at Siebel Systems and in 1999 founded SiebelNet, a subsidiary that was the company’s first SaaS attempt.

Large vendors like Siebel have failed to move away from the perpetual license model and come up with successful SaaS offerings, Hjerpe said.

“Siebel’s failed, SAP has failed, Oracle has failed, for all their talk,” he said. “(Oracle CEO) Larry Ellison, I remember in 1999 was saying ’70 percent of my revenues in two years are going to be SaaS-based.’ Well, I don’t know if you guys have looked recently, but we’re eight years later and that ain’t the fact.”

Another challenge for some vendors is finding employees with the right mindset for building software to be distributed via a services model.

“I don’t think there’s a lot of people out there who have SaaS DNA,” said Wayne Whitcomb, vice president of engineering and technical operations at Demandware, which makes an on-demand e-commerce suite. “What we deal with all the time are people who come out of the software side, or people who come out of the services side. …. The software people are hell-bent on building packaged software without any concern on how this would be deployed. … They want to take liberties with the software that aren’t compliant or don’t work in the overall model.”

The panel also discussed the trend of large businesses adopting SaaS solutions, despite concerns about data security and reliability.

“Once you get over those basic hurdles, the IT folks can start to think strategically about not how to cut costs, but how to provide value by bringing this new application in to their IT ‘infrastructure,'” Brennan said.

One audience member asked the vendors to address the concern of some customers that SaaS might eliminate a competitive advantage businesses can gain using customized applications.

Tod Loofbourrow, founder, president and CEO of Authoria, which makes a SaaS offering for employee hiring and management, said his customers compete on the open market based on their own business processes, not on the software they use.

When a customer says it wants exclusive access to a particular feature, Loofbourrow said he points out to the customer that Authoria doesn’t do that and, “by the way, you’re getting the benefit of 250 other customers who are thinking hard about what best practices are, and all that is going into our thinking and product planning.

“For customers to look to our software as a differentiator against another customer who’s buying our software I think is the wrong conversation,” Loofbourrow said. “I mean, McDonald’s and Burger King are both customers. And I’m not going to help McDonald’s beat Burger King (by putting) a special feature in my software.”

Hjerpe asked panelists if they think SaaS is just one intermediary step toward business process outsourcing, where businesses outsource every task that does not add value to their business model.

Loofbourrow said he thinks SaaS is a component of business process outsourcing, not a stepping stone towards it.

Bush, though, discussed plans to go beyond SaaS in the medical field.

“We’ve got a plan to take on every non-seeing patient function in ambulatory health care,” he said. “All of it, every phone call. You’re going to call your doctor, we’re going to pick up the phone in 20 seconds for that doctor 24 hours a day and make your appointment, tell you about your bill and give you your lab results.”

— IDG Newswire

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