SaaS/On-Demand/ASP Solutions - Current Challenges and Opportunities

A few years ago, if you asked anyone at an emerging software company whether ASP/SaaS/On-Demand (referred to as ASP) solutions were for real, you would probably get a 50/50 response. Over the last year or so, I’ve been seeing a completely different scale of adoption of ASP solutions. This scale of adoption can only mean one thing – SaaS is here to stay. Not only that, small, mid-sized businesses, departments of large enterprises, and to some extent entire enterprises, are clearly embracing ASP solutions today.

Current Trends

A $100 million dollar hi-tech growth company is using anywhere between 10 and 15 different ASP solutions to manage business processes across all departments. The number may be lower or higher depending on the size of the company and industry. Some business areas where ASP solutions are being commonly used are:

Payroll
Options Management
PDM
Intellectual Property Management
Facilities Management
Employee Reviews
SOX
Expense Management
Vendor Qualification
Meetings & Collaboration
CRM

An interesting trend now is that some of the established large enterprises are beginning to replace on-premise applications. Recent examples being Cisco (click here for details) and Merrill Lynch – something one wouldn’t have imagined a few years ago!

Why is there such a momentum for ASP/SaaS/On-Demand solutions?

There are primarily three reasons why there is such momentum for ASP solutions:

1) Pressure to lower IT Budgets

The pressure to lower IT budgets has always been there but with shifts in markets as well as large scale adoption of offshoring, the cost pressures on IT has been increasing. This trend will not change as there is competition from emerging economies.

2) Increasingly difficult for IT to address every business need

While prices of software, resources, and infrastructure have been going down, the complexity has increased exponentially. An IT department has to deal with more tasks at every layer of the infrastructure and business application. An IT department did not have to deal with wireless networks before, now they do; they did not have to deal with open source stacks, now they do; they did not have to deal with the increasingly complex set of security requirements, now they do; they did not have to deal with SOX compliance, now they do! As a result, their constrained resources are stretched and their ability to support business needs has become increasingly more challenging.

3) Increase in confidence to allow data reside outside the four walls of the enterprise

The widespread adoption of Salesforce.com has instilled confidence in storing key data outside the four walls of the enterprise. In my experience, the security of applications residing in 90% of the enterprises is far less compared to those offered by established ASP solution providers. Most ASP solution providers now allow the customer to export data out and store them locally in their enterprise.


What is the biggest problem that ASP/SaaS/On-Demand solves?

It takes away complexity and friction. It solves the complexity around implementation, the complexity around hosting, upgrades and resulting delays and the frustration business users have to go through with on-premise applications. Most ASP application still lag in terms of functionality compared to their on-premise counterparts but they solve the critical issue of complexity and friction. This is the one most important factor which I believe is driving their success.


Challenges that ASP/SaaS/On-Demand face today

1) User Management

Each ASP solution has its own user authentication and authorization model. Imagine getting new employees authorized into multiple hosted applications and ensuring that their accounts are disabled when they leave the company. The same is true with partners who are granted access to applications. With companies moving towards an integrated single sign-on model, the ASP solutions are an odd ball. Currently, I’m unaware of single sign-on solutions for ASP solutions.

2) Lack of support for integrated business processes

Integration of business processes managed in different ASP solutions can be a challenging integration effort. Most ASP solution providers charge an arm and a leg for integration. This is a huge challenge for businesses who want to use systems for managing integrated business processes.

3) Information Integration

Integrating ASP solutions with back office systems is a challenge. While there are middleware solutions to enable the integration, this continues to be a challenge because ASP solutions reside outside the company’s firewall and data is completely insulated behind the ASP providers firewall.

4) Unified Master Data Management

Lack of master data creates significant challenges for ASP solutions. It becomes even more challenging when the ASP solution becomes the source of master data. Systems that need the master data from the ASP solution do not have an easy way to obtain this information. For example, an employee’s office location may be stored in an ASP Facilities Management system. The internal LDAP/Active Directory may not contain the latest and the most accurate employee location information; therefore, one must somehow obtain the employee’s location information from the Facilities Management system.


Opportunity that ASP/SaaS/On-Demand solutions provide

1) User lifecycle management

A simple to use system that can manage the entire user lifecycle from hiring to the termination of employees, contractors, partners, customers and suppliers specifically in the context of managing ASP solution access. Such a system would alleviate the growing pain of companies that increasingly depend on ASP solutions.

2) Support for canned integrated business processes

Currently, most ASP solution providers provide APIs to integrate with their systems. However, the effort and complexity of integrating on-premise applications with ASP solutions is a major roadblock in the adoption of ASP solutions. There is a large opportunity for providing integrated solutions that enable seamless business process integration. An example would be providing order status visibility in salesforce.com or providing visibility into outstanding customer invoices in salesforce.com

3) Easier information access

There are several solutions that enable users to query data from their ASP solutions right to their desktop. In fact, several of these solutions are easier to use and more secure than what is available from on-premise applications. However, there are no out of the box solutions in the market that allow users to view and analyze information stored across multiple ASP solutions. The arcane and expensive approaches of pulling data into a datamart or datawarehouse and then running traditional BI tools seem to be the most prevalent.


4) Master Data Management support for ASP solutions
Deploying ASP solutions on a broader scale in an enterprise is usually an issue due to the lack of master data management systems in most SMBs. There is a significant need to address master data management issues so that ASP solutions can easily use data about products, customers, price lists, vendors etc and, in some cases, be the source of the master data.


A win-win situation for customers and service providers

Companies such as Salesforce.com and RightNow Technologies are proving that the ASP model works. You never hear horror stories about Salesforce.com implementations failing. The single instance model is a lot more scalable, supportable, and profitable in the long run. The non value-add services that companies perform to support multiple stacks such as app servers, operating systems, platforms, software versions etc. should be a thing of the past.

If the business users can deal directly with the ASP vendors, and the ASP model enables them to do so, the entire IT organization can focus on more value add initiatives rather than playing block and tackle with business users.

Final Comments

If you are an independent software vendor that has not started working on an ASP strategy, it’s time to get serious about it. Some may argue you are late but I believe that the ASP era has just started. If done right, it could very well be the tipping point for your company!

Are you paying too much for offshore resources?

I was recently in Bangalore and Hyderabad on work as well as vacation and stumbled across something very interesting. While looking through the financials of each of the top 3 offshore providers, Infosys, TCS and Wipro I noticed their incredible margins and revenue growth for '07.

More interesting than their phenomenal revenue growth was their margins. Given all we hear now from offshore teams is that costs are rising and retention is so hard, these companies are showing stronger margins than ever before. Either their billing rates have been going up steadily and/or they are finding ways to reduce or keep their costs steady. Perhaps, they are doing a bit of both.

What is interesting is that there is a large resource pool in the Tier 2 cities or perhaps even the Tier 2 or Tier 3 colleges that is willing to work harder and meet commitments at a much lower cost than what is widely known to most clients. These companies seem to be tapping into this pool quite effectively.

If you are headed down the path of offshoring and have the right connections, you should explore companies that offer resources based out of Tier 2 cities. If you are committed to offshoring, at the end of the day, you will spend tons of time and sleepless nights providing detailed specs, managing offshore projects and spending time and money on QA. Of course, once your team has learnt your product/system and is trained, you will see benefits that will justify all your initial pain. If the pain remains the same, why not maximize your cost savings? This line of reasoning works only if the work entails simple coding typical of business applications and not some complex engineering tasks such as chip design or complex algorithm development.

Bottom line - there is a huge talent pool that is outside the Tier 1 cities in India that is untapped and offers tremendous opportunities to clients and software service providers that will not go unnoticed for long. While I was aware of this in the past, it hit home when I saw it first hand!

Looking for a simple way to evaluate software for your business?

If you work for a company with revenues over a Billion $s a year, you probably want to save yourself some time by ignoring this article. For those that work in IT or a similar organization responsible for business applications, this may be worth your time....

I'm sure most of us that have been involved in evaluating software will agree that its extremely difficult to figure out which among all those offerings from seeming endless number of vendors is the right one for your particular business and more importantly a good fit for the business given the direction its headed. It’s usually the great demo and sales talk combined with a very attractive starter deal that gets most of us. While a great demo may reflect the vendor's knowledge and understanding of the business you are in, it may just be that the vendor has invested more in fine tuning their demos for every vertical.

In fact what is most important are the following:

- Feature/function fit
- License cost
- Hosting cost
- Services cost
- Integration cost
- Training cost
- Compliance/Security cost

Cost must be quantified in terms of what you actually pay the vendor and what you actually spend internally deploying and using it. While this may all seem too obvious, it’s amazing how we get sold on one or the other and completely ignore the overall picture. While a product may have all the bells and whistles, the question really is whether those are features your users need. Integration is often an overlooked area while purchasing software. Simply asking how you do integration is not sufficient. Most software vendors can answer that question. The real question is how much integration you foresee for your business going forward. If you do expect a lot of integration, you may want to have your data as close as possible so that you can have complete control on the data/APIs and make it available to applications that need that data. Integration is always expensive when you change requirements and add functionality in the app that sends the data or receives the data. You may spend almost nothing on the license but if integration costs are high you are probably going down the wrong path.

Feature/function fit is sometimes highly overrated. Again, don't believe what the vendor tells you. They always know that under certain conditions, the feature works but it my not work for all the conditions that are actually important for you. So, nothing beats trying out something and then making that assessment. You not only get to play with the software but you get to see the bugs and caveats which the sales folks conveniently never share with you. Open Source software is perfect if you want to try out something before deciding to buy it. Some of the On-Demand apps that are now available are truly amazing when it comes to value - most of them let you test drive before you sign up.

Last but not the least, be practical. Most of the established products have been around a while and those vendors are unlikely to make major improvements. They have long release cycles. Look at what is out there, try out some of the newer products and make an independent decision on what is best for your business. There is a lot of software/hardware being developed, faster, cheaper and better every day. Do your homework and even better, listen to folks who have used the product or evaluated it in the past.

Finally, if you believe that you should use software only from the established players such as Oracle, SAP or Microsoft, then you better be working for a $1 Billion plus company or one that is rapidly headed in that direction - they are safe bets and probably will do the job if you have deep pockets and resources to spare!

Enterprise Software Open Source Business Model

For companies looking to break away from the traditional enterprise sales model, open source does provide some interesting and more importantly compelling opportunities. Recently, I had the opportunity to attend a luncheon where an executive from a successful Open Source software company laid out the business model with great clarity. Here is what he had to say...

The traditional enterprise sales model is based on a well-oiled lead generation machinery that feeds a direct sales force. The formula is based on Total Revenue = Quota/salesrep * Number of salesreps. While this maybe an oversimplification, this is what it really boils down to. If you look at the Open Source business model, especially for an enterprise software company, the lead gen source are the downloads. The inside sales and eventually direct sales teams have to take these leads and convert them to sales. The big difference and reason why most of us are excited about Open Source is that for the first time emerging software companies are able to get a large volume of leads from successful Open Source communities. However, the conversion rates are low, perhaps as low as 1% over a reasonable period of time from download to deal close.

So, having said this, there is a play here if one has a very successful Open Source project that has thousands of downloads. If you don't have such a community, believe me, building one is not that easy. You are probably better off buying one if you can. Its an added risk especially for companies switching from a traditional enterprise sales model to an open source model.

For the more established players, this creates a new threat as now start-ups can start to spread virally (in a good way) in their installed base. Given the tens and thousands of customers they currently have, I would think that their strategy should be to emulate the open source model and offer low cost, low friction products and solutions that their customers can try and adopt. Once they are ready they can sign-up for support etc., the way one would do with an Open Source software company. On-Demand apps certainly address some of the issues being addressed by Open Source and a whole lot of issues that are not addressed by Open Source.

I hope this provides clarity to software execs looking for business reasons for adopting an Open Source strategy.

Attracting "outside developers" to your Open Source project...

During a brief discussion with some folks who work at Actuate, it became apparent that several open source projects in fact have little or no participation from "outside developers". I'm referring to "outside developers" as those who are not employees of the sponsoring organization. An "outside developer" could be an end user, an employee of a customer using that software or someone who just has time on Sunday mornings to exercise his/her programming brain cells for no particular financial gain.

Having said that, it is interesting to note that some projects such as BIRT, which is being sponsored by Actuate, were created to counter open source software such as Jasper's reporting software. However they have been unable to attract adequate open source developers. Given the size of Actuate's customer base, one would have thought otherwise. Just take a look at the their bug list.

From what I can tell, there maybe several reasons for the lack of "outside developers" including the following:

a. First mover advantage - Given that there is a limited pool of independent "outside developers", its likely they have already flocked to the likes of JasperReports. The remaining set of "outside developers" has not developed probably for some of the reasons described below.

b. Complexity - The complexity of the code is an important factor for someone to contribute. For those of us who have been developers, the more complex the code, the harder it gets to make changes to it.

c. Barrier to contributing - If there are a lot of instructions and the time and effort required to start contributing code is high, its very likely to turn off potential "outside developers".

c. Incentive - For someone to contribute code, there has to be reason to do so. If I work for a company that uses some of the open source code and I uncover some bugs, I am clearly incented to contribute the fix. Similarly, open source developers provide enhancements if they feel they will be useful for others in the open source community.

The bottom line is that one has to address the above issues in order to leverage "outside developers". If that does not happen, one needs to invest in the development activity. This does not mean that a project without a large number of "outside developers" is entirely worthless (because there is value for the end users of the software to review bugs, fixes etc. from the project web site) but to put it mildly the value to the promoters of the open source project is marginal in the long run.

How does one move from a traditional software model to an Open Source model?

Recently, I had an opportunity to meet with Murugan Pal, founder and CTO of SpikeSource. We discussed various topics relating to Open Source. Two areas of particular interest were around Pricing Model and Migration steps. Murugan promised to summarize his thoughts in his blog, take a look at http://www.oreillynet.com/pub/wlg/8510.

At first glance the migration steps Murugan outlined seemed a little overwhelming especially if one has hundreds of thousands of lines of code, however, Murugan was quick to point out that the code need not be perfect. He is of the opinion that if you take the approach of being open, honest and willing to clearly document areas of code that need cleanup/work, Open Source developers will still embrace you. The steps as outlined by Murugan make a lot of sense. Anyone serious about the Open Source model will find his write up very useful.

In my next posting, I'll share my discussions with someone involved with Actuate's open source initiative, BIRT (http://www.eclipse.org/birt/) and perhaps someone close to SugarCRM and Alfresco. The next few weeks are really busy with travel to Bangalore, Chicago etc., but hopefully i will be able to get a couple of postings in before the end of the year.

Excellent perspective on benefits of Open Source...

Interesting editorial by Larry Augustin, founder and Chairman of the Board of VA Software, creator of SourceForge.net and board member of SugarCRM.

What really grabbed my attention is his comment that savings in sales & marketing could be closer to 75 percent. This is huge!!!

I was skeptical on how much core R&D leverage can be expected from an Open Source community. Larry's comment that there is little community leverage developing the core of the app addresses my question. It makes sense that the leverage tends to come from testing, bug fixes and interface/integration code. I would add internationalization to the mix as well.

The biggest benefit on the R&D side is the reduction in time to market. Companies with offshore development models have been able to squeeze out a lot of their R&D costs, however, the big drawback with offshore development is the long turnaround times. Startups using Open Source components have been able to quickly pull together applications (using onshore or offshore resources) in a much shorter timeframe. Given the pace at which innovation is occuring today, i think the reduced time to market benefit makes the Open Source model a natural fit for many startups.

I'll be tracking Larry's next piece on "The Next Wave of Open Source, why the application market is ripe for open source offerings - and which applications will gain traction the fastest." I'm really looking forward to his next article.