Why SaaS will flourish only with Managed Services as the building block

Venu Venugopal, VP, CA

Software-as-a-Service (SaaS) as a market has been heating up for the past three years. Whether SaaS is a reincarnation of the Hosted Services (or Application Service Provider – ASP) or centralized computing – that was pioneered during the mainframe era – the trend is gaining momentum. Media coverage on this buzz is plenty, whether that is general press, specialized magazines or online portals. Examples are: Wall Street Journal talking about the SaaS as a savior, KM World Magazine listing SaaS applications as trend setters of the year, coverage on Google (GOOG) acquiring Postini to augment their expanding SaaS portfolio or Microsoft (MSFT) going against Salesforce.com for the small & medium business (SMB) market with the Live CRM product.

The question one has to ask is whether this trend shakes down the Independent Software Vendors (ISV) and their long-survived grip on perpetual licensing based revenue model? Will it drive the flexibility and agility (and not to mention, cost efficiency) that businesses have been striving to attain from IT in general and software in particular?

The world-wide packaged software market is huge, about $230B in 2006, with a healthy Compound Average Growth Rate (CAGR) of about 8% for next five years (Source: IDC). At the same time, the SaaS market is expected to grow from $3.9B to $14.5B, a CAGR of about 30%. Whether the buzz stays or not, the SaaS market is not expected to be more than 5% of the overall software market in five years. Even if it is assumed that the same high growth rate will continue for next ten years – which is an over optimistic assumption by any means - expected dent on overall software market from SaaS will not be more than 10%. 



Why? Firstly, pure-play SaaS will be restricted to a few areas of software for foreseeable future. Examples of these areas are HR Applications, Customer Relationship Management (CRM), Security from the Cloud, and Supply Chain Management (SCM). Even in these areas, there are fundamental architectural issues like multi-tenancy and security that the SaaS vendors have to address before gaining wide adoption. As many of them have learned the hard way SaaS enabling of an existing software product is often time consuming, costly and in many cases technically impossible. SaaS has limited play in software segments like systems software, infrastructure management or end-point security - altogether about 65 -70% of the overall market. Not that these software cannot be served as a services; they surely can be, but only as part of an outsourced IT infrastructure (not just software) service setup. In other words, SaaS has to become part of Infrastructure-as-a-Service or IT Managed Service.



Which takes us to the second point, that is, a more comprehensive value proposition, with flexibility, agility and efficiency as critical drivers, can be provided to a customer - whether they are large enterprises or SMB - when SaaS is delivered as part of a larger outsourced IT infrastructure framework; a framework that includes network, systems, applications, security and business processes. Centrally hosted, shared software becomes a critical component of the overall business service that the provider is offering.

The subscription based pricing and customer friendly contract models already in existence in managed services setup for a decade or more now, aligns well with the SaaS pricing and revenue model. As a managed services setup can have a mix of SaaS and other shared/unshared infrastructure if architectured well (whether it is through Service Oriented Architecture or Service Delivery Platform framework), can provide an excellent vehicle for transitioning internal enterprise IT infrastructure (including software) to an outsourced external infrastructure backed by Service Level Agreements (SLA). In other words, Saas becomes part of a larger IT journey that the enterprises have been taking for a number of years. Of course, on a number of fronts on the IT value chain, technologies, service delivery frameworks and business processes have to continue to mature for reaping full benefits from that journey.

As MSPs have started to focus more and more (finally!) on the SMB IT market (which is as big as the large enterprise market per Forrester), the synergies between SaaS and managed services are more than ever before. From the SaaS vendors’ perspective, the MSPs, if they cannot be one themselves, become a new channel to push their products into the market. Note that MSP market has large pull through power, in terms of size and growth (worldwide: $145B in 2006; 13-15% CAGR for next five years; sources: TelecomWeb, Gartner, IDC). The SaaS vendors have much to gain from aligning well with that market. And, without that alignment SaaS will continue to be a fringe play in the software marketplace.


1 - If SaaS is less disruptive than as predicted by the pundits, why are a number of ISVs closely watching it like a hurricane? Their revenue streams are not going to dry out overnight and there are no compelling market forces overturning their revenue model that is built on perpetual licensing and maintenance contracts. The answer is that most of them have learned a lesson from the past – the emergence of Web 2.0 dominants who came from nowhere and started to deliver on a business model that is more customer centric than any of them could imagine. The last thing they want to do is playing a second fiddle to the next Google. There are parallels here. Look how a number of the legacy telecom service providers struggled/struggling during the Internet era to be more than dumb pipe providers.

(An earlier version of this analysis appeared as a blog by the author titled, “SaaS will lose steam without the fire from Managed Services”, on the GLG Expert Network. Opinions expressed here are solely that of the author and by no means represent that of his employer.)

Venu Venugopal, PhD, is the VP of Solutions Marketing at CA (Computer Associates) with responsibility for leading CA’s solutions strategy and marketing efforts into the Communications, Media and Entertainment industry. Previously he was the Director of Product Management for Security Software solutions at CA. Prior to joining CA in 2004 he was a Senior Manager for Product Management and Marketing at Sprint, where he founded and directed Sprint’s IP Virtual Private Networking and Managed Security Services, a portfolio of twelve global services. His tenure at Sprint also included positions as Senior Manager for Network Security Services and Principal Program Manager for Managed Network Services.

Prior to his eight years at Sprint, he was a Research Faculty at the University of Pennsylvania, Philadelphia, and a Senior Software Engineer at Wipro, Bangalore, India. He is a graduate of the Indian Institute of Technology, Madras and the University of Maryland, College Park, US, and holds a PhD in Electrical Engineering and an MBA in Marketing. He has over 35 publications and conference presentation to his credit.