Flying with Airlines use case can be considered as a close analogy to explain a SaaS model; where Airlines is able to leverage the same set of infrastructure (physical aircraft, Reservation systems, Agents, check in, boarding gates etc.), still differentiating services based on what packages a user buys or pays for. Airline’s value-added services in check-in points, on-boarding gates, airport lounge, inflight services all are decided which travel class an user is traveling with.
Similarly, SaaS model allows users to consume selective services from available set of services. This could be as simple as accessing only few set of ERP functions for a specific time period and required number of registered users. In addition, customer can buy support services such as Platinum, Gold and Silver depending on resolution time and time coverage. Features like Multitenancy where many customers can share a single application instance helps the SaaS vendor to bring efficiency in operations. Multitenancy allows vendors to apply patches and update infrastructure for many customers at once and get more mileage out of the underlying infrastructure, therefore providing a competitive price to their customers.
According to Gartner forecast; the SaaS market will grow up to 22 billion USD by end of 2015. Expectation is that SaaS business will grow at 20% which is almost 3 times as fast as software overall.
Key reasons for buying SaaS by corporate customers:
- Easy access via the Internet,
- Converting capex into opex which allows organization to spend diligently
- No need to have internal team to manage complex software and hardware systems
- New product features are rolled out every now and then (every month)
Organization started seeing this is not a set of technology; but as fuels for business growth and outcome; with quick Return on Investment.
Critical to Success
- Win together: As there would not be any existing distribution channel, hence SaaS vendors (especially startup or new in the market) leverage existing distribution ecosystem. Ecosystem of Reseller, Channel Partners, consultants, licensed trainers, System Integrators is the key
- Portability: Focus on 3rd party APIs to feed into SaaS product rather than building everything into the product.
Establishing developer community, product certifications, distribution via channel partners, and portability to open APIs increases the attractiveness of a SaaS product especially for enterprise customers.
Known Revenue Streams
- Revenues from subscription (primary): Subscription fees collected from customers accessing SaaS offerings.
- Professional services (secondary): Related implementation services like product configuration, process mapping, project management, training etc.
SFDC revenue over 4 billion USD for the FY’ 14 with year on year growth of more than 30% tells the story. Similarly, Workday has posted a revenue close to 470 million USD for the FY’ 14 up 71% year on year. One common characteristic observed in both of these SaaS vendors is; spend on product development. Workday has spent close 180 million USD for product development; which is close to 40% of the revenue earned in FY’ 14. Similarly, SuccessFactor the leader in Human Capital Management (HCM) SaaS offering has built over 20 million subscribers across 3,700 companies.
SaaS model allows organization to focus on their strength leaving behind Software and Hardware complexity for SaaS vendor to manage. Pay as you go model also allows organization to try out various IT enablers/adoptions with clear business outcome KPIs which can be switch off any point of time without any significant penalty or losses. This perfectly suits to the current economic scenario; there is a fierce competition among all players (big and small) to provide business values at a very thin margin and stay relevant.
Please share your thoughts!
nice article, detailed and informative
Good insights. Saas is the growth model for any organization but it should not come at the cost of loosing focus from on-premise solutions.With quick ROI , Saas looks appealing and very well fit into budget plans but down the line 5 years , it’s at par vis-a-vis on-premise solutions in terms of ROI. In my opinion , hybrid model (Saas fused with on-premise) is the way to go for any organization .
Hi Amit,
Thank you for sharing your thoughts. You are absolutely right that a combination of SaaS and on premises works fine for an organization. Just imagine a start up company wants to have a CRM application for their sales forces…. instead of investing on SW and HW, they can very well get into a subscription based model from one of the available SaaS vendors. This way they can realize their ROI quickly. They can have a stand alone CRM on cloud; or they may wish to integrate CRM (SaaS) to their other business functions like Order Mgmt or Logistics systems. Here it comes Hybrid cloud concept… The second cloud could be a public or private cloud or even a on-premises set up. All established organizations landed up with a combination on public cloud and on-premises as they have many working systems they have built over the time. However, for new organizations they have a choice to host their applications all in cloud.