CMC Focus: Software as a Service

The software as a service (SaaS) is a disruptive business and technology model that is changing the face of the CRM applications landscape. There have been previous disruptive technologies introduced into established market sector with varying degrees of impact.

One of the most famous examples concerns a man called John Cullinane. You may not know who Cullinane is and that's a shame as he was - almost literally - the Larry Ellison of his time. Cullinane was the founder and CEO of Cullinet which in the early 1980s was the dominant mainframe database.

But in California small start-up companies were working on a new model of database technology, spearheading the relational revolution. Cullinane watched as Relational Software Inc - later known as Oracle - and Relational Technology Inc - better known as Ingres - came to market with relational databases and began to eat into his market share.

In an act of almost wilfull perversity, Cullinane chose to adopt the stance of the King Canute of the database world and commanded the relational tide to turn back. And like that other silly Canute, he drowned in the process.

It's a salutary warning to all software vendors ever since. When a disruptive new model of computing appears, you don't sit back and assume it won't work. You assess the level of threat and act accordingly. So we've seen the likes of Siebel reacting to the emergence of the Salesforce.com by playing catch-up with their own on demand offerings.

More recently, we've seen SAP finally step up to the mark with its own on demand noises and an ominous - for the rest of the market - set of noises coming out of Redmond that suggest that Bill Gates has gone on to a war footing over the SaaS model. It all adds weight to the overall credibility of the movement.

This is the first in a series of monthly newswires focusing on specific topics impacting on the customer management industry. For our first issue, there seemed no more urgent or fitting topic to begin with than SaaS. There's a revolution going on out there - and we're going to be there all the way. Don't be a Cullinane. Read on...

Final Demand

Rent or buy? Do you saddle yourself with a mortgage and become a slave to interest rates committee or do you throw good money after bad by renting accommodation, but enjoy the freedom that being able to give one months notice to quit affords.

The debate is currently being mirrored in the software industry where traditional habits of buying licences and owning the technology are vying with a new form of rental model which offers software as a service (SaaS) rather than as a product.

The basic principle makes perfect sense. If we want electricity in our homes, we don't dig up the garden, build a generator and produce our own power. Instead, we go to a company that provides electricity, buy as much or as little from that company as we need and then pay a bill on a monthly or quarterly basis. If we need more electricity in any given period, we pay more, but if we then need less, we pay for less on a usage based subscription model.

The traditional enterprise applications approach has caused companies to become used to 'building their own generators' - and at some considerable cost. Buying an 'on premises' solution from a software vendor incurs considerable up front expenditure: the software licences themselves, the hardware to run it on, networking, implementation costs and so on. On top of that, add maintenance and support costs year on year as well as the inevitable upgrade whenever the vendor decides to add a new piece of functionality and it's all very expensive and inflexible.

"Essentially, SaaS can be described as software delivered through an on-demand business model," explains Robert Bois, senior research analyst in AMR Research's customer management practice. "It is important to distinguish that SaaS is fundamentally different from traditional application hosting. This leads us to the concept of single tenancy, multi-tenancy, and mega-tenancy.

"In the traditional hosting model referred to as single tenancy, a service provider licenses an application from an Independent Software Vendor (ISV) and remotely hosts and manages the application, typically for a start-up charge and a monthly maintenance fee. In contrast, the SaaS model makes use of software architecture called multi-tenancy, in which one instance of the software and data model is provisioned to multiple customers, and can continually monitor and adapt to changing customer usage on demand. Some vendors now refer to multi-tenancy as the more impressive sounding mega-tenancy. The two are fundamentally the same, but 'mega' helps imply the ability to scale, particularly to large enterprise deployments with thousands of users. In practice, SaaS vendors often provide blends of these models to balance cost effectiveness and scalability.

"Benefits derived from SaaS have helped overcome a number of stumbling blocks, most notably in customer management." Highly publicised implementation failures and rumblings of user adoption problems with on-premises projects have left a wake of shelfware, frequently colouring customer management as a riskier investment. The SaaS model, however, directly addresses many of these objections, therefore making it an attractive, lower risk option for small and large enterprises alike."

Now let's be honest. The concept of SaaS isn't new: the application service provider (ASP) movement has famously been about to become the 'next big thing' for well over a decade, but outside of a few pockets of the small and medium enterprise (SME) sector has to date enjoyed little success. But the ASP model has finally found its day thanks to a number of related, but distinct factors. Perhaps most important is the acceptance of the Internet as a global business platform.

"The ASP model of the 90's did not work for two reasons," reckons Gerry Carr, marketing manager at Sage CRM. "Firstly, it was over-hyped with very little application or service being delivered and secondly the technology was ahead of the bandwidth availability. Trying to deliver meaningful data or application logic over a 56K dial-up that you paid for by the minute is not a compelling business model as the short life of the ASP vendors proved. Now, however we have resolved these problems, i.e. the apps are there and the access is fast, reliable and affordable."

Zach Nelson, CEO of NetSuite, takes a similar tack. "The original outsourcing model of the 90s was for a third party to host one or several vendors' software as an outsourcing service to user companies," he argues. "They hosted the software and either offered implementation services or facilitated implementation with system integrators. They, many times, even provided first line support.

"This failed for a number of reasons. The applications they were outsourcing weren't designed to be hosted. They were client/server applications that were retrofitted to work on the Internet. I think a comment like they were putting lipstick on a pig is appropriate here.

"A traditional outsourcer didn't own the software they were hosting, therefore when changes needed to be made to it (for better performance, usability, new features etc.), they couldn't get their vendor to make them in a reasonable time. Applications need to be designed to be delivered as Internet services. The software vendor is probably in the best position to be the outsourcer because they have control of the software AND are motivated to make changes based on customer input."

So what conditions are creating the new market opportunities for SaaS vendors? For a start there's the radical disruption in the existing industry landscape. Among the traditional market leaders in the enterprise applications space, there has been considerable consolidation, led by - of all companies Oracle, whose CEO once famously - and perhaps now regrettably - sneered that it was easy to write cheques, not so easy to write software.

Reversing its previous strategy of expansion through organic growth, Oracle has opened its corporate cheque book to snap up CRM functionality - and customers - in the shape of PeopleSoft (including JD Edwards) and Siebel. But it's not just Oracle. SSA snapped up Epiphany, only to be swallowed up itself by Infor. Onyx Software remains the subject of an on-gong hostile takeover bid from CDC which had previously gobbled up Pivotal.

So what does this have to do with the software as a service debate? Well other than noting that the new on demand players are themselves engaging in their own merger and acquisition activities - Salesforce.com taking over Sendia and RightNow grabbing Salesnet - the consolidation provides an excellent sales opportunity for the on demand vendors.

All of the leading on premises vendors are working on their respective next generation product sets. Most notably, Oracle is working to pull the multiple code streams that it now finds itself with in its CRM portfolio under the banner of Fusion. This will eventually result in the emergence of a single code base and a next generation applications suite.

Analyst firms are taking a softly softly line on such grand schemes and advising a degree of caution in new investments. But companies can't just stand still with their IT implementations. The SaaS model offers a way for organisations to deploy tactical CRM implementations to complement existing investments without having to commit irrevocably to a new vendor. From a SaaS provider's point of view, this is a way into an enterprise and a chance to prove the viability of the on demand model.

Then there's the economic argument. Every CIO in the world faces the same demands from his or her senior executives: do more with less. Every time the CIO goes to the board and asks for more money for another CRM implementation or an extension to an existing deployment, eyebrows are increasingly raised. Didn't we pay for CRM last year? Or five years ago? And where's the return on investment?

Millions of pounds and dollars and Euros have been spent on applications from the likes of Siebel and SAP, yet much of what has been spent sits unused on shelves. According to figures from market analyst firm Gartner Group, over a one year period some 42 per cent of CRM licences went unused at an estimated waste of $1.2 billion that could have been spent more effectively elsewhere.

One of the reasons for this is the pricing model that most applications vendors have adopted over the years. Users have grown accustomed to having to buy in bands of licensed users - e.g. up to 50, 50-100, 100-500 and so on. That means they need to calculate not only how many users are likely to require access to a particular application, but also predict some slack so that they can add more on easily as needed.

Most companies err on the side of caution, particularly in good economic times. So a company that needs a 251 seat licence will end up buying a 300 seat licence because that's the user bracket they fall into. That 49 of those seats are never filled is an unfortunate fact of life.

Such questions do actually play into the hands of the pure play SaaS vendors. Essentially, all the hosted applications providers make the same basic claim: it's cheaper to do it this way. Using a hosted model, you pay a monthly fee per user. You pay for as much or as little as you need at any given time. And if you no longer want to use the software, you give notice and switch it off. With a hosted model, companies can scale up and down as their needs dictate and you pay for what you use and only for what you use.

To balance this out, there are analysts who question the long term cost-effectiveness of the SaaS model. "Total cost of ownership (TCO) is really where the rub is," advises Steve Bonadio, senior programme director at research firm Meta Group. "Hosting vendors do tell us that it's a heck of lot cheaper than an on premises approach. The hosted providers have generated a great deal of market hype and we see clients jumping into decisions like lemmings off a cliff."

Meta put together a comprehensive model to test the TCO of the two approaches. "The model shows that in year one, hosted CRM will indeed be cheaper, up to 50 per cent cheaper than on premises," he explains. "On premises implementation costs are front-end loaded, in the form of licences, hardware, implementation services and infrastructure. With the hosted model, you pay by the drink on a per user per month.

"But the analysis reveals that over the long term five year costs, there's a breakeven point at approximately the three year mark. After three years, hosted will cost more than the on premises alternative. You end up paying more as you go on. With on premises you will pay maintenance, but it will be less than the cost of pay as you go."

But this view does not ring true with some on demand vendors. "It is a myth that on demand applications cost more over the long term when compared with on-premise deployments," insists Gian Gianforte, CEO of RightNow Technologies. "The misunderstanding results from confusing the delivery methods with how a customer pays for the application. A monthly subscription contract will cost more than a pre-paid term license or a perpetual license over the long term, but says nothing about how it is delivered.

"If comparing apples to apples, there is never ever a scenario where a hosted system costs more than an on premise deployment when comparing like payment methods because the customer will always have incremental hardware, database and system administration expenses that do not exist when hosting with a vendor. Said another way, RightNow charges the same amount for our software if we host it or if we deliver it for on-premise deployment - the customer always has incremental costs when deploying on-premise, making it always more expensive."

There's also the question of reliability and trust. Recently Salesforce.com has had a series of embarrassing outages of service, caused seemingly by bugs in the underlying Oracle database infrastructure. This led to a happy chorus of 'told you so' from the on premises vendors - and also rather short-sightedly from rival on demand firms who happily undercut their own SaaS messaging in order to take a pot shot at their most hated rival.

Salesforce.com's response has been to open up its performance indictors to the world via a website, an action that has yet to be echoed by any of its rivals. There is also the harsh reality that no computer system - hosted or on premises - is ever going to offer 100 per cent uptime. There seems no particular reason to jump on a SaaS vendor for downtime when that is taken into consideration.

Perhaps the ultimate indicator of how potent the SaaS revolution actually is lies in the response of the on premises vendors. One by one they have all had to play their SaaS hand to keep in the game. While the SaaS leaders like Salesforce.com and RightNow are small fry compared to giants like Oracle and SAP, they have managed to set an agenda against which the far more established firms are being forced to play.

Oracle had long been an advocate of hosting, but its own efforts - regularly redefined over the years - had not enjoyed enormous success. It now offers Oracle On Demand, which is essentially a rebadged version of Siebel CRM On Demand which was itself a latter day effort by Siebel before it was taken over.

SAP had seemed to be the most sceptical player in the market, but recently had made more noises about on demand, although commentators are still unclear about the exact direction of its offering.

The dog that hasn't yet barked is Microsoft. Officially the party line is that Microsoft CRM is deliverable on a hosted model, but through third party partners, not directly through Microsoft. That said, Microsoft is making more moves to making it easier for these partners to host its applications.

But if you want a clearer idea of Microsoft's long term ambitions, consider Bill Gates warning to Microsoft developers: "This coming 'services wave' will be very disruptive," he said. "Services designed to scale to tens or hundreds of millions will dramatically change the nature and cost of solutions deliverable to enterprises or small businesses." In other words Microsoft perceives a threat... and when Microsoft perceives a threat, things start to happen very rapidly. The last company to underestimate Microsoft's ability to turn on a coin was Netscape...and we all know what happened there.

But whatever their ultimate threat to the pureplay vendors, the reactions of software giants like SAP and Microsoft serve initially to validate the SaaS model and give it credibility. Critics argue that the SaaS model has yet to enter the mainstream. They're absolutely correct. And one of those who argues this most strongly is Marc Benioff, CEO of Salesforce.com who reckons that it's another 5 years before we can consider SaaS as a mainstream technology offering.

Naysayers argue the pureplay SaaS providers are not stable and mature enough to risk spending IT pounds or euros on.In fact Salesforce.com has been in business over five years, has more than 399,000 subscribers at 20,500 companies worldwide, and is growing at about 80 percent a year. NetSuite has been in business eight years, and has thousands of customers globally using its online applications.

But they're babes in arms compared to the oldest SaaS provider which is ADP - the world's largest payroll application outfit. That's been in business for nearly 60 years, generated $8.5 billion in revenues last year, and served about 590,000 clients worldwide. Not bad for an immature and unstable market!

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Market Makers

CMC invited three of the leading market makers in the SaaS space to provide their own commentaries on the evolving industry:

Children of the Revolution

Oracle (Siebel) - Oracle's SaaS push is heavily dependent on the Siebel CRM On Demand offering. Siebel was itself a relative latecomer to the on demand market, partnering with IBM and BT for delivery of hosting services. These were based on IBM's DB2 technology, which raises the thorny question of what happens now that Siebel is part of the ever-expanding Oracle empire. IBM has moved closer to SAP since the Oracle takeover of Siebel, while it is impossible to imagine Oracle not replacing DB2 with its own database technology. The biggest question mark over Oracle CRM On Demand lies with the success or otherwise of its Fusion initiative to pull together all the diverse code bases that it has acquired in its recent spending spree.

Salesforce.com - Probably the company most identified with the advancement of the software as service concept, Salesforce.com has managed to be a post- dot com crash dot com that Wall Street likes. The firm successfully floated on Wall Street last year, has scored significant customer successes and managed to get under the skin of market leader Siebel to the extent that it can be seen to be setting the agenda in this sector. "We have become the market leader in on demand," boasts founder and CEO Marc Benioff. "We have eight times the number of subscribers as our nearest competitor, we added six times as many new subscribers as them in our most recent quarter." On the downside, there was some speculation about how scalable the service is with rumours circulating about a possible lack of progress on some enterprise projects, although these have tailed off in recent months. More recently the firm suffered embarrassing publicity after a series of outages of service, but has responded to these by throwing open its performance monitoring - a move that none of its rivals has seen fit to emulate.

NetSuite - A pureplay hosted applications vendor, NetSuite is privately-held and majority owned by Oracle CEO Larry Ellison. The company has made inroads into the UK market, primarily at the low end of the small and medium enterprise (SME), but with some notable larger successes such as Carphone Warehouse. It also boasts integration with back end applications as a major selling point - the suite aspect as its sweet point. "NetSuite provides much broader functionality than stand-alone CRM vendors," argues CEO Zach Nelson. The firm, which will most likely seek a public listing this year, has had a lower profile than arch rival Salesforce.com, but has shown some encouraging signs of late of beefing up its marketing to compete.

RightNow - Often unfairly overlooked, RightNow has been preaching the on demand gospel for a long time. Starting life seven years ago with two men in a spare bedroom, the company now has offices around the world, over 500 employees and has gone public. CEO Greg Gianforte has little time for religious debates about the merits of on demand versus on premises deployments, arguing that there is only one direction for the industry. "Over time there won't be this debate about on premises or on demand, there will only be on demand," he declares. RightNow specialises in customer service, but has recently acquired Salesnet in a move to beef up its salesforce automation capabilities. It can also boast an impressive list of enterprise level customers.

Sage Group - Best known for its accounting software heritage, Sage Group has a significant installed base in CRM. Its hosting strategy is a more recent development with the emphasis placed on offering it as a complementary service to its existing portfolio. "Do we think that the hosted model is a viable model, certainly; do we think that software as service will be the only way forward, no we don't," says Sage CRM marketing director Gerry Carr. "I really don't think that hosting is the future of CRM. I do believe that there is a market for hosted CRM though." To that end, part of the Sage portfolio is offered as a hosted option, but not the entire range.

Microsoft Business Solutions - Until recently hosting has not been seriously on the agenda for Microsoft Dynamics CRM, but this is slowly changing. The company still chooses not to sell its CRM applications as a hosted offering itself, but will be making it easier for third party channel partners to do so on its behalf. "Hosted versions of CRM are delivered through our partners, like Aspective," explains Jason Nash, CRM product manager. But with CEO Steve Ballmer talking about the idea of offering desktop productivity applications such as Office and Outlook as services and Bill Gates himself warning of the disruptive impact of SaaS, few seriously believe that Microsoft will not end up offering a hosted option itself. The tricky part for the company will lie in squaring the circle with its existing channel partners. In the meantime, the company is making it easier for third parties to offer hosted versions themselves.

SAP - SAP has been a seemingly reluctant convert to the SaaS revolution. "We do not think that on-demand is a singular, pure play situation," says Shai Agassi, SAP president of the product and technology group. "We think that you need to have the same processes, the same governance, the same data, the same experience on both on-demand and on-premise." But it is beginning to deliver on demand versions of its products. SAP Marketing on-demand solution is its first on-demand foray while SAP CRM 2006s is a hybrid on-demand/on-premise CRM suite which the company says allows customers to select the most appropriate deployment model for their needs.

Case Studies - Who's Hosting Who?

Brooklands College - hosting CRM

Brooklands College, a further education college in Surrey with 1,700 full-time students, is using a hosted version of Microsoft Dynamics CRM. The system is used to increase sales of the college's training courses and other educational products as well as drive efficiencies in the processing of thousands of student applications.

The hosted solution, which was provided by Microsoft partner Aspective, was intended to speed up Brookland College's application process by allowing administration staff, interviewers and management access to up-to-date information on each individual application. It was also installed to give the college full visibility of its entire sales process Ð from initial contact through to course completion as well as improving on-going customer support.

Speed of deployment was a driving factor for Brooklands College, a further education college in Surrey with 1,700 full-time students. The college felt that most CRM systems are geared towards large enterprises and are complex and costly to implement, but a hosted approach removed those barriers.

"It was important that we could get the system up and running quickly as opposed to waiting for our own IT capabilities to come up to standard," says Judith Liddle, workforce development manager. "A college environment is not a traditional CRM environment. There was some customisation. We are dealing with an extremely high number of students. We needed to have certain information and be able to capture certain data, such as previous information about schools."

The system was originally hosted by Aspective, but the intention was always to bring it under Brookland's own management. We scoped the project to be able to bring it in-house," says Liddle. "This isn't just for monetary reasons, but also for management issues. Looking at the scope of our operation, we need to have more control over it. We had used other systems in the past, but didn't like them. This just turns out that of all the CRM systems we looked at, Microsoft had the most functionality that we needed."

Nikon - on demand customer service

Nikon Corporation is deploying RightNow across the US and Europe to improve the delivery of customer service and technical support to purchasers of its digital cameras and scanners. RightNow has become the strategic platform for integrated telephone, email, and Web-based support.

After a very successful initial deployment by Nikon, the company has rolled RightNow out in six countries and three languages bringing the solution to bear in Nikon's key European markets.

Nikon is currently using RightNow in the United States, United Kingdom, France, Germany, Switzerland, and Ireland. The languages being supported are English, French and German. Further worldwide expansion of the deployment is planned in 2003 and beyond.

"RightNow was first introduced to us in the US as a means of providing information to digital customers in the North American market," says David Ward, CRM manager at Nikon Europe.

"As part of a worldwide consolidation and coordination, we looked at what the US was doing and decided to deploy it on a worldwide basis to provide self-service customer support."

RightNow provides Nikon customers and technical support staff with easy access to a knowledge base containing several thousand answers to recurring technical questions. RightNow also supplies Nikon with common case management for all of its phone, email and Web interactions.

"Our overall drivers were not just the TCO." adds Ward. "It is a developing situation and we wanted to be able to reflect that. We went to a permanent licence this year. It would be very difficult for us to bring it in-house and achieve the operational levels that we need. We need it 24-hour. To introduce that in-house and on a worldwide basis would require a lot of management overhead.

"We talked about buying SAP and Siebel but we found when we looked at them that we would end up spending three to five times the licence fee on customisation. With the on-demand approach, we haven't spent anything like that. The customisation element is outsourced to RightNow contractors. It has been pretty easy to manage and we have been very strict on the statement of work definitions."

Esker - from on premises to on demand

Esker, a leading provider of intelligent document delivery solutions, is an on demand evangelist after switching from Siebel on premises to Salesforce.com.

Esker switched to Salesforce.com after spending three years implementing Siebel. Esker performed a two-month trial to evaluate salesforce.com's on-demand application delivery versus two other competitors. It implemented salesforce.com globally for 180 users in eight languages in 90 days. The initiative included complete integration with Esker's SAP implementation.

Esker has three million users and markets its products in 50 countries via a network of 60 distributors. The on demand system is now used by a number of different departments within the organisation, including marketing, sales and research and development.

"Salesforce.com hit the mark for 90 per cent of our needs," commented Bob McMahon, worldwide CRM director. "As a company, Esker is very cost conscious and sales driven and when you look at it in those terms, there was not question."

McMahon says that the user base within Esker took to the on demand system with ease with none of the often cited problems with the functional complexity of CRM that leads to user resistance "The salespeople think it is great," he said. "We had salespeople who had spent two years working with Siebel and they were still phoning up to ask questions. With Salesforce.com they're coming over and telling me about things that they've managed to do with the
system."

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Stuart Lauchlan
News & Analysis Editor
stuart.lauchlan@mycustomer.com