Software as a Service (SaaS) is top of mind for many leading software executives. We are often approached to talk about the current state and future evolution of SaaS as if it is a new capability and delivery model for software companies. The reality is that SaaS is already evolving into its 3rd generation (SaaS 3.0) (see diagram below).




SaaS 1.0: Hosted/ASP-based Applications
The first generation of SaaS witnessed the meteoric rise and catastrophic demise of the ASP (Application Service Provider) market. The early hosting/ASP models were based on the ASP purchasing a restricted use perpetual license from the software vendor and then providing subscription-based offerings to their end customers. ASPs offered primarily packaged applications targeted at SMB market.

In SaaS 1.0, each customer had their own implementation, with some level of infrastructure and license sharing. Generally ASPs offered their services on a subscription-based pricing, but they were still very expensive. This model was initially client/server and provided the post-deployment ability to customize and integrate.

• Example vendors include:

  Corio
  USi

• Distribution model: direct sales with "feet on the street"
• Key Drivers

  Lower initial cost
  Faster deployment
  Lack of IT infrastructure
  Modest customization and integration requirements; re-usable customization

SaaS 2.0:"Pure" SaaS Applications
SaaS 2.0, is reaching a stage of maturity. This version of SaaS offers a complete range of functional and departmental applications such as CRM, ERP, Financials, HR and more. The applications are mostly developed for SaaS ("ground up"/Web native). These apps typically have a shared code base and a one-to-many delivery model. The pricing is driven by a lower cost subscription, which includes support, rapid deployment, and easy-to-use functionality. Thus our SaaS model creates economies of scale for software vendors and also enables rapid growth. Consider salesforce.com YOY revenue growth from $176M (FY05) to $310M (FY06) and Forward P/E (1 yr) ratio of 93.10 (Oct 31, 2006).

• Example vendors include:

  Salesforce.com (today)
  Plexus
  NetSuite
  WebEx

• Distribution model: Low cost direct sales model aided by "inside sales" and web-based sales
• Key Drivers

  Lower initial cost
  Faster deployment
  Greatly reduced reliance on IT in purchase process
  Limited customization and integration requirements (mostly business user)
  Increased usability & user adoption

SaaS 3.0: Hybrid SaaS Applications
SaaS 2.0 focused on the small and mid-sized business markets. SaaS 3.0 is emerging with the adoption by Enterprise clients of the SaaS capability. Consequently, these larger companies are demanding and evolution from the pure-play SaaS model to meet their need to globally scale the SaaS solution to meet their specific corporate needs. With the entrant of the Enterprise customer, we see the increase in demands for customization, thus the rise of the seemingly contradictory hydrid pure-play and hosted SaaS model. Bigger customers are requiring integration with on premise applications, flexible delivery models, based on customer needs that are driving an evolution of targeted applications.

This next generation of SaaS is moving from a purely hosted offering to a hosted offering integrated with On Premise OR offered as either hosted or On Premise service. The code base Spans from multi-tenant at all layers to single tenant eliminating some of the earlier economies of scale of the multi-tenancy model. Customers are beginning to demand more control over on-premise upgrades and may have control over SaaS upgrades, configuration, and customization by business users, integration by IT . Today, these services are mostly developed for SaaS ("ground up"/native). The pricing model is also evolving to include a flexible subscription/licensing hybrid.

• Example vendors include:

  Salesforce.com (soon)
  RightNow
  SAP (MySAP CRM)

• Distribution model: Discontinuity, complex ecosystem of ISVs, consultancies and partnerships emerging
• Key Drivers

  Faster deployment, with ability to bring on premise
  Extended customization and integration requirements (business user & IT)
  Increased usability & functionality to compete with majors (SAP, Oracle, Siebel) & accelerate user adoption across verticals

Author Rick Sklarin is a Partner at the Crimson Consulting Group a strategic marketing firm providing consulting and implementation services to some of the largest companies in the world. Rick has served as lead partner for clients such as Adobe Systems, Business Objects, Checkpoint Systems, Clarify, Hewlett-Packard, Microsoft, Palm, SAP, SBC, Sprint, and Virgin Mobile USA.