Call it an important milestone on the road leading to a fully service-oriented IT regime. Or, call it the next logical step in the epic migration from build to buy. Software-as-a-Service (SaaS) promises to destroy the last fence that stands in the middle of an otherwise highly competitive IT marketplace. That barrier is the demarcation between what are today called IT services and commercial software products.

Yet, for some strange reason, the discussion around SaaS has revolved around what Microsoft might gain or what Oracle might lose vis-à-vis the new pure-play SaaS providers such as Salesforce.com. But that debate, notwithstanding how big it seems today, may actually turn out to be a much smaller, if not completely irrelevant point, in a much larger discussion — on what value SaaS can offer to the buyers of business and technology services.

To the uninitiated, SaaS is the jargon-loving IT industry’s term for an arrangement wherein the functionality of a software product is delivered to the user of that product over a network, typically the Internet, through a service interface. The user pays the host of that software — the SaaS provider — for either his actual usage or a fixed monthly/quarterly/annual fee, as opposed to a one-time large fee plus support as in the traditional software-licensing model.

Apart from the difference in pricing and architecture, SaaS differs from the licensing model in one more significant way. Since the provider hosts the application, the onus of upgrading the IT platform that hosts the application also lies with the provider. The user is not worried about upgrades of either the application or the platform. So by turning to a SaaS model, an IT manager passes on some nuts-and-bolts planning to the SaaS provider.

SaaS heralds a significant change in how tech executives approach the task of enterprise architecture and management. For the CFO, however, the whole proposition can be summarized in a simple sentence — SaaS is all about turning yet another “cap-ex” to “op-ex” — capital expense to operating expense. And that translates into not just better balance sheets, but also lower risk. For global sourcing and procurement executives, the SaaS trend represents a new opportunity to expand their IT and business process governance roles.

On Their Own

At the outset of the software-on-demand era, the early adopters have often been startups, spin-offs, Small to Midsize Businesses (SMB) or business units without legacy Customer Relationship Management(CRM) and software investments.

Take a company called 3 — Hutchison’s 3G mobile services. When it started in Australia, the 3G operators’ ability to make money was still being debated in Europe. Many analysts had started questioning the operator’s ability to make money in the consumer market from the offerings that were essentially touched-up 2G services.

To compete with the existing mobile operators, 3 Australia had to be aggressive in terms of quick rollout of services, and make money from the business services. At the same time, for each new technology investment, it had to be extra cautious. That meant achieving three goals at the same time: Quick deployment of the essential technologies, eschewing up-front capital and delivering business services effectively from the outset. Though 3’s management set aggressive revenue targets, it was still risky to make technology investments based on those projections. In September 2003, Hamish Michie, Marketing Manager, Business Field Sales, 3, opted to go for SaaS, when he chose Salesforce.com CRM for his 140-people business field-sales team.

“We needed a system, with low total cost of ownership, ease of deployment and flexibility, so we could mould it to our business as it grew,” says Michie.

Though ease of deployment, by definition, has nothing to do with whether the product is delivered as a service or preloaded on a server, the new pure-play SaaS providers do trumpet it as a crucial differentiating factor. Since SaaS is being deployed in specific business functions, rather than enterprise-wide, most of the decisions are taken by business managers, instead of IT units. Struggling with technical problems is the last thing that line-of-business managers want to do.

This requires the SaaS providers to excel in areas where traditional software providers have often fallen short — the ability to create cost-effective software that can be hosted reliably and delivered over Internet protocol. Quite plainly, as the market expands, some of the SaaS providers will need to partner with third parties to achieve scalable growth and maintain reliable service.

Specific advantages apart, SaaS is today a manifestation of a much bigger trend in software — the shift in enterprise IT toward Service Oriented Architecture (SOA). The increasing reliability of Web as a business platform coupled with a growing comfort level with “buying” rather than “building,” means the environmental conditions are supportive, rather than hostile to SaaS’ pay-as-you-go business model.