Challenges Lie Ahead

As experience tells us, early-stage barriers to market acceptance of any new technology or model are based on certain perceptions and fears, some of which are inevitably off-base. Technology providers, in order to see the market take off quickly, work overtime to remove (or minimize) those inhibitors.

In the early days of outsourcing, the major inhibitors were a perceived loss of control and feeling that the service provider would lack skills/expertise for providing the services. But in hindsight, we can safely say that while most good service providers have delivered on those counts, many of them have failed drastically in managing costs (the key objective behind most outsourcing efforts) and in responding with agility to changing business needs.

SaaS comes with its own set of concerns. The main complaints involve reliability of delivery, security and privacy threats and scalability. But the real challenge for SaaS adopters may lie somewhere else.

Today, most SaaS implementations are industry-specific solutions (like those offered by Casecentral) or specialized horizontal solutions like CRM and supply-chain management (Salesforce.com). These companies understand the business issues involved in their specific area, and hence sell to the functional managers (like the Marketing Manager in 3). The target-oriented line executives are swayed by the capability of these applications to solve their immediate and real (but very often fairly narrow) functional problems while offering impressive return on investment.

As long as they run in an isolated manner, they work fine. The problem is that none of the business units are self-sustainable islands, and thus their applications have to talk to the enterprise and possibly even to their customers, too.

“One needs to be very careful about the hidden costs associated with this approach,” says Bill McNee, CEO, Saugatuck, a research firm, which recently published a study on SaaS adoption. “In mid-to-large enterprises, where due to the highly decentralized models, providers are selling at the business level, there is a chance for substantially higher integration cost to be incurred, going forward,” he explains. “Ultimately,” says McNee, “the centralized IT departments will like to get their hands around this explosive growth.”

Another unproven aspect of SaaS is this. No one knows whether the line managers are as good at managing service providers as sourcing specialists or central IT executives.

Getting Around the Integration Challenge

One of the reasons why application service providers failed is that they were primarily hardware experts trying to offer business applications. Many of today’s SaaS providers are nearly the opposite — they understand users’ business requirements well and know how to build software solutions. But the SaaS model requires them to manage IT infrastructure and service delivery as well — both of which historically have not been associated with commercial Independent Software Vendors (ISV). Also, the third-party system integrators in the traditional licensing model play a smaller role in SaaS, implying the lack of a helping hand.

Pure-play SaaS providers, almost all of whom have started with this model from day one, provide service-level agreements — that basic foundation on which the service industry stands. While by and large, they have been able to deliver to expectations, they have slipped a few times, like the outage of Salesforce.com services in last December for hours. Apart from the real business cost, these kind of instances could prove to be costly for the nascent model, as the opponents of the model highlight delivery as SaaS’ inherent weakness.

A bigger challenge for the buyers of SaaS solutions could be the integration of newer applications that need to work with the subscribed SaaS application.

The SaaS supplier community is trying to get around both these problems in its own way. One of the most popular approaches is the emergence of SaaS exchanges, or as some call it, SaaS Integration Platforms (SIP). The most well known example is Salesforce.com’s AppExchange. AppExchange offers multiple applications — not just the typical sales, marketing and customer-service applications that fall in the realm of CRM, but also solutions in HR, finance and accounting, end-user collaboration tools, as well as industry-specific solutions in health care, education, manufacturing, etc. Needless to say, they all come pre-integrated with Salesforce.com’s CRM, and many of them are free and work the same way as GoogleGadget applications.

Though this is nowhere near enterprise-level integration, let alone integration with legacy applications (most of those who provide these applications are small ISVs), this is a good first step.

OpSource, a champion of the SaaS model and the organizer of the SaaS Summit, is one such integrator to watch. Jamcracker, focused on back-end hosting could also play in this space. Yet, there is a possibility that some vertically focused global service providers could come forward to play this role.