On Demand software in demand?

BusinessWeek has a story today The On-Demand Software Scrum that is similar to my SaaS (Software as a Service) post. The BusinessWeek story focuses on Oracle[ORCL], Microsoft [MSFT], SAP [SAP] and others efforts to enter the SaaS / On-Demand market.

On-Demand or SaaS software is typically "rented" on a monthly subscription basis rather than purchased up front, and hosted and maintained by the software vendor, not the internal IT staff. According to AMR Research about 10% of software is sold this way now, and it is growing at about 20% per year.

Oracle expects that up to 50% of its software will be sold on a subscription basis going forward, much of that from recently acquired Siebel.

BusinessWeek points out that Siebel was a very successful CRM company that got squeezed on the high end by SAP, and attacked on the low end by Salesforce.com. Siebel sales slumped and after several years was acquired by Oracle.

SAP offers SaaS licensing for its products but believes it is an on-ramp to its higher priced traditional offerings. Microsoft is experimenting with SaaS through its Office Live and Windows Live services.

Oracle, Microsoft, IBM, SAP, and other traditional software companies are entering the SaaS / On-Demand market but face some strategic issues. Large public companies need to continue revenue growth to support stock prices. Sales people with big quotas will be reluctant to sell cheap monthly subscriptions.  Taking on the 24X7 hosting responsibility introduces new challenges and legal responsibilities.

Any company entering this market should consider the following issues. I originally wrote these for start-ups, but they also apply to large established companies.

Cashflow - VCs or investors must be patient and willing to fund you to break even.

Sales compensation - Look at metrics, total compensation, and cash flow.

Engineering - Have an open architecture that supports end user customization

Hosting - Partner with a solid, well funded, hosting company

Legal contracts - Automatic renewals, termination clauses, SLA (Service Level Agreements), privacy issues, data loss, data export, and a variety of other issues must be addressed in your subscription license.

Comments

[Abhishek Vanamali]

An on-demand strategy requires on-demand support. As a leading Global IT and engineering services provider, we have been following the rise of the SaaS concept - and feel that an offshore partnership will be key for large and medium software companies aiming to implement a sustainable and successful on-demand software strategy. As Don mentioned in his article, companies will face a lot of challenges - organizational, financial and technical - to put a viable on-demand strategy in place. An offshore partner will be able to provide the kind of on-demand support in engineering and customization as well as hosting of these software services. Offshore players like HCL (www.hcltech.com), have built the technical and vertical skills, processes and infrastructure that will allow software companies to transition to this new paradigm with minimum fuss and pain.