Johannesburg, 28 Feb 2007
Worldwide, we are finally seeing rapid takeup and commercial adoption of software as a service (SaaS). When the market leaders such as Microsoft, SAP and Oracle follow the example of Salesforce.com and move to a SaaS rather than the traditional model of software delivery, then we know we are truly in a dynamically changed market.
But here's my bet: companies such as these will not easily be able to make the transition to SaaS. The reason is simple: these mega companies make so much money from the sale of software licences, and the subsequent annual revenues, that they have no good or logical reason to change this model.
In essence, the traditional software sales paradigm has seen vendors charge twice: once for the software licence (100% payment up-front, and typically 18% a year maintenance for five years). This means the client assumes all the risk up-front, and the vendor none.
The vendor is being paid all of his cash up-front - whether or not the software works. How could we ever have got to such a point? No one would accept such a situation when it comes to any other purchase: be it a car, an electrical appliance, a movie, or an overseas trip. In essence, we expect what we buy to deliver in terms of value.
In the entire history of commerce, only software vendors have been able to get away with a situation where they over-promise and over-charge but under-deliver. If the software doesn't work, the full burden of risk is on the shoulders of the customer; in the meantime, the vendor gets to walk away with its payment.
And let's be entirely clear on this issue: the Standish Report has underscored that 80% of all software projects fail to deliver their value.
Adding further weight to the skewed value proposition, consider that in August 2006 both Business Connexion and Standard Bank reported their earnings were down due to the implementation of new software!
Such a situation is untenable, and SaaS has arisen to address this disparity.
Vendor assumes most risk
In terms of SaaS, as we have interpreted it in South Africa, the vendor assumes the majority of the risk. Typically, a client sponsors no more than three months' worth of development - this is easily affordable for any company.
The vendor, clearly not wanting to incur excessive cost, is thus driven to develop the applications at the lowest price point ... the prospect of losing money on a deal tends to focus the mind rather sharply!
It's very important to note that most clients do not get hung up on where the software is hosted: it can be on- or off-site, on the vendor's or the client's hardware. A hybrid approach to hosting is often the best way: what matters most is the reduction of up-front cost, and the sharing of risk.
The imperative to deliver software rapidly, or start losing money, should spur the vendor to a model of rapid application development - as all business systems share a common framework, it doesn't make sense to adopt a greenfields approach every time. The client begins to see value early on, and the vendor starts to generate income.
Such a model works best with high transaction volumes, as the vendor's fortunes are tied to a per-transaction fee; this means the vendor is incentivised to get involved in the client's business, right down to helping formulate strategy.
The vendor benefits from early and sustained annuity revenue; the client benefits from a smooth payment curve, deferred off balance sheet; and from having its fortunes tied to improved systems and processes.
A per-transaction or per-member approach makes all the difference to a client: when companies are looking for systems, they buy based on the growth they expect, and this approach to SaaS ties in with that.
For it to work, though, both parties need to have some skin in the game: the vendor in sharing risk, the client in terms of financial investment and sharing of strategy. Risk and reward simply have to be shared. In addition, the vendor must have principals who are prepared to be flexible in terms of their licensing agreements, and not many are!
This model has found particular favour in South Africa, and a number of forward-thinking vendors and clients are reaping significant benefits. It awaits adoption by the rest of the market.
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