Why do companies choose Software as a Service?

The growth of popularity of Enterprise 2.0 on-demand software is remarkable. This growth is not gradual.  The pace of on-demand software adoption grows each month and equals 150 % year-over-year, according to Saugatuck Technology research.

On-demand software, or software delivered to the customer via the Internet as a service, turned out to be a revolutionary concept in the late 1990’s. Back then, it seemed unbelievable to replace the traditional on-premise software, which you have to buy and install on your computer, with a service. The situation has now changed as businesses and the software vendors serving them are serious about on-demand software delivery .In 2005, IDC announced in its report that on-demand software will represent more than 3.8% of all spending, or $10.7 billion by 2009. In 2006, on-demand software was announced to be the future of software development by many of the authoritative media, such as Forbes , the New York Times , EWeek , and BusinessWeek . Today, business magazines announce that on-demand software customers are becoming more comfortable with the model and that, according to recent research, nearly 36% of large and small companies are considering bringing software-as-a-service technologies into their organizations . About 80 percent of those considering it say they plan to adopt it within the next 12 months. Additionally, 90% of enterprises that are using on-demand software have already stated that they plan to expand their use.

Today, we have a great number of examples of software delivered as a service. The applications range from project management to CRM services.

Why is software delivered as a service adopted by more and more companies all over the world? There are certain external and internal factors which influence the software development and the development of other industries.

Here are 2 major external factors :

Fast-paced development of the telecommunication industry transforms and expands the former boundaries of software development. Telecommunications are affordable and available from almost any computer. Information workers enjoy high-speed connections to the Internet at home and at work. Almost 300 million people worldwide are now accessing the Internet, using fast broadband connections and fueling the growth of social networking and business software applications. Penetration of broadband services is seen as a key for developing businesses all over the world. Fast Internet enables companies to use software applications for storing, editing and exchanging information online and accessing it anytime they need it.

There are also very significant reasons why many business owners and CEOs choose to adopt a new online service, rather than use on-premise software. These are the internal factors . Let’s have a look at on-demand tools from a CEO’s point of view, and we’ll see the advantages for the business growth immediately.

As opposed to on-premise software, software as a service has 4 basic advantages;

1.  It is cost-effective for small and large companies. On-demand software offers lower prices and lower total cost of ownership (up to 50% and more for project management software implementation, for example). Business owners get a faster return on investment. Companies "pay as they go," so hosted solutions often carry little or no upfront cost. The savings can be really huge. For example, in 2005, the town of Stratford estimated that upgrading and merging its two in-house Microsoft Exchange 5.5 environments — one placed at town hall (250 users) and the other at the police station (100 users) — as well as the underlying 10-year-old server, would run $180,000 to $250,000. Instead, the town authorities decided to sign a contract with InfoStreet , an on-demand service provider, to host the Exchange e-mail servers. The representatives of the town authorities do not disclose the exact terms of the contract, but they do say that they paid 20 times less than they would have paid for Microsoft to replace their Exchange environment.

2.  Software as a service implies a short-term commitment, which results in dramatic financial risk reduction for businesses. By acquiring traditional software, companies pay significant amounts of money (over $100,000 for CRM solutions) and still face the high risk that the software may not fulfill the business requirements. In this case, there is no refund option.  Instead, a SaaS product manager can start implementing software as a service by purchasing 3 or 4 accounts. The users will test the application’s features and determine whether the software complies with the corporate needs. Then the organization can gradually involve more users and acquire more accounts. Otherwise, the company can make a decision to move to another software provider that offers better service conditions. A good example would be Superior Industries , a company producing conveying equipment. They had turned to an on-demand solution when their top management realized that they could save up to 90% of their expenditures on CRM software. Later the executives of the company reviewed the return on investment they were receiving from their CRM service, provided by Salesforce.com, and decided to reevaluate their approach. Their switch to SugarCRM resulted in even greater savings, up to $70 000.

3.  SaaS reduces the burden on IT staff . Moving to software as a service contract template means reducing the IT headcount, cutting the cost of hiring and training IT support and reducing IT operating costs. Internal IT personnel don't have to purchase and support the server infrastructure necessary to install and maintain the software in-house. The onus of maintaining a labor-intensive patch and upgrade process is taken by the software providers. With traditional licensed software, companies typically have to wait months for the next release of an application, which internal IT staff will then have to test and deploy. Very often, these installations are time-consuming and do not run smoothly.  On the contrary, using software as a service means that a company will receive all the software patches automatically and usually much more promptly. Moreover, by using the SaaS product management , enterprises ensure that subsidiaries in all locations are using the correct application software version.

4.  On-demand software usage usually means instant deployment . Traditional application implementation cycles inside companies can take years, consume massive resources and yield unsatisfactory results. With on-demand software, a company can start using the service the moment the provider activates the company’s accounts, which usually happens minutes after the payment is made.

So taking into consideration all these advantages, it’s not surprising that more and more companies choose to adopt on-demand software and that analysts believe that this model of software delivery is the future of the software industry. McKinsey Quarterly named software as a service a disruptive force and called for traditional software vendors to focus on integrating on-demand software into their product lines.

More and more, companies introduce their on-demand alternatives to traditional on-premise software. One of the best examples would be the project management field, where next-generation, Web-based applications have already displaced MS Project from its leading position, as they offer greater opportunities for easy and productive collaboration.

Today, the IT landscape is changing, opening new competitive advantages for early adopting customers. What we observe is, while some companies are struggling with the pain and cost of installation, others are wisely spending their time and money on their core business and become market leaders by leveraging all the benefits of the new technologies.