Software as a Service: Over-hyped, But That Doesn't Mean it Won't Kill You

We were involved in a recent roundtable meeting where the topic of Software as a Service (SaaS) came up. Some of the people there felt it’s an important trend, others viewed it as the latest round of Silicon Valley hype.
Our view is that it’s an important change in the way the industry works, but one that will take years to play out. As so often happens in our industry, it will probably be written off by a lot of people before it has its greatest impact.

What’s Not to Like?

The case against SaaS cites a couple of major barriers to its broad deployment. One is data security. Large, traditional firms are very concerned about securing their data against both loss and theft. The idea of allowing that data to be hosted someplace on the Internet is daunting, if not downright terrifying.
The second barrier is scale. Many software services are being architected as quick-turn projects, without a lot of thought to long-term maintenance and how they’ll scale to handle large numbers of customers and more complex feature sets. This has even sometimes affected Google, whose blogging service, Blogger, has been plagued by periodic outages and data loss. Consumers can live with that (sort of), but it would be utterly unacceptable to a large firm.
The SaaS skeptics conclude that it may get some traction at the edges of business, but will never be ready for the most demanding, mission critical corporate tasks, especially in large businesses.
We think it all depends on your timeframe.

An Inevitable Change

Certainly in the next 12 months, the challenges in the SaaS world will prevent it from taking over the entire software industry. But major transitions never happen that fast anyway. We think it’s a good time to go back and re-read Clayton Christensen. In The Innovator’s Dilemma he did a great job of describing the gradual process by which steel mini-mills bit off pieces of the steel industry, starting with the lowest-value products that traditional steel companies didn’t care about deeply.
We see the same sort of process happening in SaaS. The easy targets and the smaller customers are being nipped off first. But over time the SaaS implementations are becoming more and more sophisticated. We also see SaaS companies starting to create versions of their services that designed to scale, and that companies can host within their firewalls, reducing security concerns.
For the best services, we expect to see a process similar to what Research in Motion did with Blackberry e-mail. The first Blackberry systems came with a small desktop application that took care of passing messages to the mobile device. Over time, as the number of Blackberry users in a firm grew, RIM sold servers to the IT department that took over from the desktop component.
That process – get the users hooked, then sell to IT after you have established an installed base – lends itself perfectly to small guerrilla organizations like the SaaS companies. They can grow under the radar for a long time. By the time they’re competing for the biggest corporate accounts, the rest of the market will have already switched – and it’ll be too late for the incumbent software companies to do anything about it.

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