Few doubt that, if all business software currently in use were available through the Software-as-a-Service model 10 years ago, the percentage of SaaS implementations would be much higher today. Companies like the instant-on nature of SaaS products, which provides a huge advantage in the sales cycle.
Imagine a situation that is repeated on thousands of sales calls. An on-premise vendor uses presentations, screenshots and demos to explain what its software can do. By contrast, the SaaS vendor logs into its system and shows you working software that you can buy and start to use right now. This difference is compelling to many customers. The SaaS sales cycle is further accelerated when customers try the software on their own and buy it directly from the company.
As we said in "Enterprise Software Battle Heats Up," SaaS software generally enjoys an advantage in usability. In my view, the biggest achievement of SaaS vendors is not multi-tenancy or other technical accomplishments, but that their software is much easier to configure than on-premise systems. Superusers can easily change the look and behavior of the software without help from systems integrators.
Why hasn't SaaS taken over already? There are three forces that have significantly slowed adoption of SaaS and is allowing software giants
The first force is the time it takes to switch from on-premise software to SaaS. A small business may switch from Peachtree to NetSuite in a month. A larger business will take many months. For the largest businesses, such transitions take years.
Most of the on-premise software in use today was implemented not to replace existing software but to introduce automation where none previously existed. SaaS offerings are filling a vacuum in the middle market and at the small- business end of the spectrum, but most large companies have systems in place. To make a sale, you must offer enough benefits to justify a traumatic and risky replacement project.
The second force impeding SaaS adoption: The software covers too few areas of business processes. You have a lot of SaaS software options for CRM and several for the finance and accounting functions that form the center of ERP. But there are huge areas of business process automation that SaaS doesn't address. NetSuite has a killer solution for running a software company or a professional services firm, but what about mining, mill products, oil refineries, pharmaceuticals or discrete manufacturing? NetSuite will dispute that it is behind in these areas, but my impression is that SAP, Oracle and Microsoft have had thousands of people working on these markets for years, and they have rich vertical offerings that have a wider footprint than the SaaS offerings.
The third force is disaster recovery. When SaaS software becomes an important part of your infrastructure, you need to have a plan for continuing operations if the central service fails. The larger the business, the more important this is. SaaS vendors are on shakiest ground when answering this question. Their message is essentially, "Trust us." The answer from many IT departments is "No."
So, now imagine that the on-premise vendors solve their problem as follows. First they partner with as many vertically knowledgeable consulting firms to tailor their needs to specific markets. Then, instead of selling in a traditional way, they install a vertically tailored demo version on a host like the Rackspace Cloud or Amazon Web Services. Then during the sales process, SaaS and on-premise would be on the same footing. You could try each out right away. If you want to buy the software, the version on the cloud system is cloned to a virtual machine under the customer's control or installed on-premise.
The usability problem would be less severe because vertical experts would do the configuration. Instead of having one vertical version for an area like oil refineries, there could be many, many vertical versions for each specialized market. The ultimate solution to the usability problem would emerge from this process. If the product managers of the on-premise software studied all of the vertical versions created, it is likely they could figure out an intermediate layer for user interface and product configuration that would start to approach the usability of the SaaS vendors.
If the on-premise vendors follow this plan rapidly, they can close the gap with the SaaS vendors and win the "Enterprise Software Race." If on-premise vendors solve the usability and configuration problem and then deliver their products as remotely managed appliances, then the difference between on-premise and SaaS software effectively disappears from the customer's point of view. Of course, this is a lot easier said than done, but if on-premise vendors don't make bold moves to address these problems, SaaS will win slowly, then rapidly and then completely as their offerings grow.
Dan Woods is chief technology officer and editor of Evolved Technologist, a research firm focused on the needs of CTOs and chief information officers. He also consults for many of the companies he writes about. For more information, go to evolvedtechnologist.com.
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