Software as a service has some wildly successful poster boys such as Salesforce.com, Google Apps, NetSuite, Workday, ADP and Concur. Every new independent software vendor is developing for the SaaS market. And for the established software companies, it's a case of articulate and deliver on a cloud strategy or die.
On the enterprise customer side, there is an increasing familiarity with the SaaS delivery model; continued pressure on IT budgets; and a growing comfort level with the security and performance parameters of cloud computing.
So, why isn't the SaaS market bigger? What's holding it back?
Gartner pegs total worldwide software revenue at $267 billion in 2011 and expects it to hit $288 billion this year. But Gartner puts worldwide SaaS revenue at only $12.3 billion and $14.5 billion, respectively, which comes out to less than 5% of annual software sales.
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"At 10 years old, or 10 years young -- however you want to specify its age -- SaaS has the power to change everything. It should be viral, like a really hilarious YouTube video. And it just isn't. Why not?" asks Jason Currill. He is CEO of Ospero, a U.K. startup looking to use its VMware cloud running on an infrastructure-as-a-service (IaaS) platform to build a better SaaS delivery channel across Europe.
According to Gartner research director Sharon Mertz, the two key factors inhibiting widespread SaaS deployments in North America are the lack of customization available in large, multi-tenant cloud applications, and the dearth of real integration between SaaS applications and existing on-premise systems.
That's not to say that SaaS isn't growing. By IDC's accounting of worldwide SaaS market revenue -- which includes cloud applications, application development and deployment, and system infrastructure software -- sales will balloon to $53.6 billion by 2015 at a compound annual growth rate of about 26%. At that point, IDC expects that SaaS will represent 73% of public cloud services revenue.
IDC also asserts that SaaS will grow faster than traditional software and will comprise 80% of the software delivered by new ISVs. By 2015, nearly $1 of every $6 spent on packaged software, and $1 of every $5 spent on applications, will be consumed via the SaaS model, according to a recent IDC report.
So, even though SaaS is growing at a healthy clip, these projections say that three years from now SaaS will still be below 20% of the total software market.
The good news is that existing SaaS vendors are teaming up to address the issues identified by Mertz and others. And cloud service brokerages are emerging to help enterprises manage multiple SaaS deployments.
Robert Mahowald, research vice president of SaaS and cloud services at IDC, sees back-end data integration between SaaS vendors as a significant step toward ubiquitous SaaS adoption. He pointed to the recently announced partnership between CRM giant Salesforce and business expense management vendor Concur as an example. This partnership -- dubbed Concurforce -- links the data collected and managed within the two SaaS systems, so that customers can make choices on which business to pursue based on how much they have to spend on each sales effort.
"This kind of stitching together of composite applications is going to make customers living with their current systems reconsider what future applications driving their businesses are going to look like," Mahowald says. The incentive for SaaS vendors to enable this level of data integration is all in the numbers. "In this deal alone, Salesforce gets pass-through access to Concur's 15,000 customers and Concur can tap into Salesforce's couple of hundred thousand accounts," he says.
When pressed about other such SaaS application marriages on the horizon, Mahowald would only say that he'd heard rumors about several deals that have not been consummated mainly because the business rules around selling these intertwined SaaS products into existing enterprise customers have yet to be worked out.
But customers should push vendors to build these kinds of cross-cloud connectors into SaaS applications at the stack level, says Mahowald, because when the software is running in the cloud and not on-premise, customers don't really have the option to make the connections themselves.
Stefan Ried, principal analyst at Forrester Research, says back-end advancements in SaaS will enable business-to-business cooperation among different customers of the same multi-tenant application.
One of the underlying security questions continually posed to the young SaaS market was how one customer's data was going to be securely isolated from other customers' data, Ried says. But next-generation SaaS providers "will enable you to have controlled availability of your data to partners using the same SaaS application," he says. As an example, vendors that offer complementary products and both use Salesforce.com could share customer contact information to help facilitate sales, but could block one another from seeing other confidential information also stored in the Salesforce.com cloud.
Andrew Greenway, global cloud computing lead at Accenture, a global IT management firm, contends that data management between SaaS applications is only part of the SaaS proliferation equation. "We've got to figure out how to better manage master data flowing across all SaaS and non-SaaS applications in the enterprise," he says.
Bring in the middleman
Industry analysts across the board assert that an orchestrated move away from the existing "load software on a pallet and ship it out" software distribution channel and toward an emerging class of cloud delivery intermediaries called cloud service brokerages (CSB) will be another driving force in SaaS.
CSB was the phrase for cloud arbitrage that Gartner coined in 2009. More recently, NIST defined this category of service providers as "an entity that manages the use, performance and delivery of cloud services and negotiates relationships between cloud providers and cloud consumers."
Practically speaking, CSBs are the middlemen that aggregate SaaS applications in the cloud and supply a portal through which its customers can buy, access and somewhat control the use of multiple multi-tenant cloud applications within their own companies. The broker negotiates a good price that is passed onto the customer, provides a single point for end users to sign onto these applications and presents the IT department with one monthly bill.
Several industry analysts and IT practitioners say that with as few as three disparate SaaS applications, a customer can benefit from a CSB's aggregation services. But all were in agreement that once that number hits double digits, a CSB becomes a necessity.
According to analyst Daryl Plummer, the Gartner definition of CSB has recently been expanded beyond simple application curating to include customization and integration services. Brokerages are in a good position to negotiate with SaaS applications vendors because they can tap into the economies of scale of bringing many customers to any brokered application, explains Plummer.
"And passing on that good price to the end user is an important part of the deal. But a broker has also got to be able to justify its own added value," Plummer says. And that justification can come by exemplary customization of the SaaS products on offer in the CSB's marketplace as well as integrating them with a customer's on-premise software.
Sprint has just rolled out its Wholesale Cloud Services bundle geared toward other service providers that want to broker services to the SMB market.
Tom Nelson, marketing director for this service, says the business case is simple: "The cloud landscape is a complex, overcrowded one. If we can help reduce that complexity and provide integration and security on top of that, it's still going to be cheaper to have us do it than to have their IT staff do it themselves.''
Behind the CSB's portal
The technological underpinnings for the CSBs are provided by cloud brokerage enablement firms such as AppDirect, Jamcracker, Parallels and Standing Cloud (see SaaS delivery companies to watch). These providers have developed the products that help CSBs quickly aggregate SaaS applications, organize them into "marketplaces" tailored to specific regional or industry segments, and build the unified management portals across the involved applications.
Right now it's unclear who these brokers will be over the long term. Currently, traditional value-added resellers (VAR), large telcos, regional carriers, established system integrators and even some IaaS vendors are assembling CSB portfolios to help in the widespread distribution of SaaS applications.
Insight Technology Solutions, a large, global Microsoft VAR based in Tempe, Ariz., employs Parallels Automation and PA for Cloud Marketplace to drive its email and collaboration CSB offerings. According to William McCarthy, senior vice president of Insight Managed and Cloud Services, his division pulled in about 6% of the VAR's overall $5.3 billion revenue in 2011.
But McCarthy is looking at 30% to 40% annual growth in cloud services due to the brokerage business. He's particularly hopeful about how business intelligence reporting can be built into a brokered service. "To be able to sell a value add that would provide customers with business intelligence between its back-office applications, for example, and accounts receivable would be a huge advantage," he says.
Christopher Smith, a marketing executive at Cambridge, Mass.-based Cloud Technology Partners (CloudTP), agrees that real-time business analytics will be a key CSB differentiator going forward. "It's a great benefit to any company -- small, medium or large -- to have all that data examined in real time and be able to put it to a real business use from whereever their employees are located," he says.
Do you want to go wide or deep with CSB?
Gartner analyst Tiffani Bova says there are two segments of CSB evolving: wide, those centered on aggregating a set of standard back-office applications that can be used across a wide range of customers; and deep, those comprising a bundle of SaaS applications that serve a specific industry segment.
"The SMB market is ripe for broad brush CSBs," Bova says.
Cincinnati Bell is hoping to tap into its existing 30,000 strong SMB customer base, to which it currently supplies dialup, broadband, hosting and wireless services, for a big bump in CSB revenue as it builds an aggregated SaaS offering using Parallel's marketplace software.
According to Dave Heimbach, senior vice president of business and carrier markets, consuming SaaS as an integrated bundle of email, shared calendaring, email archiving, collaboration, cloud-based payroll and accounting, and hosted telephony, "is very palatable to that market."
VPS.net, a cloud hosting provider based in Salt Lake City, Utah, is using Standing Cloud's Application Marketplace to offer its clients an "Office in a Box" SaaS bundle. "The downside of the SaaS marketplace model is that I have to take whatever SaaS applications they've decided to offer and make it work for my business," said VPS.net managing director Rus Foster. "The upside is that by having Standing Cloud manage all the technical details of running those apps, I can focus on building the business around them."
As an IT consultant helping enterprise customers pull SaaS into existing networks, Kacy Clarke, principal architect at CloudTP, sees industry-specific SaaS aggregation as the bigger play. Consider the unique deployment and regulatory issues in retail, or finance, or healthcare, Clarke says. "Having an aggregated back-office suite, billing system, and reconciliation application that all comply with all the specific regulations or deployment requirements of your particular industry would be a big gain."
Burns is a freelance writer and editor who has over 15 years experience covering the networking industry. She can be reached at firstname.lastname@example.org.