SaaS model gaining ground

NEEDHAM, Mass. -- Software-as-a-service is still a relatively small component of the business applications industry, but vendor executives who spoke at a Mass Technology Leadership Council today are betting that the hosted service model will quickly gain ground on traditional applications deployed and managed by users in-house.

“Software is dead. Dead, dead, dead, dead,” opined Jonathan Bush, chairman and CEO of athenahealth in Massachusetts, which provides Web-based billing services and other practice management tools for doctors’ offices.

Bush asked the audience to imagine Yahoo, which currently offers a free online mapping tool, trying to charge companies $2,000 a seat for the ability to look up directions.

“There’s an acknowledgement that software in and of itself isn’t that differentiating a thing,” Bush said. “You’ve got to give software, and then you have to sell work.”

The percentage of business and IT executives who use at least one SaaS technology rose from 11% to 26% in the past year, Saugatuck Technology said in research published last week. While small and medium-sized businesses initially comprised the biggest market for hosted software solutions, Saugatuck says it expects a growth surge in SaaS adoption among large enterprises.

On the whole, Saugatuck states that usage of SaaS is “skyrocketing on all cylinders.”

But SaaS is probably still a few years away from becoming a dominant player in the applications market, a panel of vendors and one venture capitalist said at the Mass Technology Leadership Council event.

“Even Salesforce.com, for all its size and market presence, still in the grand scheme of things is a small company,” said Tom Brennan, chief financial officer and vice president of strategic alliances for OpenAir, a vendor of on-demand applications that handle timesheets, expense reports, and project and resource management. “At the bottom line, the SaaS world is quite small,” he also said.

Although customers are sometimes leery of outsourcing operations currently managed in-house, Atlas Venture investor Eric Hjerpe argued that the SaaS model is a healthier dynamic for customers because vendors must satisfy them on an ongoing basis in order to win renewals.

Hjerpe, who moderated the discussion, said one challenge for vendors is switching to the subscription model from perpetual licenses, which provides money up front and can fuel growth.

Hjerpe used to work at Siebel Systems and in 1999 founded SiebelNet, a subsidiary that was the company’s first SaaS attempt.

Large vendors like Siebel have failed to move away from the perpetual license model and come up with successful SaaS offerings, Hjerpe said.

“Siebel’s failed, SAP has failed, Oracle has failed, for all their talk,” he said. “[Oracle CEO] Larry Ellison, I remember in 1999 was saying ‘70%of my revenues in two years are going to be SaaS-based.’ Well, I don’t know if you guys have looked recently, but we’re eight years later and that ain’t the fact.”

Another challenge for some vendors is finding employees with the right mindset for building software to be distributed via a services model.