SaaS Beyond the Tipping Point: Four Key Challenges by SMARTLINE SYSTEMS

RESEARCH ALERT RA-343 MAY 3, 2007 M. WEST, M. KOENIG Title

SaaS Beyond the Tipping Point: Three Waves, Four Key Challenges, Five Planning Positions

What is Happening?

SaaS has already entered the second of three successive, growing waves of adoption, delivery and robustness – even as many user and vendor organizations still struggle to understand the impacts of SaaS on their business, their customers, and markets in general. The third, and largest wave, is now building on the horizon – as SaaS continues to evolve toward becoming a platform for missioncritical application workloads.

Note 1: SaaS Research Report Three Waves of Change: SaaS Beyond the Tipping-Point

For more information about this report, including singleuser and multi-user licensing plans, please go to http://www.saugatech.com/342 order.htm. Contact: Chris MacGregor Analyst and Media Liaison 203-454-3900, or at chris.macgregor@ saugatech.com.

The authors invite your comments and inquiries on this Research Alert. Please contact Mark Koenig at mark.koenig@saugatech.com or Mike West at mike.west@saugatech.com Browse Related Research: • Business Applications • Emerging Trends / Technologies • Software-as-a-Service

While the pace of growth and change has been fast, longer-term success with SaaS will require that users and vendors rethink how business software deployment strategies and architectures will evolve so as to fully understand the impacts of this new delivery and licensing approach. Failure to ride the SaaS waves successfully – i.e., to understand and effectively manage SaaS – could result in user enterprises being swamped by exploding demand, and outflanked by more SaaS-savvy competitors. This is one of the important conclusions of Saugatuck’s latest research report, Three Waves of Change: SaaS Beyond the Tipping Point (SSR-342, 3May07, see Note 1 for more information). This Research Alert highlights some of the key findings and conclusions from the 34-page report, including: • • •

Saugatuck’s three-wave SaaS evolution framework and roadmap; The most influential market phenomena to emerge within that framework – SaaS Integration Platforms (SIPs), SaaS ecosystems and marketplaces, and the shift toward business services; and Recommendations of what to expect and what to do – including the effects of user and vendor business transformation resulting from the rapid pace of SaaS evolution.

These profound market changes have already begun to fundamentally change the business organizations, structures and operations of IT vendor and user enterprises.

Why is it Happening?

SaaS is attractive to users due to key business cost, usage, and flexibility factors. For these reasons, it is relatively easy to become dependent upon and integrate SaaS into critical business structures and operations. In this manner, SaaS resembles such other disruptive, useful, and ultimately game-changing information technologies as desktop computers and wireless telephony.

Research Report Highlights

Saugatuck began presenting data and analysis from our most recent SaaS research initiative regarding the rapid growth of SaaS deployment and adoption in early March, 2007. As Strategic Perspective SaaS Adoption Tsunami: Redefining Software and Services (MKT-331, 27March07), highlighted, SaaS adoption is exploding across enterprises of all sizes, industries and geographies worldwide – indicating that SaaS is both a core disruptive technology and a business services phenomenon.

SAUGATUCK RESEARCH ALERT The critical questions now are: Note 2 nd

Saugatuck 2 Annual SaaS Research Program Saugatuck’s newest research report, Three Waves of Change: SaaS Beyond the Tipping-Point, is based in part on a new worldwide web survey of 250 senior business and IT executives, 30+ briefings with leading SaaS providers and 15 deep dive interviews with early adopter SaaS users. The report updates our SaaS adoption scenario, and fine-tunes our SaaS 2.0 vision in areas such as pricing and licensing, ecosystems and verticalization. Vendors who participated in our SaaS briefing process include: • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

Adobe ADP Akamai Ariba Business Objects Coradiant CORESense EMC Fiberlink IBM Informatica Infosys Intacct Jamcracker Ketera Lucidera Microsoft NetSuite Nimaya OpSource OutlookSoft Pragmatech Progress Software Prolifiq Software RightNow Technologies Salesforce Symantec WebEx Workday Xactly Xora

For more information about this report, including single-user and multi-user licensing plans, please go to http://www.saugatech.com/342ord er.htm or contact Chris MacGregor, Analyst and Media Liaison, at 203-454-3900, or at chris.macgregor@saugatech.com.

• • •

How will SaaS transform IT and business – for user and vendor enterprises? What will be the things to watch for in the next major wave of SaaS? How will this SaaS tsunami impact the way we do business in the future?

Our most recent report (see Note 2) shows that SaaS has moved beyond the “tipping-point” from standalone, cost-driven software functionality to sophisticated, integrative, business-process-driven platforms and services. While overall SaaS adoption (of one or more SaaS applications) has grown from 11 percent in 2006 to 26 percent in 2007 (see SaaS Adoption: Skyrocketing on All Cylinders, RA-332, 28Mar07) – adoption has also grown to the point where mission-critical SaaS is now on the agenda for both SMBs and Large Enterprises. In fact, the number of enterprises of all sizes planning to deploy mission-critical SaaS over time jumped from 18 percent to 49 percent from 2006 to 2007. Ecosystems, marketplaces, business suites, appliances, and service offerings layered over SaaS are several current examples of offerings that have moved beyond first-generation application functionality and deployment. Beyond the numbers, Saugatuck’s research has also helped to clarify how SaaS is shifting and evolving, and how these changes will affect user and vendor organizations over the next several years. Figure 1: Waves of SaaS Evolution

Evolution of Software-as-a-Service SaaS 2 0 SaaS 1.0 High

A d o p t i o n

SaaS 2.0

Wave I: 2001-2006

Wave II: 2005-2010

Wave III: 2008-2014

Cost-effective Software Delivery

Integrated Business Solutions

Workflow-enabled Business Transformation

Ubiquitous Adoption

Early Adoption

• Stand-alone Apps • Multi-tenancy • Limited Configurability • Focus on TCO / rapid

Mainstream Adoption • Integrated w/ Bus. Portfolio • SaaS Integration Platforms • Business Marketplaces and SaaS ecosystems

• Customization Capability • Focus on Integration

• Optimized Bus. Ecosystems • IT-targeted Ecosystems • Inter-enterprise Collaboration • IT Utility / SaaS Infrastructure • Customized, Personalized Workflow

• Focus on Bus. Transformation

deploy

SaaS TippingPoint Low 2003 2004 2005

2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Saugatuck Technology

Saugatuck research indicates three distinct and over-lapping waves of SaaS adoption and usage (see Figure 1 above):

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SAUGATUCK RESEARCH ALERT • • •

Wave I: Early Adoption, characterized by cost-effective software delivery Wave II: Mainstream Adoption, characterized by the growth of integrated business solutions Wave III: Ubiquitous Adoption, characterized by the growth of workflowenabled business transformation.

As can be seen, Saugatuck believes that the focus of SaaS is shifting from costeffective delivery of stand-alone application services (Wave I), to integrated business solutions enabled by web services APIs and Enterprise Services Busses (ESBs and X-ESBs) (Wave II), to workflow-and collaboration-enabled business transformation (Wave III). The Early Adoption wave spanned the period from 2001–2006, and was characterized by standalone, multi-tenant application services with limited configurability, and extract-and-populate integration capabilities. Adoption was driven by a buyer focus on total cost of ownership and rapid deployment. Business users, rather than IT organizations, acquired SaaS 1.0 solutions to meet their line-of-business needs. Saugatuck believes that the SaaS 2.0 “tipping-point” occurred in the latter half of 2006, at which time SaaS solutions and their buyers moved deeper into the Mainstream Adoption wave, which began in 2005 and will continue through 2010. Mainstream Adoption is characterized by SaaS business solutions increasingly integrated with on-premise applications in the IT business portfolio, the emergence of SaaS Integration Platforms (SIPs) enabling not only business portfolio integration, but also SaaS ecosystems and business marketplaces. These SaaS 2.0 solutions are characterized by increasing customization capabilities at the user interface, data structure and process layer, and the introduction of web services APIs. The Ubiquitous Adoption wave will begin in 2008 and continue through 2014, ushering in a wave of workflow-enabled business transformation, optimized business and IT ecosystems, inter-enterprise collaboration, maturation of the IT utility and of SaaS infrastructure providers. This focus on business transformation will be enabled by customized and personalized business workflow, integrating inthe-cloud SaaS solutions with onpremise business services in a services-oriented architecture (SOA). (Saugatuck examines this in more detail in Strategic Perspective MKT-337, SaaS’ Third Wave: On The Road To Personalized Workflows, 18April07.) Four Essential Management Challenges In this new environment, Saugatuck believes that enterprises – and SaaS vendors – will be confronted with four essential challenges that will need to be resolved: • • • •

Integrating SaaS Workflows with Enterprise Business Processes Collaboration Across Business Units or Other Enterprises Customizing and Personalizing Business Workflow Utilizing SaaS Business Analytics, both Built-in and Adjunct Services

It won’t be until Wave III that we will see widespread solutions to these challenges. SaaS providers must ensure that mission-critical SaaS, whether delivered best-of-breed, or in a vertical or horizontal ecosystem, can become

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SAUGATUCK RESEARCH ALERT seamlessly part of enterprise business processes. Yet these workflows will cross organizational boundaries in virtually-integrated and dynamic value chains, requiring collaboration platforms that can enable knowledge worker collaboration securely. Moreover, tomorrow’s workplace will be increasingly role- and event-driven, and support for workflow customization and personalization, mashups and other Web 2.0 features will prove essential to success in the SaaS marketplace, as cloudbased and on-premise solutions blend together in the enterprise. Analytics will provide the means to monitor not only what has occurred, but what is occurring in the moment, as business intelligence will be increasingly built-in and more sophisticated analytic capabilities from SaaS solution providers will interoperate with platform solutions. Market Impact

Strategic Planning Positions (SPPs): • • • • •

By 2010, at least 65 percent of businesses will have deployed at least one SaaS application – with the U.S. achieving deployment rates in excess of 75 percent. By 2010, SaaS will be woven into the fabric of enterprise architecture, as buyers become increasingly comfortable with acquiring SaaS solutions as part of their broader business services portfolio. SaaS usage within mid-size and large enterprises will more than double by 2010 – averaging more than 7 SaaS solutions in production. Through 2010, spending on SaaS will grow at a 25 percent or greater compound annual growth rate. By 2012, 30 percent or more of all new business software will be deployed and delivered as SaaS.

Implications for Users: One significant challenge in Waves II and III will be the orchestration and management of services. This includes external services from “in-the-cloud” SaaS providers and supply chain partners, and internal services from the IT portfolio of services or from on-premise software delivered in a Services-Oriented Architecture. Because SaaS will increasingly become the means for delivering mission-critical solutions such as ERP and supply chain management, tightly interwoven with onpremise services, longer-term buyers will increasingly exercise a strong preference for brand-name SaaS providers and will expect comprehensive and published service level agreements (SLAs) before making commitments and risking vendor lock-in. Implications for Vendors: Integration requirements and opportunities will increase and become more complex. Saugatuck expects more opportunities for large system integrators (SIs), consultancies and services providers as SaaS proliferates and evolves through Waves II and III. Requirements will become more complex; projects and operations will become larger; and greater scales of services and capabilities will be required.

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SAUGATUCK RESEARCH ALERT This is good news for both the traditional services giants such as IBM and Accenture, as well as key offshore competitors such as Infosys, Wipro, Tata Consulting Services (TCS) and Satyam. It also provides a significant new opportunity for emerging players such as Blue Wolf and other next-generation services providers. Challenged to compete in this new environment will be Tier 2 and 3 players such as BearingPoint, CapGemini and Deloitte, among others. In addition, a new business services provisioning model may be emerging, that leverages standardized business services, applications and infrastructure provided by SaaS vendors, partnered in many cases with traditional (onshore or offshore) BPO solution providers, as well as next-generation process-specific players. These providers will continue to manage and own the overall outcome on behalf of the user organization. In closing, relatively few software vendors, even including some of the largest Master Brands, will be able to cope with the tremendous scale of SaaS demand and usage. Saugatuck looks for more and more software vendors to outsource and license SaaS provisioning of their portfolios, especially to their biggest partner services providers and hosting providers. But, as examined in more detail in April 2007, SaaS providers and hosting providers face significant business and technology challenges as well (see Strategic Perspective Does A SaaS Explosion Imply A Hosting Implosion?, STR-336, 12April07)

Saugatuck’s 2nd Annual SaaS Research Program – Recent Publications: •

Three Waves of Change: SaaS Beyond the Tipping Point (Research Report SSR-342, 3May07, $$$)

•

SaaS Pricing: The Value Metric Is Only the Tip of the Iceberg (Strategic

•

SaaS’ Third Wave: On The Road To Personalized Workflows (Strategic

•

Does A SaaS Explosion Imply A Hosting Implosion? (Strategic Perspective STR-

Perspective STR-344, 3May07, $$$) Perspective MKT-337, 18April07, $$$) 336, 12April07, $$$) •

SaaS Adoption: Skyrocketing on All Cylinders! (Research Alert RA-332,

•

SaaS Adoption Tsunami: Redefining Software and Services (Strategic

•

One Year Later: SaaS Breaks Out (Research Alert RA-326, 7March07)

28March07) Perspective MKT-331, 27March07, $$$)

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