Last week, Kevin Potts of Emptoris commented on my note on Procurement Market trends with a good question – Why did we write that Hybrid SaaS/On-Premises vendors are at a disadvantage to pure SaaS vendors in the procurement tools market?
Thanks for your comments, Kevin. I did not intend for my research to imply that SaaS is superior to on-premises or hosted solutions. Sometimes organizations want to customize their software and sometimes they want to heavily integrate their software with other applications. Sometimes they are just not comfortable putting their data outside of their firewall. If these organizations are willing to give up access to innovation– because the more you customize and integrate a solution, the greater you hamper your ability to upgrade – then on-premises or hosted delivery is appropriate.
However, SaaS offers some interesting benefits that on-premises/hosted offerings do not. My colleague and Gartner lead analyst on SaaS, Rob Desisto, has written extensively on our position of skepticism of hybrid SaaS/on-premises vendors. I agree with his position and will state my evolved point of view here. A bit of background first. If you may recall, a number of vendors including several large ERP suite vendors responded to popular SaaS offerings such as SalesForce.com, SuccessFactors and yes, Procuri and Ketera, by rolling out SaaS versions of their own products. Vendors certainly can re-architect their product to make them partionable and therefore SaaS-deliverable. Voilá – no more competitive advantage for SaaS providers. Right?
Wrong. This quick and dirty approach to SaaS does not address some of the most important value adds that the SaaS models brings. Top on my list is access to enhancements. Native SaaS vendors roll out new functionality as often as every month – and in an immature market, this is a very valuable deliverable because it facilitates the ability of customers to consume innovation because vendors can address product shortcomings expeditiously. On-premises vendors march to the beat of a much slower drummer, and for good reasons.
Secondly, the SaaS model enables infrastructure to be outsourced or even moved into the cloud. I agree with you Kevin, Procuri may have faced higher costs than SaaS vendors incur today because Procuri did not have access to the infrastructure options that SaaS vendors have now. It is a consequence of playing early in the game. I led a note on the business model of SaaS that speaks in depth to the economics of SaaS– see “Financial Implications of the Software as a Service Business Model” published August 27th, 2008.
The main point is that fully evolved SaaS solutions are not lightly re-architected on-premises apps, and they are more than an on-ramp to an on-premises solution. SaaS is a different way of thinking, a different approach to the business of software. This differentiated way of doing business and thinking is indeed putting on-premises vendors at a disadvantage for software applications that do not require customization, multiple integrations or near-term updates to deliver ROI.