2010 was a watershed year in the evolution of the Softwareas a Service (SaaS) industry. Worldwide sales of SaaS tools within the enterprise application software market exceeded $9B.¹ The industry bellwether— Salesforce.com — continued to grow its revenue dramatically.

A variety of IT research organizations predicted that by 2014 SaaS products would account for more than 40 percent of all new software sales. By any reasonable measure, SaaS is now considered to be an acceptable and, in some cases, a desirable means of supporting a company’s business operations.

SaaS Is Here to Stay

SaaS tools were originally considered to be niche products,largely confined to the CRM (Customer Relationship Management) segment of acompany’s application portfolio. SaaS products have matured considerably over the past ten years and are now available to support back-office and mid-office operationsas well. A variety of SaaS tools support human resources functions, such as recruiting, contingent worker management, performance management, succession planning, payroll and bonus administration, and so on. SaaS products have also expanded into procurement and financial management functions, supporting such activities as pricing, quoting, order processing, tax and tariff administration,and currency exchange operations.

SaaS capabilities have even crept into the IT function. Several companies, including BMC Software, offer tools for servicedesk operations, project portfolio management, vendor contract management,budgeting and forecasting, and compliance administration that are specifically designed for IT organizations.

Why SaaS?

BMC’s IT organization has implemented at least one new SaaS application per quarter since the first calendar quarter of 2009. We have realized several benefits through large-scale adoption of SaaS tools. The hard benefits associated with SaaS are well known to all IT professionals. SaaS products are built, hosted, maintained, and operated by the SaaS vendor. This approach can absolve IT of responsibilities for hardware procurement and installation, availabilityand disaster recovery management, and application maintenance and development.

This transfer of responsibilities has enabled us to reduce the size of our datacenter and achieve savings in hardware depreciation and maintenance, cooling requirements,power consumption, and operator support. In addition, we have been able to repurpose several members of our applications teams into business systems analyst roles since their former responsibilities for software coding and testing are now being performed by the SaaS vendors.

The more significant benefits of SaaS adoption have been an accelerated time-to-market of new IT capabilities and an improved return on our softwarei nvestments. Through practice, we have developed the ability to implement new SaaS applications in roughly three to four months. This is in marked contrast to the time typically required to implement licensed software applications. Like most IT shops, we would likely need six to nine months to put a licensed software application into production. This time would be needed to design anappropriate hardware environment to host the application, procure and install then eeded equipment, license the database software and additional utilities required to support the application, customize the application to support our users’ requirements, and perform extensive testing in collaboration with our users prior to the “go-live” date.

The business sponsors of IT projects tend to have changing priorities and short attention spans. One of the not-so-obvious benefits of SaaS applications is that their original sponsors are much more likely to be present to drive adoption and realize forecasted business benefits, simply because SaaSimplementation timetables are so much shorter than conventional application projects.

The second, less obvious benefit of SaaS products is the true return achieved on a company’s software investment. Simplistic financial comparisons of SaaS subscription fees versus the costs of conventional licensed software typically fail to capture all of the tradeoffs involved. A simplistic analysis of the cost of a licensed application will combine the costs of depreciation and maintenance of the software and hardware that is initially procured. It will also include the professional service fees of any external consultants required to configure the application and the labor costs of the internal staff required to maintain the software and operate the system. This total cost of ownership will be compared to the subscription fees of acompeting SaaS solution over a multiyear period, typically three years.Whichever procurement approach results in the lower multi-year cost would appear to be the preferred strategy (assuming that Capex and Opex funds are equally available).

What this type of analysis fails to capture is the benefit being realized on the maintenance fees for licensed software versus the subscriptionfees for SaaS software. Many companies heavily customize licensed software applications that have been implemented internally. In principle, they are paying maintenance fees on the licensed software to preserve their ability to leverage the functional enhancements in subsequent product releases. In practice,however, they become mired in customizations that make it difficult, if not impossible, to move to the latest version of the licensed product. In contrast,enhancements in the functionality of SaaS products are typically delivered in an incremental fashion over much shorter intervals (four to six months).  Incremental upgrades are much more likely to be adopted immediately, producing a return on the investment in SaaS subscription fees that is not typically realized on the maintenance fees for licensed software.

The less obvious benefits of SaaS adoption significantly outweigh the hard benefits described in this article. A SaaS-first application strategy will enable any IT organization to reduce hardware and data center expenses, as well as repurpose application developers into analyst roles that produce more inherent business value.

Far more significant is the ability to drive adoption of new IT capabilities and ensure that the business benefits of a new application are achieved. It is easier to drive adoption and achieve business benefits if the original business sponsors of a new application are available and enthusiastic at the time of “go live.” This is much more likely to be the case for the introduction of a new SaaS product. Furthermore, SaaS subscription fees allow you to offer your users functional enhancements on a much more frequent basis and avoid maintenance fees for which you are receiving no immediate benefit. These qualitative benefits are rarely captured in simplistic comparisons of SaaS and licensed software costs.

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By Mark Settle, Chief Information Officer, BMC Software