IDC Makes Predictions for Software as a Service for 2006

IT market watcher IDC knows a good opportunity to dice and slice an emerging market, and that is why it last week announced a new report on the advent of Software as a Service, or SaaS.

IDC is predicting that service-based software offerings, where vendors host their own applications or work with third parties to host them on behalf of customers, is going to have a disruptive effect on various subsectors of the software industry in 2006. IDC is projecting that the largest ISVs, seeing the impending threats of upstarts who only deliver SaaS products, like Salesforce.com, will spin-off so-called on-demand versions of their products, which is easy to predict since the major software providers have been working on this for some time. IDC is also projecting that smaller ISVs will have a tougher time getting involved with SaaS, and that mergers and acquisitions in the software market will make the competitive landscape tough to read. IDC also expects that SaaS will be an important stepping-stone to subscription-based pricing.

Well, this all sounds very reasonable. But SaaS has some issues, as the repeated failures in the Salesforce.com network demonstrated. The fact is, software companies, even those that manage to get partners who know about how to manage systems, may not fare any better in handling the systems that support SaaS setups than companies themselves do. While there are economies of scale and scope that you get from the SaaS approach, it is equally true that you can become the victim of the SaaS vendor’s growth. How many times will the SaaS vendor that is growing sales in the triple or quadruple digits have to reconfigure the network of servers, storage arrays, and other gear to support those growing workloads? How much experience does any IT player have in managing such growth? The answer to the first question is lots, and the second, very little.

As is always the case, customers will test SaaS in areas where they do not have software already. Letting Salesforce.com handle customer relationship management makes perfect sense if you have not yet automated this function, but that does not mean companies should rush out and use the SaaS to do their core applications without seeing how it works. That said, companies that do not have an ERP suite might be inclined to never have one, and simply rent ERP software from a SaaS vendor from Day One. The real issue is this: if SaaS works, and people pay for software based on what they use, which is the logical conclusion of shifting from perpetual software licensing through SaaS and on to real subscription-based pricing, how is the software industry, and the hardware industries that are dependent upon the inefficient use of IT assets to generate revenues and profits, going to survive this change? How many more software seats do you have to sell to stay in business? How many software companies will be driven out of business by such a shift? How many companies will be willing or able to let go of their software and rent it?

There are many more questions raised by the advent of SaaS that can be answered right now.