RealTime IT News

SaaS Players Jostle For Position

Software-as-a-service (SaaS) is ready to break out of its ghetto.

With a few notable exceptions, vendors of on-demand software have been relegated to offering narrow point solutions to non-mission-critical functions in the small- and medium-sized business (SMB) arena.

Randy Haykin, managing director of Outlook Ventures, noted that from an investment standpoint, "the most compelling aspect of software as a service is the ability to break into the SMB space."

He explained that the SMB market is attractive because IT spending is growing more quickly among SMBs than among larger companies. Part of the reason for that, of course, is that SaaS has made solutions available to SMBs that they couldn't afford under the on-premise delivery model.

Typical of these niche SaaS vendors is nSite, a four-year old Pleasanton, Calif.-based vendor offering channel, quote and proposal management solutions.

NSite targets the SMB market with Ajax-based technology that lets business executives configure and use its applications even if they are not tech savvy and have limited IT resources.

"Our sweet spot is small- and medium-sized companies of several hundred employees and 20 or more sales reps," said Lawrence Lindsey, vice president of engineering.

"That's where this tool really becomes effective."

But venture capitalists and many vendors of on-demand software are convinced that not only is SaaS ready to penetrate the enterprise market, but that SaaS is itself entering a new phase they're calling SaaS 2.0.

There are, of course, a number of takes on what that really means.

The Evolution Has Begun

For Adam Gross, vice president of developer marketing at Salesforce.com, a leading provider of customer relationship management (CRM), SaaS 2.0 will resemble Web 2.0, drawing inspiration from interconnectivity and trends such as mash-ups.

"What matters is less what your system runs on than what your system can talk to," he told internetnews.com.

Salesforce.com's AppExchange platform allows its customers to access and even combine solutions from different SaaS vendors, such as the mash-up between a CRM solution for the real estate market and mapping technology from Google.

"This," he said, "is how the Internet works."

Gross credits AppExchange for helping provide a context or ecosystem for various SaaS solutions to interconnect.

That ecosystem, Gross and others argue, is what will give enterprise-level customers the confidence to adopt SaaS solutions and to accept SaaS applications for solving mission-critical business problems.

But others see AppExchange as an attempt by Salesforce.com to federate and control SaaS.

Gordon Ritter, general partner with Emergence Capital, which has a $125 million fund invested principally in SaaS vendors, agrees that SaaS vendors need a centralizing force.

"Someone needs to be the backbone for the services that are too small to be standalone," he said.

But while Salesforce.com CEO Marc Benioff would like to become that epicenter, he said, other players would also play a significant role.

"Benioff would like to own the world," he told internetnews.com, "but there will be many other players and many other opportunities."

It should be noted that Ritter was one of the original backers of Salesforce.com.

One of the "other" players Ritter referred to is Jamcracker, which provides what Brent Arslaner, vice president for business development, describes as an agnostic ecosystem for SaaS vendors.

"For SaaS to be more than a point solution," he said, "there needs to be a surrounding ecosystem."

He credited Salesforce.com as being the "greatest advocate for this industry," but agreed with Ritter that AppExchange was an attempt to hegemonize the space.

"It's the SaaS version of lock-in," he said.

SaaS vendors say they are beginning to find traction for business-critical Solutions, such as enterprise resource planning (ERP).

Jeff Beinke, vice president of product strategy for Employease, an Atlanta-based vendor providing on-demand HR solutions, told internetnews.com that the company now earns 66 percent of its revenues from customers employing more than 1,000 people.

He explained that the business proposition for SaaS has gone beyond convincing potential customers that the model is as reliable and secure as on-premise software.

"It's no longer about technology, it's a business conversation," he said.

Chris Cabrera, CEO at sales compensation management solution provider Xactly, told internetnews.com that he could see tripling his prices as the company gains traction with larger companies.

"People will recognize there is so much value in this," he said, "because the ROI is so high."

SaaS in The Enterprise

And it's value that more enterprise-level companies are recognizing.

Jeff Kaplan, principal analyst with THINKStrategies, based in Boston, said that SaaS vendors are winning contracts with "large brand-name companies."

"SaaS has sunk its roots into the very fabric of how companies operate," he said.

The reason, he added, is that in many cases, the functionality of on-demand software "exceeds legacy applications."

But gaining sales among enterprises with legacy on-premise systems won't be easy.

Mark Hilderbrand, general partner at Onset Ventures, cautioned that SaaS vendors will displace existing on-premise vendors, but only over time.

Moreover, he said, they would have to deliver new types of services, "not simply offer the same thing as on-premise only better."

Haykin of Outlook Ventures said that the path to enterprise-level sales will come through the department level.

"A departmental decision maker can sign off on the budget without having to get approvals from multiple divisions or departments," he said.

But SaaS vendors are also finding an appetite for more mission-critical applications.

"Critical but non-core functions are ripe for SaaS," agreed Ritter.

So How Far Will SaaS Go?

According to several observers, "traditional" SaaS vendors face an imminent threat from vendors of open source solutions, such as SugarCRM.

"That's an exciting and very disruptive model that could be quite threatening to the software as a service vendors," said Hilderbrand of Onset Ventures.

The open source model allows customers to download most of the software for free. Open source vendors such as SugarCRM earns revenues from professional support and customized enterprise editions.

SugarCRM provides its solution on-demand, but will also install it on premise, or even sell customers a server with its solution pre-installed.

John Roberts, CEO of SugarCRM, openly disparaged the Salesforce.com model of providing SaaS.

"The reality is they want to lock you into a proprietary code base to force you to pay their prices for their products," he told internetnews.com.

He added that software should be provided however customers want it.

"We treat on-demand as a deployment option," he said. "Placing restrictions is not going to withstand the test of time."