A field guide to software as a service

Hosted-application providers offer everything you need for a totally outsourced datacenter -- almost

Everywhere you turn, another company pops up offering SaaS (software as a service). Inspired by the success of Salesforce.com, SaaS vendors are hoping customers large and small will get the message: Browser-based, pay-as-you-go applications mean fewer servers for your IT department to maintain and less capital to shake loose from the CFO for software licenses and hardware.

For whatever such estimates are worth, IDC recently forecasted that worldwide spending on SaaS will reach $10.7 billion by 2009. But there’s so much SaaS running around already that we couldn’t help but wonder: Could you run a business entirely on hosted offerings?

That somewhat playful question was the genesis of this buyer’s guide to SaaS -- although we already knew the answer. Healthy enterprises need to develop their own unique applications, and any modern IT infrastructure needs to be fully integrated in a manner that can’t be achieved with SaaS solutions today.

But an urgent need to stop piling cost and complexity on IT is sowing the seeds of change. Although enterprises may not be replacing effective, large-scale systems with SaaS alternatives, the SaaS option suddenly becomes perfectly viable when it comes to adding new functionality. And, as Salesforce.com discovered, SaaS can be particularly successful at replacing in-house or off-the-shelf software that has failed miserably.

In our survey of hosted software offerings, we’ve divided the SaaS universe into four parts: back-office applications (ERP, purchasing, HR, and so on), messaging, integration, and CRM.

These rough groupings, however, hardly cover the whole territory. For example, hosted versions of Mercury’s software quality, performance, and availability solutions continue to increase in popularity. Meanwhile, Web analytics, another monitoring technology, enjoys more traction as a hosted service than as server-based software. Recently, InfoWorld reviewed three of the leading hosted content management systems, revealing a surprising depth of functionality. SaaS search and collaboration are also proliferating. BPO (business process outsourcing) vendors provide not just software but the staff to operate it as well. And we haven’t even touched MSPs (managed security providers), a world unto itself that we’ll cover in an upcoming issue.

The bottom line is that a growing number of companies are choosing the on-demand model instead of packaged software. True, no enterprise would switch all its systems to SaaS overnight. But the success of Google’s Gmail proves that the hosted model is viable even for categories such as desktop productivity apps, which were once the exclusive domain of commercial off-the-shelf vendors. Application by application, during the coming years enterprise IT will rely more and more on hosted services that deliver deep functionality with very little maintenance at a very low cost of entry.

-- Eric Knorr

Back Office

On the face of it, you might think the ERP, supply chain, and database applications your company relies on for essential operations would be the last things you’d want someone else hosting. Yet that’s exactly what big players such as Oracle, SAP, and Siebel are doing for as much as 8 percent of their customer bases.

Oracle has been particularly focused on this space, with hosted versions of its own software available under the Oracle On Demand brand and investments in NetSuite and Salesforce.com. IBM has jumped into the back-office SaaS market as part of its On Demand Business strategy, forging partnerships with hosting players such as Adexa, HRsmart, Intacct, and Peopleclick. IBM also acquired Corio, which provides hosted Oracle, PeopleSoft, SAP, and Seibel services. Meanwhile, SAP and Siebel offer SaaS packagings of their respective applications.

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In the ERP space, second-tier players such as Intacct and Lawson Software offer hosted versions of their own applications, whereas third-party service providers such as NaviSite and USi host ERP software solutions from the top-tier vendors.

Employease is a leader in the HR space, competing against Peopleclick and Ultimate Software. The latter concentrates on workforce acquisition.

Arena Solutions is a leader in PLM (product lifecycle management). Ketera specializes in e-procurement. And there’s a slew of vertical players as well, including Kintera for nonprofits and CaseCentral for law firms.

Hosted back-office applications are attractive for SMBs that lack the IT expertise to build and maintain complex in-house systems. But they are making inroads into large enterprises as well.

“We’re seeing a lot of hybrid deployments that use the SaaS model to get a new team up and running quickly or to fill in gaps in their in-house application. They look for easy integration with the in-house function,” says Amy Konary, director of software pricing, licensing, and delivery at IDC.

Gartner analyst Ben Pring also sees increased SaaS adoption by independent operating units and by branch offices of larger companies. “The business unit executive puts in a request to IT for application support, and IT says, ‘We’re busy. Get back to us in September.’ So he goes off on his own with an SaaS provider to get going quickly and expenses it as an operating cost,” Pring says.

-- Leon Erlanger


Messaging has become a major pain for companies large and small. Significant IT resources must be devoted to managing mailboxes, archiving mail, coping with spam and viruses, filtering content, and meeting compliance requirements.

“Global companies have to deal with the Patriot Act, different regulations in different countries, and all the issues around data security and privacy,” IDC’s Konary says. “We see many considering SaaS because their in-house tools are very cumbersome or they simply can’t do the type of reporting and tracking that’s needed. Many SaaS providers have already developed their e-mail applications for reporting and can pull out that information fairly easily.”

The messaging SaaS market breaks down into complete e-mail hosting solutions and e-mail security hosting. Security hosting is designed to appeal to companies that prefer to devote their own resources to compliance while farming out other aspects, such as anti-virus and anti-spam services.

Full hosting solutions mostly cater to SMBs, but a recent report from Radicati Group, entitled “Hosted Email Market, 2004-2008,” found that hosted messaging is starting to become attractive for larger companies as well.

“[Enterprises] see that a lot of the hosting providers have been around for a while with very few horror stories,” says Radicati Group analyst Marcel Nienhuis.“They like that providers have started offering management consoles to give corporations more control and access so they can easily set up new users and add rules and filters if they want to.” Nienhaus sees larger enterprises testing the SaaS waters with deployments in new departments or departments with special needs, such as factory floors or geographically dispersed users.

Some of the larger pure-play SaaS messaging vendors include ASP-One, BlueStar Solutions, BlueTie, BT Infonet, Critical Path, Intermedia.Net, Mi8, NaviSite, USA.Net, and USi.

Most providers base their services on Microsoft Exchange or in some cases Lotus Notes, but BlueTie, for example, uses its own technology. Improved scalability, Web access, and security features built into Exchange 2003 have allowed other, smaller providers to proliferate. Most providers bundle anti-virus and anti-spam services and offer those as discrete services as well. More and more vendors are also offering content filtering and compliance management.

Dedicated e-mail security providers include FrontBridge, MessageLabs, Postini, and Symantec, which acquired Brightmail. To varying degrees, they all offer anti-virus, anti-spam, encryption, e-mail filtering, and compliance management. And then there’s FivePoints, a vendor that’s particularly focused on compliance for small and midsize financial companies.

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With hosted messaging security, midsize and large companies “like the idea that most of the bad stuff is kept far away from their network,” Radicati’s Nienhuis says.

When choosing an outsourced messaging service, however, it’s important to analyze fees carefully -- particularly for extra services and storage -- and to evaluate the completeness and ease-of-use of the management tools offered. Also, if compliance is an issue, make sure the provider has appropriate expertise and has implemented the right storage and disaster recovery measures. -- L.E.


A recent IDC survey showed that more than half of SaaS subscribers use at least three kinds of applications delivered as SaaS offerings. That’s a tiny absolute number now, but as SaaS usage grows, more and more enterprises may very well demand hosted integration among the hosted services they use. Otherwise, SaaS customers will be left as points of integration, reintroducing the complexity they were trying to squeeze out of the datacenter in the first place.

One company, Grand Central, stands apart in this area. Today, Grand Central primarily acts as a b-to-b integration platform. But in the future, it plans to deliver pre-integrated SaaS suites to subscribers through its own Web-based portal offering, in effect playing host and integrator to other vendors’ hosted solutions. This opens up the possibility of mix-and-match vertical portals that address industry-specific processes in a deeper way than, say, verticalized ERP suites from the likes of Oracle or SAP. Already, Grand Central works closely with Salesforce.com to integrate the CRM offering with other services to serve Salesforce.com customers. -- E.K.


The SaaS model has resuscitated CRM by mitigating functional and integration uncertainty for chief executives, many of whom have been apprehensive after the innumerable failed projects of the late ’90s. The hosted model’s prefab, cookie-cutter approach works well for CRM because most industries follow basic best practices in sales and support.

The fact that the hosted software is delivered through the browser has also contributed to its success, allowing road warriors to gain direct access to the CRM system from virtually anywhere, without the need for proprietary devices or deep technical knowledge.

Demand for sales and service productivity among SMBs has broadened CRM vendors’ target market, making the affordable SaaS model a win-win for revenue streams on both sides of the equation.

Today there’s no shortage of competition in the hosted CRM market. NetSuite adds a good mix of ERP to its CRM -- including accounting and procurement tools -- making it attractive to SMBs in need of integrated financials and inventory management. Accpac hosts its sales and service application with a usable interface and mix of add-on accounting and ERP modules. Salesnet delivers a sales-centric application devoid of service or campaign management options, using potent, industry-specific configurations for auto, telecom, and commercial-lending applications.

Of course, Salesforce.com remains the true leader in on-demand CRM. Unsurpassed for flexibility and integration in a hosted model, it possesses strong sales and forecasting tools and facilitates customer service via its Supportforce product.

Siebel OnDemand serves the high end of the SMB market. With its newly added contact center, integrated VoIP services, and full-spectrum analytics, this CRM stalwart stands to make up for its late entry to the hosted arena. RightNow recently added SFA to its customer-service suite. This is a good place to look for strong rules-based workflow, e-mail marketing, and service perks such as Web chat and real-time alerts. Talisma also delivers solid sales tracking and automation. Collaborative chat and remote browser control are good for engaging customers in real time. And at the entry level, SugarCRM’s open source-based Sugar Suite offers good sales-side opportunity that can be brought in-house for further detailing.

The next big push from vendors will focus on verticals. Industry-specific CRM can help mitigate customization expense, but it requires more than simply tailoring custom fields to a UI. Vendors will Click for larger view. improve their products’ underlying logic to enable custom workflows and data relationships. Vendors already moving in this direction include NetSuite, Salesnet, and Siebel.

The next big push from vendors will focus on verticals. Industry-specific CRM can help mitigate customization expense, but it requires more than simply tailoring custom fields to a UI. Vendors will Click for larger view. improve their products’ underlying logic to enable custom workflows and data relationships. Vendors already moving in this direction include NetSuite, Salesnet, and Siebel.

Ultimately, the cost of SaaS may surpass the expense of buying similar software outright. Calculating TCO can be difficult given unknowns such as support, upgrade, and maintenance costs. Going with a vendor that gives you the option of migrating to an on-premise platform down the road may be a wise safeguard.

-- James Borck

Copyright © 2005 IDG Communications, Inc.