|
Software as a Service pioneer Dr. Timothy Chou shares his views
SPECIAL OFFER
Seven — Get details about Dr. Chou's Seven Business Models.
|
 Software as a Service (SaaS) is the next evolution in how companies use and pay for software. Some say it's the next step in the fulfillment of the technology "dialtone." Executives and business managers want to understand the impact of SaaS to their bottom line, business model structure, and real-time operation requirements.
Dr. Timothy Chou was an early pioneer in delivering SaaS when he launched Oracle's efforts in 1999. Over the past 10 years he has written several books, including The End of Software. He has also lectured and advised numerous companies on this significant shift in the software business. Most recently, he authored the book Seven, which discusses seven fundamental business models from the traditional to the Internet. Chou shares with Inner Circle readers his opinion on SaaS and its potential impact on how companies do business — today and in the future.
Inner Circle (IC): Is Software as a Service an executive level concern? If so, why?
"As a general rule, if you take your software purchase price and multiply
it by four, that's what you'll spend to manage that software, per year. This translates to easily 75 percent of your budget being tied up in managing existing software systems."
Dr. Timothy Chou (TC): Cost is certainly an executive concern. No matter what industry you're in, your IT budget is dominated not by the cost of computers but by the cost of people — people who are managing the performance, availability, security, and maintenance of the software you've purchased. As a general rule, if you take your software purchase price and multiply it by four, that's what you'll spend to manage that software, per year. This translates to easily 75 percent of your budget being tied up in managing existing software systems.
You have several choices for reducing that cost. For example, let's suppose that you licensed traditional enterprise software for $4000 per user. Today, you're probably spending over $1000 per user, per month to manage that software. You could choose to outsource the management of that software to traditional outsourcers. That gives you less flexibility than your traditional model, but the cost should drop below $1000 per user, per month.
Your second option is to ask the vendor if they provide their software as a service. Companies such as Callidus, Oracle, and Blackbaud all offer this option. In general their pricing will be significantly lower than $1000 per user, per month — closer to $200 per user, per month.
If you're ready to purchase a new application, there are a number of new companies that have built their software as a service from the ground up (WebEx, Taleo, Salesforce.com, Kintera, NetSuite, RightNow). Rather than $200 per user, per month, these providers will be closer to $50 per user, per month. As you can see, there are plenty of options for reducing costs.
IC: How does implementing Software as a Service impact my bottom line?
TC: Having your software delivered as a service will reduce your overall spend, but there are other bottom line advantages as well. Choosing SaaS allows you to shift valuable management attention from managing the security, performance, and availability of your enterprise software to determining how to use technology to transform your business. Today, whether you're in retail, financial services, health care, high tech, or a services business, your company is a software company in terms of how it's using technology to differentiate its offerings, impact the market, and interact with customers and partners. When you free up IT budget from managing software, you can use this budget to exploit technology and support business objectives.
IC: If I'm considering purchasing Software as a Service, what are the top things I need to think about?
TC: The first thing to think about is what are the key business processes you're trying to automate? Then find the specialist in that area. Specialization has been the key to excellence in any human endeavor. Consider examples such as Concur, which specializes in expense management, or DealerTrack, which specializes in automotive loan processing. Once you're satisfied the specialist can deliver the business process you need, start asking questions about their delivery. For example, find out how many times they've upgraded the application successfully in the last year, and ask about the average timing for the availability of a security patch release and when it's available for production systems.
"It's the job of every company to isolate what is core from what is context. Then focus on reducing the cost of delivering the context processes and information — and use the savings to fund what is core."
IC: Which applications are best to keep in-house and which should be accessed via on-demand?
TC: That depends on what's core — and what's context. A core activity (processes or information) sets an enterprise apart from its competition. Leadership in core activities directly advances the mission of the business and gains recognition from the marketplace. Core activities are those a business must concentrate its talent, management, and internal resources on because they are central to the company's strategy.
Context activities are those that, while perhaps critical, don't distinguish the business from others in its market. It's important to recognize that context activities might be mission critical but not necessarily core. As an example, electricity is mission critical, but it's not core. Accounts payable and general ledger applications might be mission critical, but it's hard to consider them core. Email might be mission critical but is it core? I recommend finding those context processes and having them delivered as an on-demand service by someone for whom it is core to their business. It's the job of every company to isolate what is core from what is context. Then focus on reducing the cost of delivering the context processes and information — and use the savings to fund what is core.
IC: Is the decision to go with on-demand driven by company size? Do small and medium businesses have the same considerations as large businesses?
TC: The choice to have your context applications delivered as a service is not driven by company size. Instead, it's driven by where you are on the technology adoption curve. Some people are early adopters while others wait until a product has reached "Main Street" before they adopt.
The market has matured considerably in the past eight years. When I started my work at Oracle, many CIOs would ask: "Why should I get my Oracle applications delivered on-demand?" By the time I left in 2005, the question was: "How do I move to on-demand?" Today I've met many CIOs who have all of their context enterprise applications delivered as a service — from spam filtering from Google, Web conferencing from WebEx, service applications from RightNow to financials from Oracle. SaaS offers a way to progressively lower price points and deliver IP to more and more people. That's applicable to any size of business.
IC: How does an on-demand strategy help reduce carbon emissions?
TC: Anyone exploring SaaS is concerned with the cost of power, cooling, and real estate needed to house hardware on-premises versus going on-demand. To understand the impact these decisions have at scale, look at the datacenter decisions that Google, Yahoo!, and Microsoft are making. The New York Times estimated Google operates about 450,000 servers. If each of those servers consumes approximately 200 watts, that means Google consumes nearly 900 GWh (Giga Watt hours) in a year. That's equivalent to powering a city of over 100,000 homes for a year. So what seems like an insignificant choice to move from a server that consumes 200 watts (yours) to one that consumes 180 watts (theirs) actually provides major reductions in carbon emissions across hundreds of thousands of servers — and obvious reductions for your company when you no longer have to house the equipment.
IC: If I'm thinking about offering my software as a service what do I need to think about?
TC: The book Seven discusses two hybrid models (Model Four and Model Five) that support providing Software as a Service if you're an existing software company. If you're a new software company, then you're probably considering only Model Six where you architect your software as a service from the outset. If you're big enough, you can provide multiple applications in multiple models. As an example, Blackbaud provides its traditional SaaS in Model Four, and through the acquisition of eTapestry and Kintera, now has two applications offered in Model Six.
The chart below characterizes key points of Chou's Seven Software Business Models. According to the author, some companies operate in only one model while others have products that operate in multiple models. Get a free copy of Dr. Chou's book, Seven.
Seven Software Business Models
My counsel to software company executives would be to figure out which model or models you want to operate in and start the execution process sooner rather than later.
About Timothy Chou
Timothy Chou was an early pioneer in the movement to software delivered as an on-demand service. He authored the book The End of Software based on his experience as the President of Oracle On Demand. More recently, in addition to authoring the book, Seven, he launched the first class in Software as a Service at Stanford University, co-founded Openwater Networks which is pioneering a new generation of enterprise application based on search (not SQL), and is a member of the board of directors of Blackbaud (NASDAQ: BLKB).
| 
