Analysis: Software as a service hits a glitch

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"There are a number of SaaS vendors doing very well," said Chip Gliedman, vice president and principal analyst at Forrester Research. "Salesforce.com has just issued guidance that their next quarter will be better than expected. But there is a completely different mindset among the software as a service vendors and the licensed software vendors."

This difference, he suggests, is largely a question of how each set of companies approaches its customers. Licensed software companies are focused on upfront licence sales, with perhaps 20 per cent of their revenues derived from additional services, such as support contracts. But as software as a service companies rely on subscriptions, they have to put more emphasis on ongoing customer satisfaction.

"The licence model puts the risk on the company buying the software," said Gliedman. "In the software as a services model, the vendor assumes more of that risk. You wonder how vendors wedded to a low-risk business model can wean themselves away from that."

NetSuite: Afraid of cannibalisation?

And according to Zach Nelson, chief executive of software as a services vendor NetSuite, there is another factor at work. The large software vendors, he said, have tended to embrace the idea of software as a service, but then pull away from it, perhaps out of a fear of simply cutting away their existing licensing revenues.

"The large vendors don't yet really know how to get into this market, and they don't want to cannibalise their existing customer bases," he said. "They tend to be hesitant and only offer SaaS for specific customers or specific needs. But customers don't see it that way - they believe it is up to them, the customers, how they use it."

"The success of SaaS brands such as salesforce.com, SuccessFactors,

Concur and NetSuite is proving that companies of all sizes - and specifically SMEs -- can take advantage of powerful applications that were previously out of reach to them," said Karen Steele, vice president of vendor Xactly, a company that offers sales performance management software on a services basis. "The economics of leasing verses buying software minimises the risk and cost associated with software implementations," she said.

Undoubtedly, the large software companies will continue to devote time and resources to this space, and companies such as SAP and Microsoft remain committed to offering some products on a pay-per-use basis.

But even if such companies only make limited inroads into the SaaS market, this might matter little to chief executive officers. The CIO of the near future is as likely to be managing a series of services from a range of vendors, as to run large, monolithic applications in house. And nor is that vision of the future limited to SMEs.

"There are still some reservations around SaaS, especially integration, customisation and security," said Forrester's Gliedman. "These could be deal breakers, but it comes back to cost benefit. Do you want to spend a year putting up, say, a CRM application and making it look exactly how you want, or do you want something you can modify through configuration, rather than customisation?"

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