Mega-vendors Warming Up to the Cloud - Part 1

At the time when my recent “SaaSy Discussions” series was already being published, I had an update briefing and great discussion with Colleen Niven Smith, vice president of software-as-a-service (SaaS) initiatives at Progress Software. Smith and Progress Software’s findings on SaaS industry dynamics concur with my assertions that growth of SaaS-based offerings is expected to outpace traditional on-site enterprise applications business in the not-so-distant future.

Combined competitive, organizational, and technological factors are expected to fuel SaaS solution growth, and many industry analysts project the SaaS market to be in the range of USD$14 billion to USD$17 billion within the next three years. Indeed, as mentioned in my 2008 blog post on Progress Software’s SaaS forays, 20 percent of Progress Software's independent software vendor (ISV) partners that leverage the Progress OpenEdge platform for SaaS applications saw their businesses grow by over 40 percent in 2008.

In addition, there has been a much higher market valuation lately of on-demand SaaS providers as compared to their on-premise-software peers. There are also more optimistic expectations about SaaS companies’ performances and long-term growth prospects as compared to traditional “perpetual license” application businesses.

Progress Software has also noticed a trend of more business service providers (BSPs) acquiring SaaS vendors to offer comprehensive service solutions using on-demand as the delivery mode. These service providers also act as a distribution channel to the market for SaaS vendors.

Ongoing SaaS/Cloud Computing Evolution

Progress Software and Saugatuck Technology Inc. believe that the SaaS and cloud computing markets will go through at least three waves. Wave 1 (or SaaS 1.0) took place from approximately 2000 to 2006, and was marked by an early adoption of cost-effective hosted service delivery. Estimated market size was around USD$3.6 billion.

Wave 1 was characterized by stand-alone on-demand applications where multitenancy was merely an advanced software architecture option. The focus of early adopter customers was on total cost of ownership (TCO) and rapid deployment, and many now-outdated Web 1.0 technologies were still leveraged at the time.

The current wave, Wave 2 (or SaaS 2.0), started in the mid-2000s and is expected to last until around 2011. In this phase, the on-demand applications market has become mainstream, with an estimated size in the range of USD$8 billion to USD$14 billion, and is characterized by the use of integrated business services. Namely, SaaS Integration Platforms (SIPs), first described by Saugatuck Technology in its original SaaS 2.0 report in 2007, have emerged. SIPs enable clusters of related SaaS point applications to exchange data and interoperate, driving the appearance of vertical and horizontal ecosystems and marketplaces.

A SaaS ecosystem could be defined as a set of interconnected SaaS applications, meeting the needs of a horizontal (cross-industry) or vertical industry market, offered together as a business environment on-demand. The environment provides marketplaces for business services, collaboration services, transaction services, infrastructure services, and so on.

With transaction processing at the heart of the current generation of on-premise business applications, it should come as no surprise that transaction-oriented SaaS ecosystems are well down the evolutionary path. The all-too-familiar characteristics of the early-adoption Wave 1 (such as “good enough” or "80/20 rule" capabilities, configuration rather than customized software, integration challenges to both on-demand and on-premise third-party applications, etc.) have already given way to fuller feature sets, more flexible user interfaces (UIs) and logical process-based customization. Additionally, Web-services-based application programming interfaces (APIs) already enable integration with existing business workflows, providing integrated business solutions for a widening spectrum of business customers.

In addition to the use of service-oriented architecture (SOA) concepts and joint marketing and lead generation efforts by SaaS vendors and BSPs, other Wave 2 characteristics are that SaaS pricing and licensing is primarily user-based. Namely, pricing and licensing are far less frequently based on transactions and, while in the case of SaaS solutions that span organizations (rather than being departmental), contracts can occasionally be based on the size of the organization.

In other words, integrated SaaS suites are now designed and targeted specifically to the needs of either small, midsize, or large enterprises. Some are tuned to a specific industry, while others have added functionality that appeals to some vertical sectors. Some offerings target business users, others target IT organizations, and still others might have even more targeted consumers within companies.

As noted above, Saugatuck and Progress believe that continued evolution of these marketplaces will be driven by the necessity to integrate both at the data level and business process level, across both SaaS and on-premise solutions within a specific horizontal or vertical business process. In most cases, these will be partnerships focused on a market-leading SaaS solution or solution stack (e.g.,’s AppExchange and NetSuite’s SuiteBuilder) and will leverage a key channel as well (e.g., Microsoft and British Telecom’s Applications Marketplace).

As such, these types of ecosystems will be critical to the development and ultimately the success of integrated business solutions. But while many SaaS providers are reaching across geographies, “one size does not yet fit all” in the current mainstream wave of SaaS.

The SaaS Wave of the Future

The future Wave 3 (or SaaS 3.0) is envisioned to start in 2010 and completely form by 2014. This phase is seen as the period of ubiquitous adoption of business service delivery in the cloud. To make a distinction between SaaS and cloud computing, the latter is the next generation of the first, where a complete software environment is subscribed to by a user, and where low-cost, secure, and dependable hardware infrastructure is “rented” from a utility-computing provider. Gartner also recently identified the five attributes of cloud computing here

This will be the time when SaaS offerings will become part of critical business applications, and worldwide adoption of SaaS in this wave is expected to range from 42 percent to 80 percent or more in the small and medium enterprise (SME) space and 63 percent to 85 percent or more in the large enterprise space. SaaS solutions will become an essential part of the fabric of business, motivated by the need to manage virtual value chains and to enhance the effectiveness of internal and external processes within extended enterprises.

Key applications in this “ubiquitous SaaS adoption” Wave 3 will include mission-critical solutions for enterprise resource planning (ERP) and supply chain management (SCM). These solutions are expected to be provided within suites or via vertical and horizontal ecosystems (or hubs), especially for SMEs. On the other hand, in the large enterprise space, buyers will want to acquire “core” front-office and back-office SaaS solutions.

Security-as-a-service practices will emerge from highly-trusted and branded SaaS providers (such as QualysSymantec,  or Alert Logic), who increasingly deliver IT infrastructure services and ecosystems. Collaboration SIPs and mobility solutions will accent the strong user demand for services in support of internal and inter-enterprise collaboration.

In this ubiquitous adoption wave, SaaS solutions will be increasingly linked to on-premise data, applications, and processes through Web services-based integration APIs and enterprise service buses (ESB), then orchestrated through workflow engines and business process management (BPM) suites. Workflow-based customization and personalization will require SaaS providers in the cloud to develop highly granular Web services APIs.

Implications for Users

In summary, Wave 3 characteristics will include vertical industry-based business ecosystems, inter-enterprise collaboration, common infrastructure-as-a-service (IaaS), and pervasive use of Web 2.0 gadgets and virtualization. One significant challenge in Wave 2 and Wave 3 will be the orchestration and management of services.

This includes external services from “in-the-cloud” SaaS providers and trading partners, as well as internal services from the company’s own IT portfolio of services or from legacy on-premise software delivered in a SOA manner (i.e., exposed as services). Because SaaS will be the means for delivering mission-critical solutions such as ERP and SCM, tightly interwoven with on-premise services, buyers will likely exercise a strong preference for brand-name SaaS providers and will expect published service level agreements (SLAs) before making commitments and risking any vendor lock-in.

Research from other recognized industry analysts supports Progress Software’s findings and adoption forecasts. According to Gartner, SaaS represented approximately 5 percent of spending on business software revenues in 2005, growing to 25 percent (or more) by 2011. By 2012, 40 percent of enterprises will achieve integration of cloud-based solutions with on-premise services through ESBs and SIPs.

Part 2 of this blog series will explore the apparent opportunity and accompanying challenges (and soul-searching) that SaaS aspirants face in their endeavors. Some concrete examples of vendors and their new strategies and solutions will follow.

In the meantime, your comments and feedback with regard to the opinions and assertions expressed thus far are welcome. If you are applications users, how important are the aforementioned considerations in your software selections? For both users and vendors, what are your SaaS experiences (both in using and delivering a solution), and how far down the SaaS evolution track are you?
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