At cloud tipping point: How SaaS is becoming the status quo

Firms are choosing SaaS to serve core business needs, rather than just using it to augment existing on-premise software.
Written by Nick Heath, Contributor
After years of building popularity, software-as-a-service (SaaS) is becoming the predominant way that enterprises access core applications.

Software that supports key areas of business, such as customer relationship management, will soon primarily be delivered via SaaS.

SaaS is a term used to describe software that is centrally hosted on virtualized infrastructure and served on demand via the internet to multiple organisations, as opposed to the traditional manner of businesses buying software and installing it on-premises.

Analyst house Gartner said that of the $149.9bn it estimates will be spent on enterprise application software in 2015, "the majority" will go towards modernizing, replacing or extending existing business software using SaaS.

"SaaS has become the model for software delivery at the moment, more than on-premise," said Laurent Lachal, senior analyst for infrastructure solutions with analyst house Ovum.

Core business processes supported by SaaS across businesses today include email and collaboration via offerings such as Microsoft's Office 365 and Google's Gmail, Customer Relationship Management via services such as NetSuite CRM and Salesforce, and human resources using services from Workday, SAP SuccessFactors and others. To a lesser extent, SaaS is also used to manage BI, document management and demand generation.

"Very few organisations trying to adopt an email or productivity solution would not be considering Office 365 or Google at this point," said Gartner VP and fellow Daryl Plummer.

Gartner estimates that by next year half of all CRM systems will be deployed via SaaS, with that figure rising to as high as 85 percent by 2025. Similarly, a survey by HR industry group HRO Today found that, when it comes to updating on-premise HR software, nearly as many firms are choosing to replace it with SaaS HCM as are choosing to upgrade those in-house systems.

The Forrester report Benchmark Your Enterprise Cloud Adoption found that in 2013 the median number of SaaS applications in use within enterprise was 11, and that respondents expected that number to rise by more than 30 percent each year over the following two years.

"This adoption rate is fueled by users acclimating to the agility and speed of SaaS solutions and the expansion of available SaaS offerings in the market. Today, nearly all categories of enterprise applications offer a choice of deployment, and in some categories, SaaS is overtaking older on-premises models," the report states.

SaaS can become the de facto delivery model for software supporting important business processes within a relatively small space of time; Forrester found that software supporting spend analysis within ePurchasing moved from 10 percent being delivered via SaaS to more than 70 percent within a decade.

The popularity of SaaS is also reflected in its status as the category of cloud service that handles the most workloads, relative to infrastructure as a service (IaaS) and platform as a service (PaaS). The estimate, made by the Cisco Cloud Index, gauges how cloud services are being consumed by users. By 2019, the report found, 56 percent of cloud workloads will be SaaS, up from 45 percent in 2014.

Image: Cisco

As well a rise in the volume of SaaS being deployed, the criticality of the work carried out in the cloud is also changing, Gartner found in a 10-country survey in 2014.

"We've seen a real transition from use cases in previous surveys where early SaaS adoption focused on smaller pilot projects,"said Joanne Correia, research vice president at Gartner.

"Today, the projects are mission-critical and production-grade. This is an affirmation that more businesses are comfortable with cloud deployments beyond the front office running sales force automation and email."

Over the two years to 2016, Forrester predicts that enterprises will move roughly another 15 percent of applications into cloud environments, with spending on SaaS as a replacement for on-premise software soon overtaking that on SaaS as an add-on.

"Not only are businesses aggressively seeking SaaS alternatives, but they are also considering cloud for a broader category of services," says the Forrester report.

In the early days of SaaS, the report says that adoption was driven by new categories of applications that complemented existing core transactional software -- such as analytics and social and collaboration platforms. Today, however, Forrester finds that firms are replacing existing licensed software with SaaS, in areas such as sales force automation, CRM, human resource management, and eProcurement.

The popularity of SaaS in these key areas is reflected in the financials of the cloud specialists, with annual revenues at Workday steadily rising over the past five years to $975.8m and to $5.97bn at Salesforce.

Image: Forrester
This appetite for SaaS CRM and HCM is seeing core modules within on-premise ERP systems being replaced with SaaS offerings, according to the PwC report Beyond ERP: New technology, new options.

"New enterprise-grade applications are fast replacing old enterprise resource planning (ERP) systems as companies move to become more flexible and more mobile," says the PwC report.

"These new applications can be integrated with traditional ERP software into "hybrid ERP" systems to enable specific functions such as human resources, supplier management, and e-commerce to operate with greater agility and independence from old-style IT organizations."

Why are organisations choosing SaaS?

So why the interest in SaaS? According to Gartner's Plummer it's to do with the efficiency of the service model and companies being burned by failed on-premise upgrade projects.

"The main reason is the way we have been doing it isn't working that well," he said.

"Budgets are being decreased and the business units are already going out and buying SaaS without talking to the IT departments about it. They're finding that they get more choice, they get it faster, they get it with less hassle -- it's instant gratification if you will."

Given the choice between waiting years for major upgrades to be delivered, alongside the associated disruption and the complications of not breaking legacy dependencies, versus using a SaaS product that's constantly updated with no interruption to the service, companies will often choose SaaS, said Plummer.

SaaS often means swapping the capital outlay of buying IT infrastructure and licences upfront for the operational expense of paying an ongoing subscription. On top of this, it can be easier for firms to scale their subscription to SaaS offerings up and down as needed, while an in-house deployment requires infrastructure that firms can't easily divest themselves of. When all the costs are weighed up, SaaS will likely prove cheaper overall, he said.

"SaaS is more expensive in many cases, but that's only if you look at the direct price -- on-premises licensing versus cloud subscription. When you begin to look at those five-year upgrade cycles, you begin to look at all those customisations you spent money doing, you look at all the angst created at not being able to change what you want -- the cost [of SaaS] is not that much."

Ovum's Lachal agreed, stating the price tag for licensing or subscriptions are just the "tip of the iceberg" when it comes to what software truly costs a company.

"Yes, there is a cost element, but when you take the entirety of the cost, on top of being able to get the latest updates, as well as being able to move much faster, you get positive ROI," he said, adding that SaaS providers were more likely than in-house IT to regularly update not just the end-user software, but also the hardware and software stack underneath.

A ZDNet survey asked businesses to list their top three reasons for adopting SaaS. ANZ sample size was 580.
Image: ZDNet
The most common reasons for companies' reluctance to use SaaS are concerns over the security of the data and the service's reliability, said Gartner's Plummer.

There have been a couple of high-profile outages of Amazon Web Service's cloud infrastructure platform this year, which in turn temporarily took down some of the many SaaS offerings built on top of AWS.

But, Plummer added, "our research finds the cloud is more secure than most datacenters and it's safer, so these are mostly just emotional reasons".

Emotional or not, they are a real roadblock for firms, said Ovum's Lachal.

"The center of gravity is that everything in the world is moving to the SaaS environment, absolutely, but there's still a lot of specific cases for which SaaS is less relevant: it can be for performance, security, or design reasons -- meaning that all the stuff that is really important cannot be moved."

Revelations by NSA whistleblower Edward Snowden that US security services have widespread access to data stored on the servers of technology giants such as Microsoft and Google via programs such as PRISM have damaged confidence in the security of data stored in cloud services, as well as contributing to the EU Court of Justice's decision to scrap the Safe Harbor US-EU data sharing agreement that many cloud services rely upon.

Over the next three years, Snowden's revelation will cost US vendors $47bn in lost sales of public cloud services, according to estimates by Forrester.

Another common argument against public-cloud SaaS is that its offerings are generic and aimed at large numbers of companies, without the ability to cater to the specific needs of individual companies.

Firms rate their satisfaction with SaaS in a ZDNet survey.
Image: ZDNet
However, Gartner's Plummer says that businesses only need this level of control and customisation for a tiny proportion of the software they run -- usually when it relates to a core part of the business that differentiate the firm from its competitors.

"If you have something in 2015 where you want to take tight control over how it's delivered, it better be really, really special or you should start to think about going back to live in your cave with the dinosaurs. Some things it's OK to keep on premises, but that's about maybe five to ten percent of the stuff that you've got."

Shaking up the old guard

As an increasing number of business workloads move into the cloud, vendors of on-premise software are having to reinvent themselves as cloud-first companies.

Database giant Oracle has been undergoing such a transition, with chairman and CTO Larry Ellison saying the company had filled in the last of "our major blocks" for its cloud portfolio as of June this year.

Not that it's plain sailing: in its most recent earnings, Oracle stumbled on software and cloud, which together were down two percent. Oracle also missed analyst expectations on cloud revenue, taking $611m instead of the forecast $630m.

Ellison explained away these problems as the company and the wider tech industry being in the middle of a generational shift. However, in contrast, a SaaS-first company like Salesforce, while having far smaller revenues than Oracle, is seeing earnings rise and rise, jumping to $1.635 billion for the most recent financial quarter.

SAP, traditionally a purveyor of on-premise ERP, has similarly declared itself to be a "cloud-first" company and is retooling its vertical and horizontal offerings to suit. The effort does appear to be starting to pay dividends, with the company reporting cloud subscription and support revenues of €600m in its most recent quarter, which, while still only a minor contributor to its €4.98bn revenues overall, is up 116 per cent on last year.

Also engaged in the same journey is Microsoft, which is heavily promoting its Office 365 SaaS offering and the fact that it has invested more than $15bn in building out cloud infrastructure, with its Azure platform available in 24 regions around the world.

Azure lags some way behind Amazon Web Services in size and public cloud market share -- AWS is bigger than its next four largest competitors. However, Microsoft is doing a good job of being the best of the rest, with analyst firm Forrester estimating that Azure has double the cloud platform revenue of its enterprise competition, including Oracle and IBM.

As you can see from their earnings, despite the shift to cloud, none of these traditional vendors are about to go under, as companies are still spending a lot to support and upgrade on-premise software. According to IDC, in 2015 firms will spend about twice as much on on-premise infrastructure than they will on that supporting public cloud, as they continue to invest in legacy in-house systems.

Where is SaaS heading?

The process of companies moving software to the cloud will happen in fits and starts, said Ovum's Lachal, and in many cases will involve SaaS being gradually phased into a firm, he added.

"It's not a black-and-white world where you have on-premise legacy and then you have SaaS applications; you have a whole continuum, as well as integration between on-premise on one hand and SaaS on the other.

This hybrid approach sees many firms running NetSuite as a second-tier ERP system alongside an on-premise SAP system acting as their core ERP, he said.

"We're living in a world where a lot of boundaries are blurring and the notion of SaaS is becoming more fluid. It's a very dynamic landscape."

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