SaaS in 2007: It's about services, doh!

SaaS is just part of a wider move towards Internet-based automated services, an all-embracing trend that will drive several other sub-trends. This post comprises five separate predictions, all derived from the underlying services mega-trend.
Written by Phil Wainewright, Contributor

In my trio of predictions for SaaS in 2007, I've saved the biggest trend till last. The coming year will see a growing acknowledgement that SaaS is just part of a wider move towards Internet-based automated services. This is such an all-embracing trend that it will drive several other sub-trends, each of which can be turned into a prediction of their own. All of these emerging phenomena will be signs of the wider underlying trend taking hold.

More acquisitions of SaaS vendors by business service providers. I already highlighted several examples during 2006. The most telling was ADP's acquisition of Employease in August. As I said at the time, this wasn't a case of ADP moving into the SaaS sector:

"... it's merely extending into new areas of automated business services — and that's what the on-demand revolution is really about — using software to do a better job of operating automated business services."

Proof that this wasn't just a one-off came in testimony from Progress Software's SaaS partner ecosystem, which as a result of acquisitions now includes US Bank and legal and business information provider LexisNexis. Then in November, American Express Business Travel made a $22.5 million investment in Rearden Commerce alongside the launch of Axiom, an AmEx-branded 'intelligent online marketplace' based on Rearden's hosted employee services platform. My verdict on the deal:

"American Express is the grand-daddy of business service providers and so the alliance with Rearden both reinforces and further validates the trend."

The acquisition trend will accelerate in 2007 as business service providers recognize the potential of SaaS solutions to enhance and modernize their service offerings, extend their market reach and enrichen their profitability.

An expanding universe of partnerships between SaaS vendors and other online service providers. The flipside of business service providers acquiring SaaS capabilities is that SaaS vendors will increasingly package online services into their offerings. Discussing this trend in November, I mentioned examples from Landslide and Winweb, two vendors serving the small business market that bundle optional virtual assistant services with their on-demand applications. I noted that:

"...these solutions focus on live business results that really matter to their customers. They're not selling software, they're focusing on what customers actually want to achieve."

Another example is Klir Technologies, which aggregates information from vendor support databases and industry publications into its on-demand systems management application. This means that when users get an alert of a problem, the application can automatically retrieve relevant background information, cutting the time it takes to identify and implement a fix.

During the course of the year, this 'mashing up' of on-demand software and other virtual services will make the term SaaS increasingly redundant. Software in itself 'as a service' is not where we're headed. It's just services, with software as just one of several supporting enablers, and the Internet as another.

Convergence of Web 2.0 with SaaS and SOA. Look at any well-known Web 2.0 provider — Flickr, 37Signals, YouTube, Skype, Feedburner — and one thing they all have in common is that they're hosted services, resident on the Web. Of course, no one calls them SaaS, in part because this mode of delivery is taken for granted in the Web 2.0 arena, and in part because, although they rely on some pretty powerful and innovative software, what they deliver is a complete usable service, not just a raw software tool. In this context, SaaS is just the software industry's way of catching up with what Web 2.0 represents: a move towards using Web-resident software to deliver the services that people want to use.

A separate but related development in the enterprise software world is a move to what's called service-oriented architecture (SOA), which is a way of designing software infrastructure as a set of autonomous on-demand services. As Microsoft's Gianpaolo Carraro and Fred Chong have written, this enables a composition layer where services can be assembled into applications as required. Those services will typically come from inside the enterprise, but it's just as easy to include services from external providers and fold them into the mix.

Whether they're internal services or external services, Web 2.0 mashups or enterprise 1.0 legacy applications, the overriding trend I'm highlighting here is that It's all about services:

"... Some of the services are like components. Others are like applications. A further bunch are like Web 2.0 information feeds and mashups. Another set are more like semi-automated business services that deliver real-world business results, such as shipping an order or transacting a payment. The common unifying factor here is a services idiom, in which providers autonomously deliver results according to contracts. That describes SOA and SaaS and Web 2.0."

Aggregation as the new competitive battleground. One of the least appreciated strengths of the on-demand model is its ability to leverage shared services. When hosted systems managemnt vendor Klir Technologies launched in September, one of the things that fascinated me was its use of the shared services model to slash the cost of keeping up to date with manufacturers' device interfaces:

"For every application or class of device that Klir supports, it writes code to query the standard interface developed by the manufacturer, and then it hosts that code in its data center. Because of its shared services architecture, that code is instantly available to all its customers. That’s it. No messing about with agents. No deployment delays. It’s compelling because you can imagine how many applications and devices there are in the world, and how often a systems management vendor has to develop, distribute and deploy new agents because some application vendor or device maker has decided to upgrade their new systems management interface. Klir’s shared services, standard-interface, no-agent model allows it to implement support across its entire customer and prospect base for any new interface, within just a few days of that new interface appearing."

As I noted above, Klir also leverages links to third-party information sources, with similar economies of scale.

This ability to aggregate shared services is absolutely core to the on-demand model, and it was interesting that the ability to integrate different services came up as one of the most important future themes when SaaS CEOs discussed What's next for SaaS at the recent SIIA OnDemand Summit:

"There's clearly a shared belief that integration will happen through some kind of hub — though no clear view as to whether that hub will be a platform, a marketplace or a customer-facing aggregator. The inherent risk here that vendors have to be wary of is the potential to become dependent on — and perhaps at the mercy of — an intermediary who takes control of the customer relationship. Several vendors were evidently alive to the flipside opportunity this represents of themselves becoming the hub that others depend on."

One of the most critical challenges for vendors in 2007 and beyond will be winning the race to aggregate shared services in the way that best meets their customers' needs while securing the vendors' own competitive position. There are many aspects to get right, including technology, choice, positioning and pricing. It will probably take more than a single year before a definitive outcome begins to become clear and we can judge who the winners finally are. One of the most interesting contention points will be getting the balance right between predetermined aggregation by the vendor or by its ecosystem partners and on-demand aggregation by the end user (especially in the context of client-centric aggregation platforms, which I touched on in my previous SaaS in 2007 posting).

Emergence of the on-demand business. Concluding my recent definition of SaaS, I wrote:

Essentially, this is just a new spin on business services, which is something we've had since before the advent of the Internet, or even of computing itself. It's business services, automated by software and connected up by the Internet.

The corollary of having a new way of delivering business services is that businesses can organize themselves and operate in innovative new ways. Fellow-ZDNet blogger Joe McKendrick has called this the loosely coupled business. It's now possible to set up in business using on-demand services and Internet-based communications without having any of the bother of acquiring premises, staff, manufacturing plant or distribution facilities.

This goes way beyond business process outsourcing, in the same way that SaaS has gone way beyond application outsourcing. Thinking in terms of outsourcing internal capabilities retains the old mindset of a monolithic corporation. It's not BPO, it's about contracting for services, and being able to do so for services that previously could only realistically be performed internally.

This change in how businesses are built and operated parallels the change that's taken place in manufacturing over the past two decades. A hundred years ago, the norm was for a manufacturer to custom-build every component that went into any of its products. Ford even smelted its own steel and generated its own electricity. Today, look at your mobile phone, assembled from parts manufactured by a myriad of different suppliers, relying on intellectual property contributed by dozens of different patent holders, each of whom earned a royalty when the phone was made. Today's world is built on connections, and the on-demand business is one that successfully exploits those connections to deliver the service its customers demand economically, efficiently and profitably.

This is the last of three articles in which I'm making predictions for SaaS in 2007. The first two were:

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