Delivering Software as a Service

In their article Delivering Software as a Service the authors Abhijit Dubey and Dilip Wagle address the evolution from the "traditional" licensing software model to the "new" model in which software is not sold, installed and maintained at the clients site but rather contracted as a service over the Net.

Overall, I think their analysis is very precise and I can only subscribe to their views about this trend. And this, not only because I manage a company that offers its software as a service, but because the what we are seeing is the result of technologies and business models that have been proven and that are now starting to reach maturity level. Not to mention the evolution that the receiving end, aka customers, have been experiencing. Do you remember the times when companies were reluctant to consider email?

All in all, I would still like to add some minor thoughts to their sauce ...

They say that

...Perhaps most important, many customers are eager for the shift, as they’re frustrated by the traditional cycle of buying a software license, paying for a maintenance contract, and then having to go through time-consuming and expensive upgrades. Many customers believe they would have more control over the relationship if they simply paid monthly fees that could be switched to another vendor if the first failed to perform.

I can only (partly) agree with this if the software package is not at the core of a company's operation. Take and ERP, for instance. Any company with ongoing operations and wanting to implement a new ERP system, be it as a traditional software package or as a service, will have to figure out how to migrate existing data and processes onto the new system. The more specific the operation, the more difficult it will be to adopt a standard implementation and the more difficult it will become to switch providers. So, I would not be too optimistic about the freedom to switch vendors.

Furthermore, it is true that the nasty upgrading scheme disappears from the panorama and customers will sometimes not even notice any of the maintenance and upgrading work, which will be done behind the scenes by the service provider. But that is a service they are paying for with their fees.

So, yes, software as a service is a good idea, but it is still software, if it is not from ...

...The next frontier—we might call it software as a service 2.0—... which [is] actually better suited for online delivery and seamlessly integrate with on-premise applications.

There I see the real shift. Applications that are designed for the Web and which integrate with other internal products will perform better, especially in business to business interactions. And, hey, which business does not have them? The business world has long been a web of relationships. At last, IT is reaching the point where we are seeing applications being actually built to fit this reality.

In what concerns the P&Ls of software companies, I don't think that they will radically change. Certainly there are important re-organisations and shifts in terms of how business is done, but at the end of the day, a software company will need to do its R&D, sales, etc. and the client will have to pay for it.

Software as a service is not about comfortable monthly payments: you can have that with the old model as well if you lease. It is about the ability to deliver functionality over the Net.... to the masses.

Trends in the IT equipment leasing market

Interesting lessons can be drawn from the trends in the IT equipment leasing market.

IDC says here that the worldwide IT leasing and financing market exceeded $70 billion worldwide in 2006, and that it will pass the $100 billion mark by 2010. All this while shifting from IT equipment to software and services.

At the same time, AMI Partners is saying in this study that small and medium businesses in Germany alone are increasing their IT infrastructure spend by 5% to $37.7 billion in 2007. Equally, the say here that in China companies only (!) will be spending over $28 billion in IT for the same period.

If these numbers are right, then Germany and China together will spend almost 80% of what the entire World will lease or finance. And this, excluding the fact that the $70 billion mentioned by IDC include software AND services. I don't know how AMI Partners compiled their numbers, though. But that is rather irrelevant here.-

What I adventure to conclude from the above is:

• while leasing and financing are growing fast, it seems that they are only covering a fraction of the potential market
• leasing and financing of IT equipment is giving way to leasing and financing of software and services, yet not to the detriment of the latter: companies are adding software and services to their leases
  

But that, I am afraid, is not the full story.

From my own experience, I see smaller leasing companies, like Infibail, who traditionally served big accounts and small accounts alike, shifting towards the SME segments alone.

This can have many reasons. The two most convincing that I know are:

• I guess large enterprises have found out (the hard way) that leasing IT equipment requires good IT asset management and that given the sheer quantities of equipment that they constantly turn over, it is quite difficult to be efficient at it. In other words, it is expensive to lease if you cannot manage the contract start and end phases correctly. Are they now buying the material?
• SMEs are becoming more computerised and they represent a very large market (this seems to be partly confirmed by the number given by AMI)

Putting all the above together, everything seems to fit, somehow. But still, this is a superficial assessment. Yet, IDC seems to be betting on "systems management and virtualization software" at the root of the shift. This may be part of it, but not the most important, if you ask me. Of course, we all know that these studies are paid for by someone, so that may distort things a bit.

And again, I may be making the wrong assessment.