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The shape of software to come

A few years ago the IT industry started touting an idea it called ‘applications service provision’. The concept proposed that, instead of buying a software package off the shelf of a retail store or a license and a CD from a reseller, you would simply download the software you needed, when you needed it, over the Internet.

The idea did not catch on. One of the main reasons being that, while the Internet was already popular with businesses most companies were still using dial-up connections. It was just too slow and cumbersome. There was also a lot of concern about ownership of software and issues such as billing. End users – and certainly not smaller businesses – just weren’t ready to pay an annual subscription to use software or to ‘rent’ it or buy it on a pay-as-you-go basis.

The bandwidth issue has since been well and truly solved with most businesses and home users in the UK now having access to something approaching 8Mbps download speeds and with the upgrades that are coming in the near future, that will be boosted to something closer to 24Mbps.

Big deal

Another reason ASP did not catch on was that Microsoft in particular did not put its considerable marketing muscle fully behind it. But now, the concept is back and Microsoft is on board – although it is not trying to drive the idea too quickly just yet. One thing is certain though – you are going to hear a lot more about Software as a Service (SaaS) over the next few years. It is the way that Microsoft and the rest of the industry sees software going in the future.

At a financial analyst meeting earlier this year, Microsoft’s Chief Technical Officer, Ray Ozzie said: “This transformation from software to software plus services, is a very, very big deal for our company. It'll be a critical aspect of all of our offerings over the next few years.”

For SaaS you can also read hosted applications. There are plenty of services around offering applications such as customer relationship management (CRM) and electronic resource planning (ERP) already and more are on the way. The idea is that instead of having them living on your own server or PC, all your applications and data will reside in a secure and completely resilient data centre somewhere out there. When you want to use those applications, you simply log in using a secure connection and start working.

Any time, any place

What this means is that you can work any where and at any time. It also means that you never have to back up data and never need to worry about upgrades, security and the on-going management of applications. It also means that you can purchase software in different ways. You can still buy a copy or a license to use the whole of an application of course, but you’d do this on a subscription basis, as you do today with anti-virus and other security software.

But you could also ‘rent’ packages for a set period of time – effectively paying to use them and the storage space you’d need as you would pay to buy time on a WiFi hotspot or for Internet connectivity in a hotel.

Another option would be to ‘pay as you go’ as you might with a mobile phone contract, topping up your usage time whenever you need to. You might even be able to pay to use smaller, cut down versions of applications that give you the functionality that you need – basic word processing or spreadsheet functions for example – and no more. Some applications may even be provided free as part of some other overall package such as Internet connectivity or subscription to digital content services such as managed security or backup services, or even financial management and banking services.

A new era

In theory, all this will make software more flexible, affordable and easier and cheaper to manage. It will also do away with most of the problems associated with security, licensing and piracy which cost businesses and the industry millions every year. It will also make software companies more stable suppliers. Instead of the peaks and troughs that come as a result of waves of new software releases, they will have a continuous and much more predictable revenue stream.

If it takes hold, SaaS could make the market unrecognisable from what it is today in just a few years time. But turning the SaaS concept into a reality is not so simple. Traditionally, of course, software is ‘shrink-wrapped’; shipped in boxes and purchased, based on a high-value, one-off licence. These ‘traditional’ payment and delivery models have not changed all that much over the past 20 years.

Well aware of this, Microsoft, while supporting the concept, is treading carefully. Its rivals however, see SaaS and the hosting of applications as a potential way to challenge Microsoft’s dominance in the market. Google is one of the most enthusiastic of supporters for a rapid adoption of SaaS at present and has already started offering several applications on-line – for the moment, free of charge. Microsoft has also started experimenting with initiatives such as Office Live which provides small businesses with a free web site and email presence at its most basic level. More advanced services attract a small monthly charge.

Strong competition

Google and the presence of other players is going to accelerate the move towards SaaS so Microsoft will need to make its move sooner or later and start moving everyone towards this new model – or at least giving them the choice of buying software in this way. Now that broadband is virtually everywhere, there is no real barrier to putting SaaS in place, says Steve Clayton, head of Microsoft small business in the UK.

“The increasing prevalence and availability of broadband is making software delivery much faster and easier, and it’s also facilitating the provision of richer applications and content”, he says. “This is totally changing the shape of the software landscape, not just in terms of the how users are now consuming software, but in their awareness of the fact that other options are now open to them.”

“Just look at the millions of download-based purchases taking place now. Many of these involve some chunky and not insignificant bits of software. People couldn’t and wouldn’t have even dreamt of procuring their business applications in this way a few years ago.”

Joe Brown, general manager EMEA at RightNow Technology, a provider of on-demand CRM solutions, says that customers are also starting to understand that hosted applications could help them to reduce the burden of running and managing IT. “It’s taking away the burden of the infrastructure so that we can get down to the level of content with customers very quickly. Until a year or so ago, SaaS was an evangelical sell, but now it’s far less so. It has crossed the chasm”.

‘Utility’ computing

Alan Edwards, marketing director of on-line storage provider, NetStore agrees. “End-users are saying ‘we’ve had enough of being taken with perpetual licenses and the cost and complexity of running the applications ourselves. We want to purchase application functionality when we want, where we want, how we want.’ Why should software be different to phones, electricity, or any other utility?”

The concept of ‘utility computing’ is one that extends beyond software but also requires a mindset change and that won’t come easily. Companies are too used to owning and managing their own systems and infrastructure and have an instinctive distrust of anything that is managed off-site. This is especially true of smaller businesses and it will take a significant change in attitudes before SaaS can really take off.

When it does, the very nature of software applications and the industry is likely to change says Robert Steggles, European marketing director at web hosting firm, NTT Europe. “SaaS will potentially give us access to a whole new range of applications. It will be easier for software companies to start-up as there is less infrastructure and capital expenditure. Customers will have a bigger choice and have access to the global market via the Internet; increasing selection further.”

Hybrid offerings

Along with the changes to the way that software is delivered and paid for, there will be changes in what software suppliers offer. Microsoft will be looking to deliver not just SaaS but software plus services, says Clayton. “We’ll likely see several hybrid combinations of software, services, and software delivered as a service beginning to emerge; many applications will appear essentially the same, but there will be many more ways to consume them, via many different devices. It will all be about what’s most suitable for you, your role, and your business”, he says.

There is likely to be what at first seems a confusing array of choices made available, as vendors and third party suppliers compete for business. But the market will settle down and slowly but surely drive more customers towards hosted software services. Market research firm Ovum estimates that SaaS will account for around 20 per cent of the overall software market over the next five years. Some predict that this figure may end up much higher, but traditional licensing and boxed product sales will continue to dominate the market for some time.

“Based on the uptake we’re experiencing, we anticipate nearer 30 per cent”, says Steggles.

“Different individuals like to conduct their business differently. Some customers value face-to-face interaction and build trust in human contact; others will welcome the time and money saved through service delivery on-line”.

Cultural issues

A number of logistical and cultural barriers, such as concerns over security, loss of control and network reliability, will also hold back adoption of SaaS. So in the short-term at least, there will be a lack in variety of the applications available through service providers. At present there are a number of CRM packages available and a smattering of other productivity tools such as ERP systems, and project, financial and human resources management. There are very few core office applications services such as word processing or accounting software available on this basis.

Edwards says: “Being able to purchase my CRM, perhaps my finance system, and little else as a SaaS application, doesn't help when I have another 50 applications that are perpetually licensed, on premises, and costing. It’s really just an incremental benefit”.

Another major barrier to adoption will be the change that will have to take place in the way customers pay for software. There are many different options at the moment and customers are likely to dictate which will be widely adopted in the end, says Steggles. Specific models will emerge and evolve according to the vagaries of individual products and the flexibility of the software companies, suggests Steggles, with the more successful players mapping their offers to the way different customers want to pay.

As you like it

What we are likely to end up with is a choice of different ways to access and pay for software, he continues. “Think of your bank – people don’t keep their money under the bed, or at least most don’t. Money is held at the bank and a person can access the bank’s services via many different routes – walk into a branch, pick-up the phone, or log-in to your account on-line”.

The same should and will apply to software eventually, he says, with users being given access to software in very different ways, tailored to the needs of the business. You may, for example, want staff to be able to access applications on a PDA or to restrict access to specific locations or devices.

The arrival of SaaS will also bring many more suppliers into the market. ISPs and other communications services providers are likely to see hosted applications as a natural extension of what they offer, says Terry Hiles, managing director of address management solutions and data integrity services provider, Capscan.

“The proliferation of mobile telephones and broadband presents a perfect opportunity for manufacturers and retailers to approach their customers more directly than was ever possible in the past. Providing software that is charged on usage, or is provided free is a very effective way of reaching out to this audience and opening a dialogue with them. It also overcomes price objections”.

Shifting sands

Basic functionality or cut down versions of software will be included as standard or provided free of charge, with full-feature versions provided on a bundled basis with the charges hidden within the main service or support agreement, rather than purchased separately, says Hiles. “Other applications will be purchased as at present, but may be billed centrally, or with the costs aggregated into invoices for other services.”

Driven by these shifting market dynamics and new found user control, suggests Clayton, new models will begin to emerge and evolve almost of their own accord. It will be “something of a moving feast”, he says.

But Clayton believes that the process of moving from owning software and having it stalled locally to simply calling on a remotely hosted service as and when you need it, won’t be too onerous. That transition is only just starting now but it will gather pace over the next two years and for small businesses that need the flexibility to work any time, anywhere, and want to remove the pain and hassle of managing software applications, it is well worth thinking about joining in the revolution early.