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Software as a service 'gives power to the user'

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10th Nov 2005
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John Stokdyk, 2003by John Stokdyk
Just a couple of weeks after IT Zone published its guide to application software providers (ASPs), two recent events helped to raise the profile of software as a service (SaaS) on AccountingWEB.

First, Sage told us it was about to unveil its strategy for delivering its accounting products online and then, at the beginning of November, Microsoft announced Windows Live, a series of initiatives to establish its credibility as a web services provider.

With the profession's two biggest software suppliers making serious adjustments to accommodate SaaS, it seems an appropriate time to try and identify what is going on, and what it will mean for users.

Nearly two years ago, Astute Software founder Ian Skinner warned that the end was nigh for the traditional software licence model and said it was time the industry stopped selling software as though it were vintage port - "the older it is and sweeter it is, the more expensive it is".

Software developers and consultants have convinced users that functionality was related to cost, Skinner argued, and had conned them into paying too much. "The industry has created the impression that ERP, CRM and the like are only for the big boys. But the needs of SMEs are just as sophisticated."

A new generation of SaaS developers are beginning to prove Skinner's point.

So far, accountants have been reluctant to let their electronic ledgers out of their sight, but online software service providers such as Salesforce.com and NetSuite have been tearing up the customer relationship management (CRM) marketplace - as frequently documented on our sister site CMC InsightExec.

The 2001 dotcom bust dampened demand for accountancy-related SaaS in the UK, but in 2003 hosted services operator IT Inside Out revived the idea by introducing a Sage-approved hosting service called Online<>50. After signing up nearly 100 accountancy firms, Online<>50 was tripped up by its own success when Sage changed its pricing model for hosted versions of Line 50. Sage is expected to explain its new online product and pricing strategy at its Accountants Division conference in London next week.

Online<>50 managing director Rob Lambden says it's understandable that hosted software is causing problems for traditional client/server software developers, because it undermines their existing pricing models. "Monthly licencing puts more power in the hands of users," he argues.

"Rather than forking out for an initial software licence, users pay monthly 'on demand', so they can scale up their spending or down as they see fit. People who really get switched on to it transform their way of thinking, and look at what they do as providing a service," Lambden told AccountingWEB.

Prominent among the online debates about Sage and Microsoft in recent weeks has been David Terrar, UK managing director for Dutch SaaS software company Twinfield. Like Online<>50's Lambden, he says service-based implementations shift power in favour to software buyers.

"As a client of a traditional supplier, I have to buy the software licence, and hardware and infrastructure to support it, and I have to take risk on something that might or might not work. SaaS reverses the situation - I rent software on a month-by-month basis. I can start with a much smaller pilot, prove that it can be successful and then roll it out to whole community."

Twinfield points to a TripleTree/SIIA study which found, among other things, that a $1m Salesforce.com CRM implementation was nearly the eighth of the cost of a equivalent Siebel client/server project and paid for itself within three months rather than 12-18 month payback for the more expensive project.

But the cost difference was not the only advantage, Terrar argued. Software as a service can liberate users from being locked into a particular supplier.

"If I go down that route, I 've got a significant investment in that application and the infrastructure it sits on. To change horses, there's a significant expense. The very nature of SaaS is going to make it relatively straightforward to do the switch. Good SaaS will allow you decent access to data - if you want to switch you could download all the transactions, general ledgers and balance sheet data into Excel and implement it on another system."

The analogy he uses is that of switching your gas or electricity supplier. "Suppliers have to provide a good service, and can't jack up their prices - there will be competition. We have to be customer-focused to keep people on our platform rather than somewhere else."

Citrix Online is another major SaaS player moving in on the accoutancy market. The company does not develop normal application software as such, but tools such as GoToMyPC that allow you to access your host computers from anywhere on the net, or GoToMeeting, an online collaboration environment.

Citrix Online UK sales manager Richard Wolfe-Daimpre comments: "Accountants are perfect for these solutions. Typically they prepare draft financial accounts from data supplied by clients and return them by paper, fax or email. But the new technology lets you work on them together - reducing the time it takes to submit them."

So what does the SaaS bandwagon look like to traditional desktop software developers? Sage UK managing director Paul Stobart is acutely aware of the threat, and has been working for several months on a project to cater for customers through a more flexible licence scheme.

"Our heritage is in the perpetual licence world, where you have a PC on your desk with a licence," Stobart said last week. "You fill your boots, pay maintenance and you're off.

"In tomorrow's world, that is not what customers are going to want. They will want different kinds of access on different kinds of devices. Customers want flexibility and do not want to be frustrated by 48-page price lists. They want simplicity."

Sage has been thinking in terms of a "hire to buy" approach based on equalising the costs of ownership under its old and new licence regimes over a five-year lifecycle. As Stobart acknowledged, "For software developers to change their licencing models is hugely risky. If the new approach is cheaper than the old one, you're committing suicide. If the costs increase, people will accuse you of using the opportunity to rip people off."

While we await the results of Sage's deliberations, Stobart promised that as a traditional developer, Sage was responding to the challenge by trying to devise a model that might have a new cashflow profile over five years, but which would ultimately give customers "software deployed as they want it at a cost they want."

If this is the first time you have heard about software as a service, it certainly is not going to be the last.

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By david_terrar
09th Nov 2005 17:08

It's more than just pricing
Paul Stobart's comments are quite illuminating. Obviously we have to wait to see the announcement, but he sounds more concerned with maintaining the status quo for Sage with this "hire to buy" idea. That doesn't sound like anything more than leasing the software over 5 years. It highlights how the traditional software houses will have a major problem in shifting their business model from up front licences, to the "pay as you go" SaaS approach. He also has to realise that the new approach is more than just pricing, but will need changes at all levels of his organisation, from the way the sales force is commissioned, through product development, to the way customers will need to be supported.
David Terrar
mail: [email protected]
web: http://www.d2c.org.uk and http://www.twinfield.co.uk
blog: http://www.businesstwozero.com

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By david_terrar
10th Nov 2005 11:02

The "big deal" is SaaS not pricing
David,
There's a lot more to it than just pricing. The "big deal" comes from the way the application service you are buying is delivered over the web, rather than installed on your hardware or on some ASP/outsourcing company's hardware. The ASP/outsource approach gives some benefits, but the real benefits come from a true SaaS approach. I recommend you read the Tripletree report to find out more.
David Terrar
mail: [email protected]
web: http://www.d2c.org.uk and http://www.twinfield.co.uk
blog: http://www.businesstwozero.com

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Dennis Howlett
By dahowlett
11th Nov 2005 05:00

SaaS - not ASP
Sage's model sounds suspiciously like ASP and is rooted in the idea that firms only change software every 5 or so years. True - because once you're locked in, it's a heck of a lot of work ot get out.

Microsoft's model is as clear as mud. I've not seen anything yet that persuades me they will offer SaaS for accountants anytime soon, unless they make a change of direction in development of the MBS product line. Even then, there's no guarantee of success as they're betting the farm (at present) on wiping out Google/Yahoo! That's not a great strategy because the way Google works is entirely different to MSFT.

This is not about just pricing though I like the idea of 'free' as it reflects the commodity nature of recording debits and credits. It's about a mindset that delivers a double whammy. 1. customer value 2. a sustainable business model. Sage isn't showing any signs of change there - at the moment.

What's different today is that SaaS represents an attractive alternative at the right time. As the old saw goes: "We live in interesting times."

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By David Carter
10th Nov 2005 10:37

what's so special about this?
So, maybe some package vendors will allow you to pay a monthly rental for their software rather than buy it outright.

One of the packages I install is a courier package where you can rent it monthly.

It's just a different pricing model. The vendor takes longer to recover their development costs, but within a couple of years they have a very cash generative business. Bit like your typical reseller who has to build up a sufficient number of customers who are on annual maintenance.

The idea of "starting small" sounds good but bears no relation to reality. If you're installing an integrated package it's always going to be a massive upheaval.

What's the big deal?

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By David Carter
10th Nov 2005 11:13

Tripletree here I come
OK, I'll read the report

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By User deleted
10th Nov 2005 15:04

SaaS the future ....
The concept of SaaS has been around now for quite sometime - unfortunately the market seems to be taking a lead from the vendors such as Sage who should be regarded as 'also rans'

Any software house with a SaaS product will have had to make critical business decisions a number of years ago to ensure sufficient lead time. In our own case http://www.SureBooks.com the decision was made 4 years ago to develop SaaS software as the future.

At the time everyone had the same information and some chose to act upon it whilst others deferred any commitment.

Those who deferred now wish to throw their financial muscle and resources to acquiring some form of SaaS model in a attempt to avoid missing the boat. The route of 'least resistance' will probably result in a host of legacy applications being ported to citrix/terminal services, allowing them to be re-badged as web enabled.

'Hire to Buy' is just hedging whilst trying to maintain the current pricing model. Sage has some real issues with approx 40% of their annual revenue is derived from support contracts as well as fully paid box prices

The question is - Can Sage provide a SaaS application (Line 50 equivalent) available via the browser (not Citrix etc) and priced at £20 per month for unlimited users in an SME company?

The un-recoverable development costs alone would render this pricing model almost unachievable to the likes of Sage. Once the established players move away from the desktop they will have lost their traditional lead and be on the same footing as other suppliers with a version 1 product.

Also there is no excuse for a migration path that does not integrate or have a consistent 'look & feel' (i.e. Line 50/100). Proper integration and scaleability are fundamental attributes of the SaaS approach; in some cases this would mean a complete re-design as well as re-write to deliver a new solution

From past experience the market can expect those who have missed the boat to go on a 'buying spree' to achieve a market presence with SaaS. Sage are no strangers to this approach and have used it in the past to expand their share in a saturated desktop market

But this is an entirely different 'ball game' and all those with no SaaS offering must either evolve or die!

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By david_terrar
10th Nov 2005 11:49

Starting small is perfectly possible
David,
The other comment you added was that starting small bears no relation to reality. I don't agree with that. One of the key advantages of a SaaS offering in a finance, ERP or CRM environment is that the cost structure makes it easy for you to start with a small, controlled pilot, and make it work for a small group or department. Once the pilot is proven successful, you can then roll the solution out to a wider community or the whole company. This kind of approach would be too costly with traditional software, where there is a significant initial investment in software licence and hardware. It also means that you need a different style of consulting approach, with an organisation that is prepared to work in this way, rather than expecting a big initial project. It is one of the ways that SaaS is changing the balance of power from the vendor to the client. SaaS vendors are motivated to make the pilot succeed, because their real revenue comes when the solution is in general use, rather than with upfront fees.
David Terrar
mail: [email protected]
web: http://www.d2c.org.uk and http://www.twinfield.co.uk
blog: http://www.businesstwozero.com

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