Facing the upstarts

"It gives us a lot of flexibility," says Simon Hull, managing director of the labour hire firm. "We open new branches pretty quickly and it has given us a reasonably seamless changeover. It is just running in the main server and all you need is to get another computer up and running and there it is." Hull strongly supports a web-based approach for a multi-site business like Allied Workforce. "With this system, we can run our business from almost anywhere, using just a web browser."

Allied Workforce is just among the growing number of organisations in New Zealand that are opting for their software applications to be delivered "on demand", in a model more commonly referred to as "software as a service" or SaaS.

PR company Raynish and Partners is another organisation that has opted for the SaaS option, for its new customer relationship management (CRM) system.

"We just log on the internet," says Joanne Cotton, group accounts director.

"It is very simple to learn," she says of their salesforce.com CRM system. "We can see all our contact activity in real-time and update our work on the same interface."

The system allows staff in Auckland, Sydney and London "to be 200 per cent linked to the business".

While Cotton declines to name figures, she says going for the SaaS route was also "much more cost effective" for the company.

Gartner estimates in five years, 30 per cent of new software purchases will be delivered via an application utility or a SaaS model. In its "CIO Resolutions for 2006", Gartner says IS chiefs should ensure their department leads the first experimental introduction of this technology to master how and when to exploit this delivery mechanism.

Rolf Jester, Gartner research vice president, writes, "What was, until recently, a gradual trickle has turned into a strongly flowing stream of providers."

He says these firms providing SaaS are the "real ASPs getting on with the job of serving customers without a lot of hype".

IDC also sees SaaS as poised for greater growth in the next five years. IDC is forecasting a 30 per cent annual growth in the next five years, or a market of $71.3 million by the end of 2009.

"It is a market that we will definitely see growing, but there are a few mitigating factors over how that will grow," says Jenna Griffin, market analyst services and solutions for IDC New Zealand.

Globally and locally

One of them is broadband uptake in the small and medium business space that dominates the New Zealand economy and whose members are seen to be the major users of software as a service offerings. "We have one of the lowest broadband penetrations [in the OECD] and that will be a factor."

Another would be concerns over how the model will affect compliance with legislation and regulations. "Some industries may find compliance difficult within a SaaS model, which is something that needs to be considered if they are looking at the SaaS model. Applications can also be deemed a means of competitive differentiation for some organisations, and they may be reluctant to relinquish this, despite the cost benefits of SaaS."

Globally and locally, there is no shortage of vendors expanding their offerings via SaaS. Key players like Microsoft, IBM, SAP, Oracle and Gen-i are moving towards this space.

For instance, when Sage Group announced its first global CRM organisation for SMBs in late 2005, one of its products was SageCRM.com, a hosted service. Ros Stange, managing director for Sage CRM in New Zealand and Australia, points out, "If the market demands it, we have the offering." He adds that customers can opt for the hosted CRM service but could move to on-premise deployment in the future.

One of the best known pure SaaS vendors is salesforce.com, which reports 18,700 customers globally, with around 351,000 users logging in everyday.

"Salesforce.com has completely changed the game for on-demand application," says Doug Farber, Salesforce.com vice president for Asia Pacific. He likens the large software vendors to "drug pushers" who peddled their "fantastic tools and toys" to customers who just bought "what was pushed out".

He says the salesforce.com model broke this cycle of dependency and provided a lesson that, "Customers need not subscribe to shrink-wrapped product."

Farber says one attraction for the users is the company's focus on service. "They can unplug us anytime, like their cell phone or their magazine subscription," and this, he adds, is prompting the company to ensure it meets the needs of the customers.

Rob Kirby, CEO of Spendvision, another company providing expense management applications using the ASP model, says business has doubled in the last nine months. SpendVision's customers range from small to large organisations, both in private and government sectors, throughout Australia, New Zealand, Japan, USA and Europe.

"It is a very easy decision to say yes to," says Dr Stuart Ekdahl, executive director of eAccounts Global, which provided the system for Allied Workforce. "Most people have the hardware they need, there are no on costs for IT staff."

The Auckland firm's clients include Kiwi companies like ITM and Arano. It has customers across the Tasman and Malaysia. Ekdahl says eAccounts' growth has been "relatively steady" in the past three years, but plans to double its business in the next 12 months.<p/>"We are filling a market need for small to medium enterprises," says Ekdahl. "We provide a better service. We are flexible. Markets change, businesses change."<p/>Bob Hayward, senior vice president Asia Pacific and Japan, Gartner, attributes the rise of management service providers to several factors.<p/>In 1999, when a number of the ASPs sprung up, the internet was not as fast or as cheap as it is now. "This is making business models that may seem impractical four or five years ago suddenly much more realistic," he says. "If you bought software as a service versus buying software and installing it, it was cheaper to buy software and installing it at that time. That has changed a little bit."

Worst case scenarios

Hayward says there is also a business reason for the uptake of the service, both from the supply and demand side.

For the software providers, "Their business model is highly volatile based upon selling big pieces of software to big companies. But with a model of selling software over the internet and people paying as they use it, they get a much more reliable and regular income stream. It comes in everyday, it smoothes out the volatile revenue stream that a lot of software companies have."

On the demand side, he says organisations pay for the software as they use it. "It comes from an operating budget, not from a capital budget so that is easier to justify internally to companies."

Hayward says another reason for the attraction of SaaS is the IT environment of many companies is incapable of handling worst case scenarios of business volumes. That will not be a problem for those opting for SaaS.

"If you want 50 per cent more transactions, that's not your problem, it's the service provider's problem. You are not worried about what the software is, who makes it, who writes it. You don't worry about who is managing it, you are not worried about IT infrastructure, or TCO. It is someone else's problem. All you are buying is the service and it makes some of these things easier and simpler."

But then, the failed ASPs during the dotcom era basically operated on the same principles, so why is the SaaS market taking off now? "There were too many of them to start with," says Hayward.

"Most of the ones that did exist didn't have any track record, no credibility, and large companies only buy from companies that they think they can trust. So there was no trust built up."

ASPs had also targeted big companies, a "totally wrong" approach, says Hayward. The "perfect market", he says, is the small and medium enterprises that make up the bulk of business activity and employment in New Zealand and Australia.

"They are not the biggest technology spenders but they are the people that can use financial package out of a box. They are not really interested in having their own IT department and a CIO and technical people running around the company. That is a distraction for them. They just want to buy service."

The large companies, says Hayward, are not interested in SaaS. "They already have a very large IT infrastructure. It is no big deal for them to pop some more stuff into it. They have got those costs sunk already. They very rarely want what I call vanilla software of anything. They can customise it highly to their own requirement. And most software as a service doesn't support those customisation."

This does not faze Mike Roberts, former national manager for IBM portal and workplace products, who believes there is a market for bespoke SaaS applications in the corporate sector.

FluidViews, a SaaS service he started in late 2005 with former IBM colleague Richard Tate, is targeting large businesses. "Once you get the larger corporates, you can expand into the smaller marketplace," he explains.

He says in the major corporates, there would be business units needing certain functions that would be "mission critical" for the unit, but would be "number 23rd in the list of priorities for the corporate IT group".

"The consumer wants functionality and quick turnaround time in two or three days. That's the space we are going after."

Gartner's Hayward, on the other hand, thinks the concept of software as a service will also permeate to other offerings. There are already firms providing a host of services like storage and computing power in a grid environment, security and desktop management.

He recounts a recent visit to a company in India which manages US data centres from Delhi. He points out the company is also working in the physical security space. "It all falls under managed security provider but it is more than just IT. It is all facets of security."

There is a room with closed circuit TV feeds from a building in Manhattan. If the Delhi-based staff see something suspicious, they press a red button that goes straight through a police station in Manhattan.

"This model is destined to get bigger and bigger," says Hayward.