Software is Served

1 September 2006 Erin Traudt

A new model of software delivery is attracting the attention of the software industry. It is also capturing customer mindshare, enhancing understanding between vendors and corporate customers, writes Erin Traudt, research analyst at IDC.

The Software as a Service (SaaS) delivery model continues to gather momentum and customer mindshare throughout the software industry, and adoption rates show no signs of slowing down. The software industry has largely embraced SaaS; traditional software goliaths are transforming into SaaS players and emerging SaaS-focused companies are entering the marketplace.

IDC believes that SaaS will become an even more important element of software delivery strategies in the upcoming year as customer demands and satisfaction play an integral role in the development of SaaS solutions and ecosystems.

A number of trends taking place are helping to expand the awareness and adoption of SaaS offerings:

  • SaaS providers are concentrating on improving customer experience
  • Traditional software vendors are strengthening their SaaS resolve
  • SaaS is helping drive a software industry transition to subscription licensing
  • SaaS enablers are continuing to aid the availability of SaaS offerings
  • Mini-ecosystems are emerging to extend the reach of SaaS
  • M&A activity is continuing

IDC believes that an industry-wide value shift is occurring that is helping to drive SaaS adoption. At the heart of this value shift is the creation of positive customer experiences through vendor trust, innovation and communication.

IDC is confident that SaaS is helping to address the notion of the positive customer experience by decreasing the perception that the cost of software is disproportionate to the value it provides; increasing provider accountability due to the ongoing need to demonstrate the value of their offerings to customers; and enhancing communication between the customer and provider.

Because SaaS offerings have yet to reach maturity, providers continue to concentrate on enhancing functionality, configuration and integration characteristics as well as customer experience and usage. The rapid release cycles of SaaS offerings are also helping to improve the customer experience in working with providers, due to customers seeing their feedback implemented in shortened time periods.


The SaaS delivery model has become a competitive force in the industry, especially as the trend progresses and traditional software vendors explore SaaS delivery. The impact of SaaS on customer mindshare has been influenced not only by the media coverage, but also by the entrance / resurgence of additional SaaS providers as well as large traditional software providers.

"SaaS adoption rates show no signs of slowing down."

These large independent software vendors (ISVs) have been seen increasing their commitment to the SaaS delivery model through product offerings or enablement programmes designed to help ISVs capture the opportunity associated with SaaS.

For any vendor moving towards SaaS delivery, the transition is not instantaneous.

It is likely to require shifts in organisational culture, resources, service, software delivery, support, revenue recognition and ultimately the approval of senior management, all of which take time.

Nevertheless, while moving towards SaaS delivery should not change a vendor's core competency – developing software – the move is likely to have implications that impact all areas of the business, from development to accounting.


SaaS offerings are largely characterised by their subscription licensing models. A software subscription consists of bundled software and services where the fair value of the license fee is not separately determinable from maintenance / support.

From the vendor perspective, selling software via subscription increases the predictability of software revenue and makes it easier to demonstrate future health. Customers like the low, up-front cost of the subscription model as well as the enhanced ability to build a developing relationship with the software provider, who they pay on an ongoing basis.

While SaaS models involve software that is offered on a subscription basis, SaaS represents only a small percentage of the overall software market. Therefore, the absolute revenue impact of SaaS providers is unlikely to drive an industry shift towards subscription, but customer and vendor mindshare will.

The SaaS business model represents an evolution in the software industry toward perpetual vendor accountability to continually deliver and demonstrate the value of their software to customers. SaaS providers need to create software products that are easy to use, intuitive and ultimately enable quality customer experiences with the software.

"An industry-wide value shift is occurring that is helping to drive SaaS adoption."


SaaS providers are increasing their focus on partnering strategies to expand market penetration as well as features and functions of SaaS offerings. To an extent, some companies hovering on the periphery of the broader ecosystem are still struggling to determine their future participation in the unfolding SaaS world.

According to numerous briefings and profile research that IDC has conducted, sales channels for SaaS solutions are largely direct.

Now that the emerging delivery model has gained traction, momentum and validation in the industry, IDC believes that an increase in formalised partnerships and relationships will occur between SaaS providers themselves as well as with hardware vendors, telecommunications companies, business process outsourcers (BPOs), systems integrators, SaaS aggregators, distribution channels and SaaS enablers.

Establishing partnerships will help expose customers of various industry segments to the benefits of SaaS delivery models. SaaS providers will leverage the established relationships that partners have in order to increase the adoption of SaaS offerings and gain new customers. Partners will also be able to diversify their portfolio through offering targeted SaaS solutions to their customer base.

In conjunction with the partnering emphasis, mini-ecosystems (or distribution networks) are helping to increase exposure of SaaS solutions by introducing customers and prospects to various solutions available to the marketplace and easing the barrier to owning and integrating functionality of multiple SaaS software solutions.


When evaluating a move towards SaaS delivery, a critical question for a company to ask is: build or buy? Providers should decide whether to internally develop the technology to aid the delivery of SaaS or acquire an already-established company with a relevant SaaS offering. There are various considerations for each scenario, including speed-to-market, internal expertise, technology and investment.

"SaaS offerings are largely characterised by their subscription licensing models."

For those that buy, M&A activity largely centres around companies looking to enhance features and functionality, build efficiencies and grow their installed base. Small SaaS companies will acquire similar companies for features and functionality, economies of scale and customer acquisition in terms of volume.

Large SaaS companies will acquire small SaaS companies for features and functionality as well as customer acquisition. Lastly, traditional companies will acquire SaaS companies for speed-to-market, internal expertise and technology.


Saas has certainly become one of the hot topics in the software industry, and there has been some natural scepticism around SaaS delivery, mostly because of the rise and fall of the application service provisioning (ASP) model. However, IDC believes that SaaS delivery has the potential for industry longevity for the following reasons:

  • Technological advancements that support SaaS delivery
  • Customer willingness to accept SaaS
  • Recognition by traditional software companies of the importance of SaaS
  • Numerous SaaS providers receiving funding from venture capitalist firms
  • Increase in M&A activity
  • Ecosystem development, including enablers and channel relationships

To a large degree, the software industry has recognised the importance of the SaaS opportunity; however, current SaaS adoption is just the tip of the iceberg.