On-Demand is not SaaS. The old and new economy shaping software licensing

SaaS and on-demand are not synonymous.

Let me first start by explaining the business model behind SaaS in software development.

Old Economy - In the past, software vendors have typically modeled their business around traditional product development practices. The company sells a license for a specific version of its product and charges maintenance fees for continued support of that version. The support includes technical support as well as bug fixes and patches. In the meantime, the company plans for a version upgrade containing 12 to 18 months of software development effort. That upgrade is sometimes sold at full-price to existing customers and sometimes for a reduced price in the neighborhood of 50-75% of retail.

New Economy - Recently, software vendors have adopted the agile way of thinking about software development. This way of thinking requires that software development become very customer-focused and that innovation is delivered to customers frequently and in smaller pieces. This allows the customer to provide feedback on phased-in functionality and leads development along a path that ultimately delivers more useful software. This process requires that there be no 12 to 18 month release cycle, but rather a monthly or a quarterly release cycle. This process also requires a new business model as the traditional approach to discreet versions becomes obsolete.

SaaS is a natural outlet for the new economy. SaaS, keep in mind, means 'Software as a Service', not 'On-Demand Software' or 'Hosted Software'. The SaaS model merely allows vendors to deliver frequent upgrades to customers and still protect the revenue that would have come from selling discreet upgrades every 12 to 18 months.

The defining characteristics of a SaaS company are:
* Customer-focused software is delivered frequently (e.g. monthly or quarterly)
* An economic model that promotes use of continuously improved software instead of ownership of a discreet version of a software package

Benefits of SaaS on buyers - Buyers should understand why SaaS is a win for them, even though it may feel uncomfortable to be making an annual payment for their mission-critical software. There are several reasons why the SaaS model benefits buyers:
* SaaS is cheaper and less risky. The economic model for a SaaS vendor amortizes the cost of software over a typical packaged software's life expectancy. It is, therefore, less expensive to obtain and the lower up-front costs are less risk to the buyer. A recent study by Goldman Sachs (Investing for the next stage in software-as-a-service, Sept '08) discovered that SaaS vendors' gross margins are 15% lower than their packaged software counterparts.
* SaaS vendors tend to be extremely customer-focused. In the SaaS model, the days of shelfware are absolutely gone. If the buyer does not derive continued value from their software, they will simply not renew.
* SaaS software innovation is delivered monthly or quarterly. This allows the vendor to more quickly respond to market trends and customer needs
* SaaS software is not a capital expense, its a lease.

Why is on-demand not equivalent to SaaS and visa-versa?

Virtually all SaaS companies deliver their software on-demand, or hosted. The on-demand delivery model allows the vendor to control the upgrade process and to keep the application on the latest version. Additionally, SaaS companies have been leaders in the usage of the multi-tenant architecture, scalability techniques, and user-configurable software to dramatically improve economies of scale. Thus, architectural characteristics such as multi-tenancy have been attributed directly to SaaS companies rather than to on-demand software.

Can an on-demand application fail to be SaaS? Yes. Not all on-demand applications will exhibit the attributes of a SaaS offering. Recently, several of our competitors including Computer Associates and Serena have marketed 'SaaS' versions of their products. These products are essentially on-demand incarnations of traditional heavyweight packaged software. While the pricing model may reflect the cost amortization, I would suggest that the 'service' component is missing; namely: focus on customer usability and frequent upgrades.