Software as a Service (SaaS)

A look at the migration of applications to the web

Jeremy Deyo
INFO 658 Fall 2008 December 4, 2008

Jeremy Deyo email: [email protected] Virginia Commonwealth University

Table of Contents
Introduction!

Overview!

What is SaaS?

Adoption

Implementations of SaaS!

Salesforce.com

MobileMe

Google Apps

Microsoft Office Web

Amazon EC2 & Microsoft Windows Azure

Photoshop.com

NetSuite

Advantages!

Pay-as-you-go Elastic Pricing Model

Superior Network Infrastructure

Intellectual Property

Software Maintenance

10

Mobile Computing

10

Disadvantages!

11

Long-term Sticker Shock

11

Lack of IT Involvement

11

Jeremy Deyo email: [email protected] Virginia Commonwealth University

SaaS Maturity Market

11

Integration Problems

12

Vendor Lock-in

12

Software Changes/Enhancements

13

Carrs Perspective!

14

Security Implications!

15

Open Source vs. Proprietary!

16

Conclusion!

17

References!

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Jeremy Deyo email: [email protected] Virginia Commonwealth University

Introduction
Software has traditionally been a packaged good that consumers and businesses purchase and
install on local computers. Over the past several years, however, we are seeing a gradual shift in
how software is delivered to customers. Rather than building applications that run locally on a
computer, software developers are building applications that run remotely on multiple servers,
which can then be accessed from any computer with an Internet connection. This shift in
strategy has many implications for both new and existing software companies, as well as for the
open source community. With major players such as Microsoft, Apple, Google, and Amazon all
moving towards the cloud, we are without a doubt moving into a different era of computing.

Jeremy Deyo email: [email protected] Virginia Commonwealth University

Overview
What is SaaS?
SaaS stands for Software as a Service, and it essentially refers to software that is hosted on
servers and is provided as a service. Some initial uses for SaaS included customer relationship
management offerings, content management systems, video conferencing, and e-mail
communication systems. SaaS applications are provided over the web, which means they can be
accessed from any computer without any special software installed. In fact, many applications are
designed to run through a standard web browser. When updates to a SaaS application need to be
installed, they are simply installed on the server, which immediately ensures that all users are
running the latest version. Unlike traditional software applications that require an upfront
purchase, SaaS applications typically offer subscription-based pricing and are usually licensed on
a per-user basis.
Adoption
Many of the early adopters of SaaS were small businesses, primarily due to the low upfront costs
and simplistic integration. Larger enterprises, however, have taken a somewhat more cautious
approach to implementing SaaS solutions within their organization, particularly for missioncritical applications. Forrester Research conducted a survey in 2006 and 2007 to determine the
SaaS adoption rate in enterprises. The survey was given to IT decision-makers in enterprises
across North America and Europe. In 2006 they received 667 responses, and 450 responses in
2007. According to the 1,017 respondents, the most popular uses of SaaS included human
resource offerings, customer relationship management, and collaboration tools. The graph on
the following page shows a gradual increase in the adoption of SaaS offerings among large
enterprises between 2006 and 2007. More recently, research from Gartner indicated that
worldwide SaaS revenue was up 27 percent, reaching an all-time high of $6.4 billion. Gartner
also predicted that sales revenue would exceed $14.8 billion by 2012 (Wailgum, 2008).

Jeremy Deyo email: [email protected] Virginia Commonwealth University

How interested are you in adopting software as a service?

Interested or planning to pilot
Already using or planning to pilot
Not at all interested
2007

2006

37%

41%
46%

12%

46%
16%

Source: Forrester Research Inc., Cambridge, Mass.

Jeremy Deyo email: [email protected] Virginia Commonwealth University

Implementations of SaaS
The following are some of the more popular implementations of SaaS:
Salesforce.com
Perhaps one of the earliest implementations of SaaS is SalesForce.com. Initially launched in
1999, SalesForce.com has become a major player in the market for customer relationship
management (CRM) software services. The company was founded by former Oracle executive
Marc Benioff, and has consistently grown year-after-year into a billion dollar company.
SalesForce.com has over 47,700 customers scattered around the globe that use their CRM
services. In 2007, the company launched a new platform called force.com. Force.com is a
platform as a service, which allows developers to build plugins for their CRM solutions. The
plug-ins run on the force.com platform and are hosted by salesforce.com. In conjunction with
their force.com platform, the company also launched an AppExchange. The AppExchange
serves as an online marketplace where developers can sell their plug-ins for use in other CRM
applications.
MobileMe
Apple Inc. originally launched iTools in 2000, which later became .Mac in 2002 and ultimately
MobileMe in 2008. MobileMe is Apples suite of online applications for iPhone, iPod touch,
Mac and PC users. Customers can sync their e-mail, contacts, calendars, photos, etc. with the
MobileMe online service using their computer or mobile device. Many of their online
applications make use of advanced AJAX technologies, which allows for the online services to
appear more application-like than traditional websites. Users can, for instance, drag and drop
messages from their inbox to other folders just as they do with their traditional mail application.
While iTools and .Mac served primarily as an extension for Apples Mac operating system,
MobileMe stands by itself as a true SaaS offering.

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Google Apps
In 2004, Google launched an invitation-only e-mail service called Gmail. At the time of launch,
there were already other free e-mail services available, such as Yahoo! Mail and Microsofts
Hotmail. What set Gmail apart from the competition, however, was its simplistic interface and
abundant storage. Expanding on the success of Gmail, Google developed many other online
offerings that compliment their existing services. Google Calendar was introduced in 2006,
which also relied heavily on AJAX technologies to provide a more application-like experience.
To compete with Microsoft Office, Google acquired Upstartle, which was the company
responsible for creating an easy-to-use online word processor called Writely. Google created an
online spreadsheets application to compliment the word processor, and officially launched
Google Docs in the summer of 2006. A year later Google acquired Tonic Systems, which added
a presentation application to their online office suite. Google offers all of these services to
anyone with a Google Account, but they also offer them to their Google Apps customers. Google
Apps allows organizations to use the online services (Gmail, Calendar, Google Docs, etc.)
through a customized domain.
Microsoft Office Web
Microsoft Office version 14, the successor to Office 2007, will have a web-based version to go
along with the standard desktop application. While the details of this launch are still unknown, it
is expected that Microsoft will release sometime next year online versions of Microsoft Word,
Excel, PowerPoint, and OneNote. This strategic move is in direct response to Google Docs,
which has grown in popularity since its initial launch in 2006. Unlike traditional SaaS offerings
that are 100% web-based, Microsoft is referring to Office Web as software plus services. Rather
than moving their entire suite to the web and killing their standard Office sales, they will
continue to offer traditional software applications in conjunction with their web-based offerings.
Amazon EC2 & Microsoft Windows Azure
Amazon launched a cloud computing initiative in 2006 called EC2, which allows developers to
build scalable applications that run on their cloud. To use the cloud, developers only pay for the
computing power that they actually use. This opens the door to many opportunities, particularly
for smaller businesses that cannot afford to run their own data center. EC2 supports both
Microsoft Windows and Linux solutions. In October 2008, Microsoft announced their own
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cloud computing initiative called Windows Azure. Like Amazons Ec2, Axure will allow
developers to tap into the computing power of Microsofts hosted cluster, while only paying for
the actual usage. Perhaps one of most interesting prospects for Azure is the large developer
community that Microsoft already has. Microsoft would not be where it is today without 3rd party
developers. If they can appeal to the developers and make it relatively easy to develop solutions
for their cloud, we may very well see a huge increase in the number of SaaS offerings over the
next couple of years. Microsoft also stands to gain an advantage over other cloud-hosting
providers (i.e. Amazon, etc.), by offering more competitive pricing. Amazon, for instance, has to
license Microsoft Windows for use in the cloud. Microsoft on the other hand, could offer the
same services without any licensing fees since they are the makers of the software.
Photoshop.com
Since the early 1990s, Adobe has dominated the photo editing market place with their
Photoshop application. After seeing the success of many other photo sharing websites, such as
Flickr and Picasa, Adobe launched a new service of its own at Photoshop.com. Like many other
photo sharing websites, Photoshop.com offers a limited amount of free photo storage (currently
2 GB), and several upgrade options for purchasing more space. To add more value to their
service, Adobe has also pushed many of their photo editing tools from their Photoshop
application to their online service. Users can login to Photoshop.com and have access to many
photo editing tools absolutely free. This was a major step for Adobe, especially considering their
Photoshop Elements version retails for around $140.
NetSuite
With the financial backing of Larry Ellison (CEO of Oracle), Evan Goldberg founded NetSuite in
1999. NetSuite was one of the earliest SaaS offerings on the market, and its primary purpose is to
provide integrated business management software to midsize organizations. Their NetSuite
application includes a comprehensive set of features, including customer relationship
management (CRM), order fulfillment, inventory, accounting and finance, product assembly,
ecommerce, website management, and employee productivity. NetSuite fully supports multiple
languages, which gives customers the ability to conduct business globally while properly
handling different currencies, taxation rules, and reporting requirements.

Jeremy Deyo email: [email protected] Virginia Commonwealth University

Advantages
Pay-as-you-go Elastic Pricing Model
Unlike traditional software applications that are typically purchased upfront, many SaaS offerings
are subscription-based and are usually priced on a per-user basis. Because the cost is extended
over a subscription period, the initial cost for obtaining the software is significantly lower than
traditional upfront purchases. This can be an attractive option for small businesses that do not
have the capital to purchase expensive software licenses (i.e. Microsoft Office) for every person
in the company. In fact, even larger corporations are looking at SaaS as a way to make their IT
budget costs more consistent (Fonseca, 2008). With subscription-based pricing, companies
know exactly how much to plan for in their operating budget.
Superior Network Infrastructure
Running a data center can be a very complicated and challenging task. For small to mediumsized organizations, it can also be very expensive to provide high availability with limited
resources. UPC battery backups, diesel generators, secondary power supplies, and multiple
dedicated high-speed lines to the Internet can all be extremely expensive for data centers that are
only supporting a limited infrastructure. Many SaaS vendors understand this challenge, and help
alleviate the problem by offering their own hosted service to its customers. Often times these
vendors have very large data centers with enormous resources to provide top-notch performance,
availability, and security. In fact, many organizations can achieve a higher level of security by
hosting their data offsite in these data centers than hosting it in-house using their own resources.
Intellectual Property
Software piracy has continued to be an uphill battle for many developers. Microsoft and other
companies have taken steps to combat this problem, but they are somewhat limited in what they
can do when the software is ultimately being run on a client computer. Hackers are extremely
talented at breaking any type of piracy protection placed on the software. SaaS, however, offers
developers a new form of protection that was not possible with traditional applications. Because
Jeremy Deyo email: [email protected] Virginia Commonwealth University

the software is run on a server and not on client computers, the vendor has more control over
who has access to the services. If a customer login ID is distributed over the Internet, for
instance, the login account can simply be disabled. The vendor also does not have to worry about
competitors reverse engineering compiled computer code, since the code is securely stored on
the server.
Software Maintenance
Both developers and consumers benefit from SaaS when it comes to software maintenance.
Traditional software applications are designed to run on certain pieces of hardware, and often
times have software requirements of their own (i.e. OS version, drivers, etc.). It can be quite
challenging for developers to support the vast array of hardware and software configurations on
the market. SaaS on the other hand, runs in a controlled environment on a hosted server.
Developers only need to ensure that their software applications runs correctly in the server
platform that they support. Consequently this makes updating the software a much easier task.
Since most SaaS applications are accessed through a traditional web browser, little or no action is
required from the consumer when updates are applied. This can be especially advantageous for
IT departments supporting large groups of people. Rather than pushing updates to each
individual PC, the SaaS application can simply be updated on the server.
Mobile Computing
Since many SaaS applications can be accessed over the Internet, mobile computing devices have
opened up a new avenue for software deployment. SaaS developers can not only build software
that can be accessed over the Internet, but they can also develop applications specifically for
mobile devices. Apples iPhone, for instance, has an App Store that provides thousands of
software titles that can be easily downloaded to the device. Many SaaS developers are already
taking advantage of this resource. SalesForce.com released an iPhone application that is freely
available to subscribers of their unlimited plan. This gives their customers easy access to their
data without the need for a computer. Google has also developed a customized user interface for
their Gmail application for use with the iPhone.

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10

Disadvantages
Long-term Sticker Shock
While SaaS subscription-based pricing can certainly be cheaper in the short-run, many
organizations are concerned about facing sticker shock in the long-term. Some analysts with
Forrester Research have noted that many SaaS offerings seem quite affordable on the surface, but
can end up costing much more when various services are added in (Wailgum, 2008). For
instance, additional charges can occur when organizations purchase a support service, require
configuration services, and go beyond the preset storage limitations. Organizations may find it
difficult to enforce Service Level Agreements (SLA), and they may also be hit with unexpected
expenses at the end of a contract term.
Lack of IT Involvement
SaaS vendors know that purchasing decisions are more often than not made by the business users
and not by IT. For this reason, many vendors purposely bypass IT departments and market their
products directly to the business users. As a result, IT departments are sometimes left out of the
purchasing decisions completely. This can be particularly problematic when business users later
find out that the SaaS application does not meet a certain functionality requirement, and turn to
their IT department for support. Problems can occur as well if users are pushing sensitive data
into the hosted SaaS application, without any regard to the organizations security or regulatory
requirements.
SaaS Maturity Market
As SaaS becomes increasingly popular, more vendors are popping up offering their own latest
and greatest solution. Unfortunately these vendors can disappear quickly, leaving customers
empty-handed. As a result, vendor selection is crucial when choosing a SaaS solution. Large
organizations simply cannot afford to place their trust in a new SaaS startup firm that could quite
easily shut their service down at any time. Even vendors that have a long-standing reputation for
offering quality software must be carefully considered. SAP, one of the largest providers of ERP
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11

software in the world, recently scaled back their plans to offer an on-demand SaaS application
called Business ByDesign. The company underestimated the challenges involved in offering a
SaaS solution capable of meeting the comprehensive needs of large-scale enterprises.
Organizations must have a clear understanding of the business objectives they are trying to
achieve, and choose a SaaS offering that has had time to mature, thus reducing the overall risk.
Integration Problems
Often times when business users choose a particular SaaS offering, little or no thought is given
into how they will integrate the solution with their existing systems and data. Organizations may,
for example, have legacy systems that must be capable of integrating easily with the SaaS
solution. This reiterates the importance of having IT involved in the decision making process.
According to a Gartner report by Benoit Lheureux, the following integration options exist for
SaaS applications (Wailgum, 2008):
a SaaS vendors application programming interfaces (APIs) and technology
a third-party vendors SaaS integration technology
an integration-as-a-service (IaaS) solution
a professional services or a system integrator
The difficulty, Lheureux notes, is choosing which integration option is right for the organization.
Vendor Lock-in
Most businesses would like to retain customers over the long-term, but this is especially true for
vendors offering subscription-based SaaS products. Vendors clearly have a vested interest in
making it difficult to switch to a competitors SaaS offering. This of course holds true with
traditional software applications as well, but the very nature of SaaS makes this a slightly different
issue. Many desktop software applications today offer API access that developers can use to
access various parts of the system and data. This allows developers to create migration
applications that can pull data out of the old system and transform it into the new system. While
some SaaS vendors do provide limited API access to their online web application, users may not
be able to easily port their data to a new service.

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12

Software Changes/Enhancements
While SaaS applications can reduce the operating costs in supporting in-house applications, IT
managers are still concerned over the inability to control software changes or enhancements for
vendor-hosted applications. This is especially true since IT departments are often times the ones
providing technical support for the business users. When a vendor makes an update to the
software that drastically changes the functionality of the SaaS application, business users will
turn to IT for support. While similar problems can certainly occur with traditional software
applications, IT often times has control over when those updates are pushed to the client
computers. With SaaS offerings, IT departments have little or no control over when the vendor
will update their service.

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13

Carrs Perspective
In Nicholas Carrs book, The Big Switch, Carr offers an interesting perspective on the future of
cloud computing. He draws many parallels between the electrification of America and the
current move towards cloud computing and SaaS. Early in the book, Carr provides some
historical background on Edisons invention of electric power distribution. While Edison was
interested mostly in selling the equipment used to generate electricity, Samuel Insull (Edisons
right-hand man) saw enormous opportunity in creating an electrical grid. By centralizing power
stations and selling electricity to manufacturers as a service, Insull realized this would change
everything. Insull eventually left Edisons company and began working for a Chicago firm, where
he was able to turn his vision of an electrical grid into a reality. As a result, mostly all
manufacturers abandoned producing electricity themselves, and purchased much cheaper
electricity from the grid.
Based on this historical trend, Carr believes that cloud computing will ultimately prevail. As a
testament for this possibility, he mentions the enormous power of fiber optic technology.
During the early days of the Internet, we were limited in the amount of data that could be
transfered around the world. Today, however, our possibilities are greatly enhanced with higher
bandwidth speeds and virtually unlimited amount of growth potential. Carr believes that our
traditional desktops will be replaced with thin clients, which will connect to virtualized machines
directly over the Internet. The thin clients will be substantially cheaper to roll-out on a large
scale (i.e. corporations, etc.), and will eventually kill the PC manufacturing business.
While Carr believes that grid (cloud) computing will win, he does outline several concerns. The
technology will ultimately cause a drastic reduction in labor force, especially as more highly
scalable services are offered over the Internet. By having our grids scattered around the world,
our governments will ultimately need to decide whether we can relinquish control over the data
to foreign entities. Carr also expressed concern that the World Wide Computer will
ultimately have huge control over the human population, and that our role in society will be
reduced to being mere nodes in the larger system.

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Security Implications
Security is increasingly becoming more of a concern for companies wishing to migrate their
services to the web. Ecommerce businesses have an incredible amount to lose when faced with a
security breach. Losing sensitive customer information can not only pose significant legal
troubles, but it can also have a severe and negative impact on the customers trust. But security
issues today go well beyond the traditional challenge of securing credit card and other sensitive
information. With more companies implementing SaaS solutions, the impact of security
breaches becomes much more costly.
Vendors offering SaaS hosted solutions, such as Apple and Google, must be extremely vigilant in
securing their services to avoid a potential security breach that could ultimately affect millions of
users. If hackers compromised Googles servers, for instance, and placed malicious code on
their Gmail application, millions of users could be at risk. While evidence of these types of
breaches may not be well known, they are certainly important issues that must be addressed;
particularly for large organizations wishing to deploy SaaS across their entire user base (i.e.
Google Apps, etc.).
Organizations wishing to use a SaaS vendor must also be careful regarding the kinds of data they
push to the web. It may be financially cheaper to have a specialized data center host the
organizations applications and data, but unfortunately the security and integrity of that data is
now in the hands of someone else. This may be even more problematic in some industries where
there are strict regulatory requirements, such as Sarbanes Oxley and HIPAA.

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Open Source vs. Proprietary

Open source has without a doubt changed the software landscape over the years. Many software
applications have been developed within an open source community, and have proven to be a
reasonable alternative to other proprietary solutions. Perhaps one of the more well known
projects is OpenOffice.org, which is a suite of productivity applications that rival Microsoft
Office. While open source certainly has gained some ground over the years, the increasing
popularity of SaaS will potentially dampen the overall adoption rate in the long run.
It should be noted that most open source projects are only involved in the development of the
software. Once the application is built and ready to be deployed, it is given to users as-is.
Because open source communities are often times made up from a mix of part-time developers,
support options for these applications are usually limited at best. This is perhaps one of the key
reasons why large enterprises have not bought-in to the open source revolution. Businesses
need service contracts, but more importantly they need someone they can call and complain to
when things do not go right.
Two of the key advantages of SaaS that many businesses find compelling are the reduced
operational costs of maintaining in-house software, and faster deployment times. These
advantages are directly contributed from the software being offered over the Internet as a service
rather than as a user-installable application. In order to provide SaaS, vendors typically use very
large data centers to run their software. These data centers are very costly and do require an
enormous amount of resources to maintain. It is just simply not feasible for an open source
community to provide these types of services. Especially when their software is usually given
away for free, and the majority of their revenue (if they have any) comes from donations. With
that said, SaaS will not kill open source. In fact, many SaaS applications are actually developed
using open source tools. It is also important to understand that open source technologies as well
as open standards can be used in proprietary products. Webkit, an open source application
framework, is utilized by many proprietary browsers (i.e. Safari, Omniweb, Adobe Air, etc.) as
the primary rendering engine, which of course runs many of the SaaS applications today.

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Conclusion
SaaS is without a doubt gaining momentum, and is clearly changing the way software companies
deliver their products. Large enterprises are looking at the technology as a way to reduce
operating costs and deployment times, and small businesses are looking at it to reduce their
upfront software expenditures. While SaaS has certainly been around for a while, new and
innovative technologies (i.e. AJAX, etc.) are allowing developers to provide a more desktop-like
experience over the web. These technologies are already blurring the line between the Internet
and the desktop, which is why we will continue to see a growing trend towards moving
applications to the web. As more people utilize Internet-enabled mobile devices, they will expect
to have access to the same tools that they would normally have with their desktop computers.
Although there are some technical and financial concerns that must be looked at before
organizations decide to utilize SaaS, the long-term benefits gained from the technology far
outweigh the risks. Organizations can significantly reduce their risk by involving IT in their
purchasing decisions, and carefully choosing a SaaS vendor that has a proven tract record for
delivering the product they are looking for. Within the next few years we will undoubtedly see
more vendors offering SaaS solutions, and more enterprises adopting it as the technology
matures.

Jeremy Deyo email: [email protected] Virginia Commonwealth University

17

References
Blankenhorn, D., Rooney, P. Microsoft Becoming a SaaS Company. ZDNet. October 28,
!

2008.

Carr, Nicholas. The Big Switch: Rewiring the World, from Edison to Google. New York: W.W.
!

Norton & Company, 2008.

Fonseca, B. SaaS Benefits Starting to Outweigh Risks. Computer World, pg. 12-13. May 5,
!

2008

Golden, B. Windows Azure: Why Microsoft Better Get It Right. CIO. November 3, 2008.
Lashar, J. D. Even SaaS Requires the Right Approach. Customer Relationship
!

Management. October, 2008.

Lunn, B. Who is Not Afraid of the SaaS Wolf? The New York Times. October 28, 2008.
Lynch, C.G. Analysis: Salesforce.com Sites Slices Cloud in New Ways. CIO. November 03,
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2008.

Lyons, D. A Mostly Cloudy Computing Forecast. Washington Post. November 4, 2008;

!

D01.

Niccolai, J. How Fast Is the Road to SaaS? CIO. November 04, 2008.
Preimesberger, C. Seven Myths of SAAS Debunked. eWeek. October 28, 2008.
Schurr, A. SaaS Gives You Software on Demand. Network World,
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http://www.networkworld.com/newsletters/itlead/2008/110308itlead1.html.

November, 4, 2008.

Taft, D. K. Mashups in the Clouds. eWeek. pg. 23-27, October 13, 2008.
Wailgum, T. What to ask before saying yes to SaaS, cloud computing. The New York Times.
!

October 27, 2008.

Jeremy Deyo email: [email protected] Virginia Commonwealth University

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Weier, M. H. SaaS Integration: Real-World Problems, And How CIOs Are Solving Them.
!

Information Week. Oct. 18, 2008.

Jeremy Deyo email: [email protected] Virginia Commonwealth University

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