The Hindu Business Line : Turn on… turn off

Every time James White, CIO of a financial services company, talks IT investment, the creases on his CFO’s forehead become all the more prominent. Due to the current financial crisis, the company CFO has decided to put a lid on all IT investments that call for upfront vendor payments.

But even as most IT firms dealing with White’s company complain of slowing growth, a clutch of vendors who can provide ‘Software as a Service’ (SaaS) on a ‘pay as you use’ premise say they are seeing a tick in their business.

Inspite of being described as the next big thing by analysts for several years now, there have been only a handful of success stories when it comes to SaaS. However industry officials feel this is set to change: There is consensus emerging that SaaS thrives in a cost-conscious, capex-constrained economic environment.

SaaS takes on other aliases: hosted services, ASP (application service provider) services, cloud computing, utility computing, or software on-demand. Fundamentally, SaaS enables IT companies to offer software to clients without the latter having to invest heavily in IT infrastructure. The solutions are hosted in the vendor’s data centre and are offered to the customers on a pay-as-you-use pricing model, over the Internet.

With traditional client-server products, customers were expected to pay big money for software licences, and then make additional investments in consultants in order to get any value from them, according to Peter Coffee, Director of Platform Intelligence, salesforce.com

Instead, the SaaS model enables the customer company to amortise its costs over the duration of the IT services contract, says Rajesh Subramanian, managing director of private equity firm Walden India. The client would still have to pay a one-time implementation or a migration fee, which would not be too high.

Although the total cost over the duration of the contract (say five years) may be the same with both models, client companies are averse to spending large sums of money, especially during tough times, says Vipul Jain, CEO & Managing Director of Kale Consultants, which provides solutions on an ASP model to the travel and hospitality industry.

“In the current economic environment where everybody is concerned about conserving cash, it is easy to convince the CIO to spend $20,000 per month for two years than to spend $2 million as the engagement starts,” he said.

According to a survey conducted by research firm Forrester, over 46 per cent of the respondents in North America and Europe have cited the flexible pricing model to be a significant motivator for using SaaS.

In many cases, the ‘pay as you use’ model has been known to reduce the cost of IT maintenance significantly. By deploying an on-demand model of enterprise resources and planning (or ERP), organisations can ensure about 30-40 per cent savings in the total cost of ownership or TCO for the project, says Chandra Prabhakar, vice-president, OnDemand Solutions at Chennai headquartered Ramco Systems, which has provided its on-demand ERP model to companies such as Parrys Enterprises and Hindustan Motors.

Cost savings are achieved in several ways. For starters, the customer does not have to invest in traditional software licences — the vendor takes care of it by hosting the software from his premises.

This model also reduces the dependency on IT resources (or IT professionals). Generally, IT professionals are not very keen to join the IT units of companies — especially in India — as most of them prefer being on the rolls of third-party software vendors, says Chandra Prabhakar.

SMBs, early adopters

Small and medium enterprises, across industries, have been the early adopters of SaaS as it gives them the flexibility of experimenting with software functionalities to find the ones most suitable for their internal processes, says Venguswamy Ramaswamy, Global Head, Small and Medium Business, Tata Consultancy Services.

“The business can, for example, start using a CRM for its sales force, without the risk of being committed to an investment. In the process, it would learn to refine its processes and digitise those,” he says.

Due to the recession, SaaS usage is spreading to a growing range of applications, far beyond its early roots where it was concentrated most heavily in human resources (HR) and customer resource management (CRM) applications, according to a recent reporter from Forrester.

“Today, firms are deploying SaaS across a wide range of applications, spanning from collaboration software, to ERP, to project management,” says Forrester analyst Liz Herbert in the report.

And even large-cap companies are now experimenting with the SaaS model.

“Due to the advantages involved, even organisations in the revenue range of Rs 200-500 crore are readily taking to this model in India,” says Chandra Prabhakar of Ramco,

Just as it is easier for buyers to sign on to SaaS services in hard economic times, it is easy for them to cancel an SaaS deal, some analysts feel. However, Coffee of salesforce.com has a contrarian view.

“From our experience, once customers have experienced the power and promise of SaaS/cloud computing, they never look back. We have seen a number of customers that initially started using our products as a stop-gap or departmental solutions stay with and grow over time, not leave.”

Hedging saas against risks

The SaaS model is recession- resilient, but not recession-proof, as it is being made out to be in some quarters. As the model is based on spreading revenue over the life of the contract, if customers start to go bankrupt in large numbers, SaaS vendors will be severely impacted. Also, licence vendors get money upfront, enabling them to build up cash reserves that can be used as a marketing tool to gain customers in times of recession.

How do SaaS vendors work around this issue?

The risk of losing a customer in tough times can be hedged by having a diverse, low- fee subscription base, according to Ramaswamy of TCS.

He explains: “An on-premise product would amortise investments from revenue earned from captive customers; most revenue models associated with on-premise products rely on upgrade market for cash flows”

“In case of SaaS, amortisation happens by scaling the market to a wider segment. It would, therefore, rely less on upgrade revenues, but more on adding customers, who would take less time to buy, given the low investment barrier.”

In other words, for SaaS to be successful from the vendor’s perspective, he needs to have a sizable customer base. For instance, salesforce has more than 55,000 customers across a wide range of industries.

If the SaaS vendor’s customer base largely comprises small and medium businesses, the risk of failure is greater since SMB companies are more likely to fail in bad times, analysts feel.

Data security concerns

Since the customers’ data is sitting somewhere in the cloud, one of the biggest concerns associated with SaaS is that of data security. Fears associated with the ‘multi-tenant’ nature of SaaS also pop up from time to time. (Multi-tenancy essentially means that one instance of the software can support multiple users across multiple companies and hence customers worry over the security of their data.)

Increasingly, SaaS companies are trying to work around this issue by offering separate security domains and a private version of the solution for large organisations with huge transaction volumes, say analysts. Jain of Kale believes that apprehensions regarding security could be better addressed by providing the customer a copy of his data on a monthly basis.

Research firm Gartner advises its clients to often visit centres where their data is hosted to see whether all the security parameters are in place, says Arup Roy, senior research analyst.

Inspite of the advantages associated with the SaaS model, experts are sceptical about the capabilities of an Indian company to replicate the success of companies such as Salesforce, Ariba and Webex.

“The amount of process intelligence that you require for outcome-based pricing is humungous. Moreover, you need to have deep domain expertise,” points out Subramanian of Walden.

Indian IT vendors have traditionally focused on a headcount-intensive model, wherein the revenue grows with the increase in the number of people added. SaaS being a model that is de-linked from the number of employees added, its success in the Indian vendor context depends on technology investments made by the vendor.

“Indian vendors will have to invest more in their internal R&D labs for long-term success with SaaS. For SaaS to succeed, it is imperative to have an environment where you can manage a multi-tenancy kind of a concept,” says Roy of Gartner.

adith@thehindu.co.in

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