Software-as-a-Service (SaaS): The New Paradigm for the Software Industry

By Kate McPherron

Speaker Dave Childers, CEO & director, EthicsPoint discussed how the company began providing on-demand services and now reaps benefits from investing in SaaS.

The following notes reflect the high points of his discussion and the questions and answers that followed.

What is SaaS vs. ASP?
“A good metaphor is a house, with many TVs but no separation of space, versus an apartment building with separate units, each with its own TVs,” says Childers. “ASP is a single-tenanted environment, where everyone shares the same view, problems of latency, and the page refresh rate is slow because it refreshes all the data. SaaS is a multi-tenanted environment where people can view data differently depending on what group they belong to and refresh is by field or component, so it’s much faster.”

Evolution of SaaS
“EthicsPoint is in the unusual position of having lived through the SaaS evolution, ‘inside the tornado,’” says Childers. He referred to a diagram provided by Saugatuck Technology, with the “curve” beginning with low, early adoption, through EthicsPoint’s current, fast-growing adoption, out to the future, where adoption levels out at a high level. The basics of that diagram are below.

Evolution of SaaS – Saugatuck Technology

“EthicsPoint has evolved from the early ASP ‘pay-as-you-grow’ model to full-out SaaS,” says Childers. “We’ve crossed the tipping point where SaaS adoption is going forward. We now work with customized workflows, provide robust analytics, mine data, and most of all, we integrate with other products. We’re at the cutting edge.” Childers went on to explain that when the company was young, it was the upstart, competing against big companies with 25-plus years in the market. Those positions have flipped as the value of SaaS has been proven: EthicsPoint is now the more experienced company, and the competition is the upstart, just beginning to evolve their on-demand solutions. “We would not have been as competitive in the marketplace had we not been on-demand.”

Childers described how both companies and customers can benefit from SaaS.

How companies benefits from SaaS vs. the traditional software model

• More predictable income stream and less up-front capital required
  
• Iterative development of software
  
• Ability to learn and evolve quickly
  
• Ecosystem – while primarily a benefit to the customer, value-added services also encourage loyalty as customers become invested

Factors driving customers to adopt SaaS

• Simplicity of software management
  
• “Pay-as-you-grow” reduces capital and operating costs, estimated at 10- 30%. NOTE: If current economic trends continue, this second point will have a much larger influence and will accelerate SaaS adoption.
  
• Speed of implementation
  
• Improved service levels
  
• Software is managed and maintained
  
• Automatic software updates
  
• No hardware to manage
  
• Total cost of ownership (McKinsey suggests reductions >30%)
  
• Ecosystem – access to broader range of value-added services that can ideally provide much “greater than the sum of its parts”

Other reasons customers adopt SaaS

• User control over configuration, user activity and workflows
  
• Ability to collaborate easily
  
• Reduced reliance on internal IT
  
• Opportunity to see business process improvements
  
• Data integration
  
• SaaS ecosystem of vendors, applications, and users
  
• Built-in analytics with the goal of BI

Factors helping SaaS proliferate
“Amazon, Google and others have helped to demonstrate the elasticity of SaaS,” says Childers. The advancement of other technology, particularly virtualization, will add further motivation for on-demand. Childers referred to these analysts for their thoughts:

• THINKstrategies and Cutter Consortium surveys found that over 80% of SaaS users were very satisfied and would encourage their peers to consider SaaS
  
• By 2010, 65% of all businesses will have at least one SaaS application deployed – enterprise clients will deploy an average of seven [Saugatuck]
  
• 10% of the enterprise software market will be pure SaaS in 2009 [IDC]
  
• 25% of enterprise will be SaaS in 2010 [Gartner]

Downtime is the biggest challenge to SaaS
“The biggest danger to SaaS is service interruption,” says Childers. ”Avoid downtime at any cost – it’s the death of the on-demand model, so it is critical to control it. “EthicsPoint publishes downtime delivery and latency. We have a 24-hour call center, plus metrics on the call center’s performance. We even encourage customers to measure the competition against these metrics.”

Another challenge: the data resides with the SaaS provider
“It wasn’t always easy,” says Childers. “Clients enjoy our speed, but sometimes balk because all of the data resides with us. We’ve had to develop the infrastructure and security to give customers the comfort to let data reside with us. We evolved by really listening to customers, learning their pain points, and now have about 1,700 clients.”

Perhaps the only reasons not to SaaS
Childers says The Patriot Act may make it difficult to do international SaaS business, particularly if there are issues related to data residing in the US or data transfer across borders. Those who work in an IT department and are worried about their livelihood may also oppose SaaS!

Finding markets for SaaS
EthicsPoint has succeeded by having very well-defined marketplaces. Primary are the highly-regulated industries. But in addition to these, EthicsPoint has a few niche markets where reputation risk management is critical, e.g., universities, non-profit foundations, etc. A recent Harvard Business Review article noted that a breach of corporate social responsibility was many times more detrimental to stock price than, for example, a financial fraud loss. Small-medium businesses (SMBs) that understand the cost benefits are also a strong market for on-demand services. EthicsPoint has not been pushing the SMB market because of the importance of a scaled-down 30 -60 day trial to those users. EthicsPoint is currently working on a trial.

Future
Childers says that EthicsPoint is not growing as fast as Salesforce.com, but is on a parallel track. “Look for growing integration of wireless into SaaS, as the demand for efficiency drives the need to feed data from handhelds and wireless devices.”

Sidebar: Quarterly update from Pacific Crest Securities looks at SaaS
Steven Baack of Pacific Crest Securities focused on SaaS and on-demand in his update. On-demand ranks second of the top seven key technology shifts, below: 

1. Global perspective
   
2. On-demand software
   
3. Clean technology
   
4. Virtualization
   
5. Telecom and Internet arms race
   
6. Interactive media
   
7. Location-based services

In addition, Baack spoke about on-demand’s potential for cost savings. Of the group surveyed, nearly all expect cost savings: 75% expect hardware savings; 62% expect maintenance and support savings, and 50% expect software licensing and IT staff savings. The majority expect 11%-30% cost savings, with mean savings of 23%

BIOGRAPHIES

Dave Childers, CEO & director, EthicsPoint
David Childers is the CEO and director of EthicsPoint, a leading ethics and governance on-demand solution provider in support of issue awareness and resolution management. His 20-year leadership background is in the technology and manufacturing industries and in leading companies from infancy to acquisition. Prior to joining EthicsPoint, Mr. Childers was president and CEO of Oregon Scientific. He is a charter member of the Open Compliance and Ethics Group (OCEG) - a non-profit coalition of the nation's business leaders assembled to develop compliance standards and guidelines; serving on the OCEG Leadership Council and Technology Council where he is responsible for the development of governance, risk and compliance guidelines and best practices. Additionally, Mr. Childers is a member of the Ethics and Compliance Officers Association (ECAO), the Society of Corporate Compliance Executives (SCCE) and the National Association of Corporate Directors (NACD) and has published numerous articles on ethics and governance best practices.

Pacific Crest Securities is the leading investment bank focused exclusively on technology. Institutional Investor has ranked Pacific Crest the #1 tech research boutique from 2002 - 2006 and the firm is an industry thought leader in the SaaS sector. Pacific Crest's sales and trading group is the largest dedicated group on Wall Street.

About the Author
Kate McPherron, a product marketing consultant, has helped several small software companies reposition software products as on-demand services.