Robert Redgate, Consulting Manager, IDC UK

A Primary Agent in IT Delivery Change
A pivotal delivery vehicle for IT in the medium to long term will be Software as a Service (SaaS). Three of the primary attributes of SaaS - or rather the major subset of SaaS that IDC refers to as Software on Demand – are defined by Tim O'Reilly's original visualisation of the principles and practices that make up Web 2.0. These are:

• The Web as a platform
• Services, not packaged software
• Cost-effective scalability

In truth, the vehicle is a complete ICT delivery model and "just" Software on Demand could be regarded as a misnomer. When users access a Web based application they also utilise the computer hardware that runs the software, the devices that store any data associated with the application and the network that enables their work and to be shared with colleagues.

Market Demand and Drivers
As a delivery model for software, and as a go-to-market business model, SaaS is already established and IDC forecasts that its global use will grow significantly over the next five years. (From $6.8 billion in 2006 to $21.1 billion in 2011, with Software on Demand growing at a compound rate of just under 30% per annum). This very rapid growth is being driven by a combination of strong end user demand and software provider competitive positioning.

The logic behind end user demand is very solid, based, as it is, on a requirement for a software purchaser to see clearly the relationship between the total cost of software (including all support and running costs) and the benefit that they accrue. The simple fact is that SaaS achieves far more transparency in associating cost with benefit than traditional software delivery and go-to-market models. This is exactly what the end user community is looking for when attempting to minimise the cash risk associated with software use.

In providing this cost/benefit transparency, SaaS also addresses the pent-up demand within the Small to Medium size Business (SMB) market, where access to sophisticated business software at low levels of cash outlay and support risk suddenly becomes a reality. This market is massive (there are some 11 million SMBs in Europe) and it often represents a completely new revenue source for vendors, who typically concentrate on the enterprise sector.

The Opportunity for Vendors
It is true that a small number of UK software providers will see little additional benefit from adopting a SaaS based business model. However, for the large majority of software providers, SaaS represents a real opportunity. In particular, IDC believes that the end user mid-tier ($500 million to $2 billion turnover) could be the "sweet spot" for SaaS, as companies in this sector are demanding affordable technology and transparent business approaches from vendors.

There are also significant opportunities for other suppliers, such as Hosting Service Providers and the multitude of other service providers that can help enable the provision of software applications via the Web. These services can be offered to both vendors moving to SaaS or end users that wish to use SaaS. They include hosting, implementation consultancy, development, training and marketing.

There is little doubt that we are seeing a fundamental shift in the way software is acquired, delivered and used, and it is IDC's strong recommendation that every software provider should immediately examine the effect of this market opportunity on their traditional business and how they should respond to the new reality of software delivery.