Part 1: The ASP model offers high hopes, but ultimately low value
The Software-as-a-Service (SaaS) business model is attracting significant attention from both customers and investors, since SaaS promises to fundamentally change the economics and customer value of software. As a result, customers are increasingly turning to SaaS vendors for software solutions and publicly traded SaaS companies are receiving valuations far above those of traditional software vendors.
To understand why a SaaS model is so compelling, it’s first important to understand the limitations of another business model – that of application service provider (ASP).
The ASP Model – placing traditional software on the web
In the late 1990s and very early 2000s, the application service provider model was very popular. The theory was: take software traditionally delivered via CD-ROM and deliver it in a pre-configured, hosted model to create cost benefits for the vendor and customer. It was thought that by packaging the applications in this manner that the following would happen:
- Economies of scale in operations could be achieved
- Customer configuration demands would be limited
- Deployments of new customers could be streamlined
If these things were accomplished, one could alter the economics of software delivery.
However, this model suffered from some critical flaws.
The critical flaw: the same software that was designed for customer installation and configuration was being used for hosted operation. Many of the design trade-offs that software vendors had made favored extreme configurability. This allowed them to answer “yes” to feature/requirement requests from customers by essentially pushing back onto the customer the burden of installing and configuring the software.
The economics of traditional licensed software created strong incentives to discount the operational burdens of the customer and create half-features that, in order to become fully functional, required the customer to finish the job with services. In the traditional software model, the customer didn’t realize their obligations and added expense until well after the software is purchased. This is a critical reason for the disillusionment with enterprise software that has taken place over the last decade.
The ASP model essentially required that the hosting provider finance the cost of customer configurations. Instead of improving the economics for the vendor, it actually made the economics of software worse. In fact, it has been argued that customers of ASP solutions demanded more from their ASP providers than they would have of their own internal IT had they relied on the internal organization for delivery. These costs far outweighed any economic gains from standardizing operations and scaling up support staff.
The end-result: the ASP model did not create any economic benefits over a traditional software delivery model. The total cost of software delivery was shifted a bit, but not changed (if anything it got worse). ASP providers ended being sold-off and treated more as a conventional outsourcing option. Customers did not see a significant reduction in cost or improvement in service.
Business Intelligence walks into the ASP trap
History has shown that every architectural shift in computing begins first in operational applications and then moves to the Business Intelligence market about 5-7 years later. The same seems to be true for the shift to the ASP hosted model. The first generation of ASP companies provided operational applications. BI providers followed later -- several attempted to take the same software that they sell via CD-ROM and provide a hosted alternative. Despite calling themselves “SaaS,” these offerings are essentially the ASP business model. As a result, they have encountered the same challenges that ASP providers of operational applications experienced; they are having a difficult time providing compelling value for a compelling price.
Stay tuned for Part 2: The SaaS approach emerges for operational software
