Is SaaS Disruptive

The enterprise software industry has been dominated over the past two decades by several large incumbent firms such as Microsoft, Oracle, IBM, SAP and TCS. Very few examples of new large firms have been able to erode market share from these large incumbent firms. The aim of this study is to show that new Software as a Service (SaaS) firms are disruptive to incumbents in the enterprise software market. By using Christensen’s theory of disruptive innovation and through the detailed analysis of published annual reports, three SaaS firms, RightNow Technologies, Salesforce.com and WebEx, are tested. Christensen’s disruptive innovation theory provides a set of litmus tests that enable a thorough ex post examination of the ability of these three firms to practice disruption. A set of tests, some business model related, some financial, are carried out and for each firm and a score of disruptiveness is assigned. The results of these tests indicate that SaaS is indeed disruptive. By following a vertically integrated strategy, lowering transaction costs and reducing agency risks, SaaS firms are providing Chief Information Officers (CIOs) with alternative best of breed enterprise solutions. Customers are passed on the savings through better coordination of the IT value chain and savings through shared infrastructure and multi-tenant server architectures. At the same time, SaaS firms are building wealth for their shareholders, and all this bears well for future emergence of new SaaS firms. The affects of the open source software (OSS) community and software standards bodies on SaaS is discussed; these are positive influences on the disruptiveness of SaaS.

If you would like a copy of my entire 140 page study entitles "Is SaaS Disruptive" please email me at ccbirrell@gmail.com.

The Emergence of SaaS

With the ubiquity of the web browser, a new channel of software delivery has emerged. Software as a Service (SaaS) vendors allow enterprises to ‘out-task’ specific business applications with a single vendor specialized solution. The motivation for customers is applications can be “…built more quickly, less expensively, more securely and more precisely attuned to your company’s business goals” [1]. “Software as a service (SaaS) is a software application delivery model where a software vendor develops a web-native software application and hosts and operates (either independently or through a third-party) the application for use by its customers over the Internet” [2].

A relatively recent phenomenon, there are very few if any research articles published specifically to study SaaS. There are some trade publications, newspaper articles and blog entries, but little activity on the academic front. Commercial research and consulting firms are highlighting the emergence of SaaS vendors. According to McKinsey consulting [3] areas where SaaS is emerging are:

1. Infrastructure management: security management, storage management, system management.
2. Development, integration tools: Application development, deployment.
3. Core business applications: Enterprise resource management, supply chain management, collaboration, content applications, information marketplaces and other niche applications.

Interestingly, a new breed of SaaS services companies has emerged (refereed to as Services 2.0) that work with the SaaS vendors [4]. One other sign of SaaS’s rise is the increased level of acquisition activity. Recently Cisco Systems purchased SaaS vendor WebEx Communications for more than USD3 billion [5].

The SaaS model does have its fair share of critics. The concerns include security of network, security of data, service level agreement management and long term viability of the new firms [6]. Furthermore, a series of outages in early 2006 at salesforce.com created a negative series of press articles and sullied the reputation of SaaS (e.g. [7]). These outages lead Nicholas Carr to pen on his blog, Rough Type, about SaaS: “The fears about security and reliability may be rational or not - usually, they're a little of both - but they're real, and the onus is on suppliers to allay them. No trust, no business” [8].

1. Lindquist, Eric (2007), “The summer of SaaS: Services advantages are too good to ignore – even by Microsoft”, eWeek, July 2003, www.eweek.com.
2. Wikipedia (2007), “Software as a Service”, http://en.wikipedia.org/wiki/Software_as_a_Service.
3. Dubey, Abhijit and Wagle, Dilip (2007), “Delivering Software as a Service”, The McKinsey Quarterly, Web Exclusive, May 2007, downloaded from http://www.mckinseyquarterly.com/High_Tech/Strategy_Analysis/Delivering_software_as_a_service?gp=1.
4. Barbin, Chris (2007), “Services 2.0 – A New World for Systems Integrators”, April 5th 2007, downloaded from http://sandhill.com/opinion/editorial_print.php?id=129.
5. Shearer, Brent (2007), “Finding the Next Frontier: Cisco's acquisition of WebEx reflects a trend in the IT space to build new platforms through consolidation”, Mergers & Acquisitions: The Dealermaker's Journal, 00260010, Aug2007, Vol. 42, Issue 8, SourceMedia Inc, New York, NY, USA.
6. Kaplan, Jeffrey M. (2007), “SaaS: Friend or Foe”, Business Communications Review, June 2007, p 48-53.
7. Cowley, Stacey (2006), “Salesforce.com crashes again”, InfoWorld Online, 31st January 2006, IDG News Service, downloaded from http://www.infoworld.com/article/06/01/31/74930_HNsalesforcecrashes_1.html.
8. Carr, Nicholas (2006), “Salesforce.com’s Hiccups”, Rough Type (Nicholas Carr’s Blog), 1st February 2006, downloaded from http://www.roughtype.com/archives/2006/02/salesforcecoms.php.