Greg Gianforte, RightNow Technologies: Is the on-demand/premise war over?

A civil war has been waging between those who evangelise the benefits of software as a service (SaaS) and the proponents of the on-premise model. But Greg Gianforte believes that the war is over - and SaaS's time is finally here.

By Greg Gianforte, RightNow Technologies

It may seem like a dramatic claim, but for the last 10 years or so the software industry has been undergoing somewhat of a civil war. We have two competing factions; on one side are those who evangelise the benefits of SaaS, while on the other are the proponents of the on-premise model.

Both, at least where customer relationship management (CRM) is concerned, are battling for the same territory – namely the automation of all customer interactions. While in the middle, the civilians – or in this case, businesses – carry on serving their customers, satisfying shareholders, wondering if they’ll weather the bitter economic wind that’s currently blowing in their faces.

While companies like RightNow and Salesforce.com and SAP and Oracle have been at logger heads over which software delivery model will win the battle, businesses - which the outcome will affect the most - have been rather more concerned about buying applications that will provide competitive edge, and rather less concerned about whether SaaS is a viable option.

Of course, that hasn’t always been the case. There was a time when SaaS was met with scepticism, tainted by the memory of the failed application service providers (ASPs) of the late 90s where the overwhelming majority of ASPs simply attempted to take existing applications and offer them to customers on a 'rental' basis. Companies basically took a rack of hardware out of their premises and moved it to a data centre, and were charged a premium to have their applications hosted.

At the same time, the traditional on-premise vendors hunkered down in their trenches and began spreading propaganda about SaaS being less secure, that it would only ever be a model to serve the SMB market, or just be an ‘on ramp’ to an eventual on-premise deployment. Their reluctance to give up their crown was, in part, supported by some industry observers who added fuel to the fire by questioning whether the cost of hosted software may eventually cost the same or more than on-premise over 5 or 10 years. Other anti-SaaS messages suggested that businesses would lose control of their implementations - having to accept forced upgrades, and that they would never own the software because it was hosted.

What none of them had quite gotten to grips with is that the new school of true SaaS companies are inherently different from the old ASPs because they are multi-tenant – allowing multiple customers to be hosted securely on a unified host, while individual clients still maintain control in a scalable environment.

Here to stay?

Fast forward to 2008, however, and it’s clear that SaaS’s time has finally come. The benefits and flexibility offered by the model are now widely accepted - both by SMBs and large enterprises and by industry pundits. Inch-by-inch, the SaaS model has gained ground because it significantly accelerates time-to-benefit from years to a few months, or even weeks.

It dramatically decreases up-front investment costs and provides economies of scale across a range of areas including security, specialised staffing and production infrastructure tuning and management. Indeed, SaaS even helps businesses mitigate risk as it enables software to be piloted before committing to an enterprise-wide deployment.

While the old mantra that 'businesses buy applications first and then talk about how it’ll be delivered' is still true, it’s also true that today organisations of all shapes and sizes are adopting SaaS. Many household names saw the advantages SaaS could offer early on and started off with a small project that has now morphed into something much more strategic and business critical. Even those that have been more hesitant are migrating on-premise deployments in order to capitalise on the economies of scale SaaS provides as they prepare for future growth. And as the model gathers pace, the number of business applications available - beyond just CRM - grow as well.

But what of the traditional on-premise software vendors? Well, some of them have stuck their heads out of the trenches and, rather than get caught in ‘no-man’s land’, they have made moves to embrace the model – albeit with varying degrees of conviction. The reason it has taking them so long to offer SaaS-based solutions is that they have to implement a cultural shift. To truly embrace the new ASP model they have to rewrite all their applications from scratch for a multi-tenant hosted environment.

Then there’s Wall Street to contend with – how do they keep the market happy while transitioning from a ‘paid upfront’ model to pay-as-you-go? Another fundamental difference between the two models, and again one which is a struggle for the on-premise vendors to embrace, is that SaaS requires significant vendor accountability as it’s easier for dissatisfied customers to terminate contracts.

Current fluctuations in world markets are likely to deliver even greater impetus to on-demand solutions. At a time of economic uncertainty history tells us that appetites for buying year-long, multi-million dollar software deployments dwindle and the business imperative becomes one of cost reduction rather than revenue generation. Managers focus on projects that demonstrate fast returns while playing to the economic requirement of retaining customers and reducing costs. It's an environment ideally suited to SaaS.

If further evidence of the rebirth of the software industry is required, industry analyst Gartner recently noted that the continued rapid adoption of SaaS was one of the main drivers in CRM market growth during 2007 and predicted that the total SaaS market will be worth US$19.3 billion by 2011. Research reports from firms including Forrester, IDC and AMR also support the idea that not only is SaaS on a very rapid rise – it’s here to stay.

Greg Gianforte is CEO of RightNow Technologies.

Other articles in this focus report:

On-demand vs on-premise: You pays your money, you makes your choice

Lindsey Armstrong, Salesforce.com: Why enterprise on-demand is in demand

Jason Nash, Microsoft Business Solutions: The best of both worlds

On-premise and on-demand CRM in action

CRM vendor listing