That is the question Sadagopan addresses in his article on Sandhill.com:
In the traditional IT budget of customers, close to 75% of their budgets go towards managing installed systems- the residual money available in IT budgets are proving to be inadequate for customers to buy new software. On the customer side, the TCO of business systems is heavily weighted toward on-going support as the license cost is dwarfed by the support cost. The software manufacturers cost structure generally have a cost structure where research consumes close to 20% – most of this go towards supporting existing components leaving little to invest for attempting new innovations – with the result the pace of innovation slows significantly. The R&D costs, sales costs and maintenance/ support costs come down for the manufacturer in the hosted model. Across the business chain every aspect of business of traditional software vendors need to be revamped to embrace on demand model. The application architecture, schema, the business model including dealing with channel partners and switching costs for existing customers are major impediments…It will take more time to see what percentage of customers will find these software service offerings attractive, change their buying habits and move to annuity contracts. It is also too early to make a conclusive call on whether the software vendors are going be more comfortable with annuity revenue stream not to speak about the hit professional service firms may be forced to take In all, not a very attractive path lay to embrace software-as-a-service model.
Jeff Nolan writes:
…Nobody can fully agree on what the idea of software-as-a-service really is. Some see it as a delivery method, others see it as a pricing strategy, and theres even confusion with the popular on demand meme that we can blame IBM for inflicting.
Lets agree on one thing: just like client/server meant different things to different vendors in the mid 1990s, software-as-a-service has many definitions that the market will sort out in time and that there is no right or no wrong definitions at this time.
Lets agree on a second thing: software-as-a-service is as much a change in the perception enterprise customers have about what software is as it is a technology or business model disruption for vendors.
Most of the talk about software-as-a-service centers on the idea that it is a delivery method; vendors will host applications and clients will subscribe to them. This really isnt anything new, Im sure you can recall the heady days of the ASP company which in itself was just a new set of terms for the outsourced IT movement that began many years before.
The software-as-a-service movement is as much about the perception of what software is in the eyes of the typical enterprise customer, and the nature of the relationship they wish to have with their vendors. For software startups, the key to being successful in this model is one of economics, embracing a development methodology that brings them to market quicker and offsets the significant costs of creating a new market, as well as a sales model that decreases the significant cost of sales associated with selling large enterprise deals.
InfoWorld has a special report: “Everywhere you turn, another company pops up offering SaaS (software as a service). Inspired by the success of Salesforce.com, SaaS vendors are hoping customers large and small will get the message: Browser-based, pay-as-you-go applications mean fewer servers for your IT department to maintain and less capital to shake loose from the CFO for software licenses and hardware…theres so much SaaS running around already that we couldnt help but wonder: Could you run a business entirely on hosted offerings?..In our survey of hosted software offerings, weve divided the SaaS universe into four parts: back-office applications (ERP, purchasing, HR, and so on), messaging, integration, and CRM.”