On Demand Changes the Market

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Every now and then, something changes in a market that has a big impact on the way things are and the way they will be going forward. We are constantly trying to assess whether each change that comes down the road will be one of these game-changing events or just a passing fad. Fortunes have been made and lost betting on these outcomes, and on demand is one of those changes.

Prudent management usually treats all new events as fads until they prove themselves otherwise. To do anything else would, in most cases, be unwise and even irresponsible. Reacting to a fad — a false positive — can needlessly divert resources and attention from the business at hand and has caused many a company to lose its way. “Chasing unicorns” is one of the terms we use to describe such behavior.

On demand, or more correctly, software as a service (SaaS), was in the fad category for several years, but it has emerged as an important new trend in enterprise computing, and much of the reason can be traced to economics. SaaS is the first software advance that offers improvement in the economics of software. Like the computer network and client-server before it, SaaS provides an environment that is easier to use, lower cost and provides for more rapid deployment.

To think that SaaS can be simply described as a new or novel delivery mechanism underestimates its value and misses the point. For software entrepreneurs, for example, it reduces the price of admission, and it has the same effect in the first world as it has in emerging economies. However, whereas SaaS may make the jobs of first-world entrepreneurs easier, it may also make the jobs of some people in emerging economies possible in the first place. Therefore, one of the greatest impacts SaaS is likely to have is simply increasing the number of people involved in IT and building new applications.

In almost every aspect of the software industry, you can identify the impacts of SaaS. Systems integrators have less to do with SaaS implementations, in part because they are designed to be more easily implemented, and in part because there is no technology “stack” to manage.

More interestingly, because it costs less to develop an application in SaaS, an entrepreneur may need less cash to get started, reducing the need for venture capital. In many instances today, we see companies that are self-funded, preferring to maintain direct control of their businesses. This control is frequently lost for entrepreneurs who take money from outsiders.

SaaS also has presented the industry with new sales models based on technology platforms and the ecosystems that develop around them. These ecosystems can contain many different application vendors, as well as service providers and others dedicated to helping customers build end-to-end solutions. Furthermore, some vendors are finding that they have less need to build out their businesses to support marketing and sales efforts because some platform providers also deliver a mechanism for direct sales.

SaaS is wringing inefficiencies and cost out of the software business as surely as just-in-time inventory did for manufacturing. Customers benefit, as do new players in the industry, and the rest have to figure out a way to remain relevant and to adapt. It’s not a fad, it’s the way markets work.

Dennis Pombriant has held research and management positions in the CRM analyst community for more than eight years. He can be reached at editor (at) certmag (dot) com.

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