Business Web 2.0: The Rise of Software as a Service

Gavin Christensen

Tyler Baldwin

Niraj Zaveri

Kapil Chaudhary

Is Software Dead?

Marc Benioff

Overview

Evolution of SaaS Traditional software vs. SaaS Market Trends Hypotheses Next Steps

Evolution of SaaS

1950 1960 1970 1980 1990 2000 2006

MIT & IBM develop time-sharing on Mainframe computers

Mini computer enables more users to have computing resources

Ethernet connects PCs together

Client-server computing becomes the predominant model for software applications

The web enables hosted applications (e.g., ASPs)

Source: William Blair Analyst Report, 9/27/04

SaaS is the Future of Software

“[SaaS] affects everybody who uses software, it's a dramatic sea change." states Gates when describing the new approach in how the company develops and releases software via its live software effort

The enterprise is up for grabs again

Web 2.0 technologies enable

Web platforms will enable applications that address the long tail

Value Proposition

SaaS Key CharacteristicsSaaS Key CharacteristicsSaaS Key CharacteristicsSaaS Key Characteristics

Network-based access to, and management of, commercially available (e.g., not custom) software

Activities that are managed from central locations rather than at each customer's site, enabling customers to access applications remotely via the Web

Application delivery that typically is closer to a one-to-many model (single instance, multi-tenant architecture) than to a one-to-one model, including architecture, pricing, partnering, and management characteristics

Network-based access to, and management of, commercially available (e.g., not custom) software

Activities that are managed from central locations rather than at each customer's site, enabling customers to access applications remotely via the Web

Application delivery that typically is closer to a one-to-many model (single instance, multi-tenant architecture) than to a one-to-one model, including architecture, pricing, partnering, and management characteristics

Key BenefitsKey BenefitsKey BenefitsKey Benefits

Less pain – primary pain with traditional software are cost, time, risk e.g. 28% of CRM implementations failed to go live (AMR Research)

Management economies – manages and security updates, provisioning, license optimization, scalability

Lower up-front costs – typically enterprises face 10X license cost for full implementation, initial burden is typically much less witih SaaS

Remote access made simpler especially with Ajax

Less pain – primary pain with traditional software are cost, time, risk e.g. 28% of CRM implementations failed to go live (AMR Research)

Management economies – manages and security updates, provisioning, license optimization, scalability

Lower up-front costs – typically enterprises face 10X license cost for full implementation, initial burden is typically much less witih SaaS

Remote access made simpler especially with AjaxN

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Is Software Dead?SaaS Model Traditional Software Model

Functionality

• Can choose best of breed • Potential influence on future functionality with vendor • Remote access facilitated • Speed potentially limited by bandwidth, shared server setup

• Potential to customize to exact specifications • Unlikely future influence on vendor • Remote access potentially difficult

Implementation Speed

• Fast due to low customization, low integration, and potential for gradual rollout • Still need to adjust business processes

• Slow due to customization, integration and drain on Internal IT resources and/or consultants

Integration with Legacy Systems

• Limited integration available • Integration can be facilitated by XML or other web capabilities

• More thorough integration and customization can slow future maintenance and upgrades

Security and Reliability

• Reliance on vendor • Assess data center security, systems and operations• Content / data control an issue • Vendors must provide security or else out of business • For smaller companies, vendor security could be better

• In-house control of security • Control of content and data • Must provide own security

Organizational Impact

• Increased availability of internal IT resources • Revenue center • Training

• Cost center • Need to ensure alignment of technology with business processes, staffing, etc.

Total Cost of Ownership

• Subscription, commission, advertising, or a hybrid • Typically variable model, with small setup fee and monthly payments • Upgrades typically included • Can change or cancel contract if solution doesn’t work • Easier to budget • Low implementation costs • Hardware scalability

• Large upfront capital investment with subsequent purchases of updated versions • Opportunity for long-run economies of scale • High implementation costs, often including consultants • High, maintenance and overhead costs with internal IT staff • High switching costs • Harder to budget

Source: “On Demand: The Tectonic Shift in Computing.” Maynard, J., et al. CSFB. January 2006.

Market Potential

Source: William Blair Analyst Report, 9/27/04

$2.1

$3.3

$4.9

$6.9

$9.0

$10.8

$12.4

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

2004 2005 2006 2007 2008 2009 2010

Worldwide

34% CAGR34% CAGR

Key Players

The New Kids on the Block

The New Kids on the BlockSoftware GiantsSoftware Giants

The OutsidersThe OutsidersThe Web GiantsThe Web Giants

Hypothesis 1: Platforms will enable the long tail Will a dominate platform emerge? Very high stakes game which we believe that all the major players will seek to

play The following are early movers in the competition for the creating an ecosystem for Saas or “On-Demand

applications”

CRMEcosystems

ISVs & CustomersPartners ADP

HR

Symbiot What they do: Consolidating

sales, supply chain management, and best practices for independent commercial Pest Control, Landscaping and Snow-Removal industry

900 partners avg. revenue $5 MM Business issue – need

specialized financial and business, revenue management process applications focused on “Green Industry”

Solution: Built platform for HR, labor management, finance, accounts receivable etc on top of Appexchange

Hypothesis 1 Long-Tail Example: Symbiot

CRM

ISV

Symbiot

HR

Symbiot Partners

SaaS vendors growing at the expense of traditional software vendors Traditional software still captures 90% of revenue but

Growth slowed in 2005 to 4.9% (double digits in the 90’s) IDC predicts SaaS will grow 48% from 2005 to $4.9B in 2006

Greatest in-road in CRM market: On-demand rose from 5 to 9% Oracle, SAP, Microsoft all launching on-demand product

Companies say these are their fastest growing offerings Oracle has over 600 engineers working to better deliver this offering Siebel’s failure to adopt: Revenue ($1B-$487M), Stock ($100-$8)

Challenges large, traditional players face: Operational and Cultural Financial: Accounting practices to accommodate differing revenue streams

and expectations of analyst community

Hypothesis 2: Rapid movement towards On-Demand model

Hypothesis 3: SaaS only at the tip of the iceberg

2004 – Initial Buzz2005 – Initial implementation2006 – Reaching mainstream

Hottest IT category in VC Rocketed by 20% to $1.1B (VentureOne) First-time investments soared to 52% to $273M Overall software down 10%

Emergence of New Top Players: Salesforce.com, NetSuite, RightNow, SugarCRM

Next Wave starting: Zimbra, Vettro, Jamcracker, Rearden Commerce, Five9,

DreamFactory

Next Steps

Test hypotheses Salesforce.com, Google Platform VCs consumer & enterprise investment opportunities in

SaaS

Case Studies Dreamfactory tools for On-demand Thinkfree On demand office tools Zimbra On-demand enterprise email

Explore impacts/correlation with BPO