International Trade and Competition in High Technology

International Trade and Competition in High Technology

Charles C. Wu

www.professorwu.com

Development of the Software-as-a-Service (SaaS) Industry

Software as a ServiceWhy it matters

Who Am I?

Jimmy Tang

What is it?

“We define SaaS (Software-as-a-Service) as a vendor renting and hosting software to users

on a subscription basis.”

- William Blair & Company LLC.

Benefits to Consumers

Lower Up-front Costs

Smaller Risk

Reduction of IT Costs

Smooth Upgrades

Quick Implementation

Benefits to Vendor

Consistent Revenue

Lower Cost of Development

Longer Corporate Life

History of SaaS

Future of SaaSDespite current economic conditions experts remain

positive about SaaS model.

“We believe that SaaS talent management vendors will fundamentally outperform the overall software

industry over the next 18 months despite human resources’ inherent exposure to economic cycles. “

– Deutsche Bank

“International Data Corporation (IDC) forecasts that the on-demand market will grow at a 32% compound

annual rate to $14.8 billion by 2011.”

- William Blair & Company LLC.

What Does This Mean?

Darwin was right. Adapt or die.

References“On demand evolution volume II”, RBC, Robert

Breza, August 2008 (301 pages)

“SaaS and Cloud Computing”, Deutsche Bank, Tom Ernst Jr, 7 July 2008 (47 pages)

“Software-as-a-Service Update”, William Blair & Company, Laura Lederman, April 11 2008 (47 pages)

Software as a Service

(SaaS)

Bagher Afshar

17562187

Introduction Software as a service (SaaS) is a software business model

SaaS is a web-based software that is not offered as a product, but as a service

Software runs on a web server and the user uses it through an Internet connection. The user only pays for using the software instead of owning it

SaaS is NOT new. However, customer demand has greatly increased its importance

Payroll as a very common SaaS application for the past 30 years ASP’s were the latest fad during the dot.com days SalesForce.com is the latest publicized SaaS vendor specially in

CRM market

UC Berkeley - 12

Market Overview “Software as a service represented approximately 5

percent of business software revenue in 2005 and, by 2011, 25 percent of new business software will be delivered as SaaS”1

“Worldwide 2.4 Billion Euros are spend on Software as a Service, an amount that is expected to grow with an average of 18 percent each year.” 2

“We believe eventually all business software will be offered as a service”3

UC Berkeley - 13

1: Gartner, Inc, October 2006, http://www.gartner.com/it/page.jsp?id=496886

2: P. Vermeulen, IDC Opinion “De business case voor Software as a Service”,

2006, p.1

3: IBM, Saascon congress, 2006, source: M. de van der Schueren (Chairman ASP-Forum)

SaaS Characteristics

SaaS main characteristics: *

Be pay-as-you-use only service (the most important characteristic of SaaS)

Be multi-tenacity Incorporate shared services Have a feedback mechanism

UC Berkeley - 14

* G. Blokdijk, SaaS, 100 Succes Secrets, 2008, p.78

SaaS Business Model

SaaS solutions are offered in 3 major business models:Hosted solutions :

Customer purchases the software license and vendor runs software in hosted environment

Shared tenant :

Hosted environment is offered by vendor and several customers will share instance of software

Single Instance Multi-tenant :

One version of the software is offered to all the customers and is updated regularly and frequently

UC Berkeley - 15Mark Egan, SaaS Market Overview and CIO Perspectives

Software as a Service Advantage

Speed and ease of deployment Lower risk of failure Reduce of infrastructure investment cost from end-user More secure IT infrastructure A very good candidate for stand-alone applications (without the

need for deep integration) Disadvantage

Applications requiring deep integration or customization ( like ERP) in some vertical markets are not good candidates

Limited ability to customize software for unique business requirements

Trusting third parties to manage their applications and data could be a challenge

Companies without well-defined business process or companies who haven’t fully addressed scalability, reliability and security issues won’t benefit from it

UC Berkeley - 16

SaaS vs. Traditional Software

Traditional enterprise licensed software

Licensed on perpetual basis Customers pay annual maintenance Requires more implementation time to configure the software

based on the needs of the customer The customer had to pay for the application and the hardware to

house and deploy it

Software as a Service (SaaS)

Rented to customers on monthly basis Customers own their data, but not the software Requires much shorter implementation timeframes

UC Berkeley - 17

Application Service Providers(ASP)

ASP : Are considered predecessors of SaaS Offered application services in a hosted data center style Because of so many customer specific applications, ASPs couldn’t

offer much expertise on each application Customers still had to have in-house expertise to make sure the

applications were behaving correctly The high cost of building and maintaining data centers and

running customer-specific applications led to many ASP ventures failure

UC Berkeley - 18

SaaS vs ASP ASP:

Most ASP-supported applications were client-server programs with simple HTML Web interfaces

Concentrated on moving certain application processing duties to a third-party managed server

Technology and web interface (internet speed, web environment) were not ready for ASP

Higher set up cost Mostly did not have required application and business domain

knowledge about the applications they were running SaaS:

Designed specifically for the Web environment Providing shared services to multiple tenants Technology and web interface were ready for it More scalability

UC Berkeley - 19Christopher Souza, Software as a Service (Saas) vs the ASP Model, http://ezinearticles.com

Vendor Perspective

Business argument for offering and developing SaaS as a company

Customer-focused and customer-friendly Could be easily and frequently updated Improved customer support, service and feedback Faster time to market Increases software value by less effort on delivering the software

and more time and developing it

UC Berkeley - 20

Client Perspective

Client arguments for using SaaS:

The costs of investing are relatively small Fast implementation, no installation Improved customer support, service and feedback Shared responsibility for support infrastructure More predictable and expected ongoing costs Lower risk factors and more stable security

UC Berkeley - 21

SaaS Sample Products

UC Berkeley - 22

Company Product

SalesForce.com Sales cloud and service cloud for CRM marketAppexchange to integrate with other vendors

Oracle Siebel on Demand for CRMOracle on Demand for ERP

SAP ByDesign for ERP in SMB market

NetSuite CRM, ERP, and e-commerce solution

Google GoogleApps and GoogleDocs

Intaact Software for finance

Workday Software for HR/Payroll

Successfactors Software for talent management

SaaS Usage Today

SaaS mainly offered in these

Categories: CRM HR Procurement

SaaS biggest users by vertical

market: Technology Finance services utilities

UC Berkeley - 23Source :Gartner

Future Trend

SaaS provides convenience to both customers and vendors Trend is going towards further growth and overall

acceptance (can become a disruptive force in software industry)

The fast connection speeds and evolution of Internet added value to SaaS

Software as a service will represent 25 percent of business software revenue by 2011 with 18 percent annual growth

Edge applications such as SFA, Payroll, e-mail and ‘Office Functionality’ are good candidates for SaaS

It’s a desirable new industry to enter

UC Berkeley - 24Gartner, Inc, October 2006, http://www.gartner.com/it/page.jsp?id=496886

INTRODUCTION TO SAAS INDUSTRYMBA/ENG 290G Assignment 9/2/2009

Guan, Xu

[email protected]

WHY DO WE NEED SAAS?

Addresses cost concerns Reduced cost, more predictable costs

Provides a faster access to computing facilities

Offers both flexibility & efficiency Has an easier development & drives

innovation

It also bears some disadvantages Immaturity of model, no standards, loss of

controls, security, etc. 26

WHAT IS SAAS? (1)

a model of software deployment a service on demand

share licenses within a firm or sharing licenses between firms

from IaaS to PaaS, then to SaaS (horizontal) IaaS: technology infrastructure on-demand

Apple, Dell, Amazon, Google, HP PaaS: software services and tools

Google, Yahoo!, Facebook, MySpace SaaS: application functionality on top of basic

infrastructure; usually with the highest profit margins Google, Yahoo!, Microsoft, Facebook, LinkedIn

27

WHAT IS SAAS? (2)

Corporate cloud vs. consumer cloud (vertical) Corporate ex., Salesforce, Cisco, Google,

Netsuite Consumer ex., Facebook, MySpace

Blurring lines between both horizontal & vertical segments

28

COMPARISON OF SAAS, SOFTWARE & ASP

29

• SaaSlower management cost,has better scalability

• Softwarerequire significant up-front time and resource investments, internally managed systems to the outsourcing provider.

• ASPclient-server technologies,fails to a large extent.

Loca

l co

mputi

ng

reso

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e

allo

cati

on

Cloud computing resource allocation

Cost decreases

DESIRABILITY OF SAAS

Potential acceleration factors User adoption Vendor ecosystem Major endorsements Economic weakness Funding environment

Potential deceleration factors Security breaches Outages Market consolidation Economic weakness

A noteworthy portion of the market is likely to shift to cloud computing!

30

ISSUES TO ENTER SAAS INDUSTRY (1)

Business model discussion Subscription model Usage-based model Advertising-based model

Offering SaaS Along With PaaS increase the market size and cross-sell

opportunity closer strategic relationship

Impact of SaaS deployments Beneficiaries

PaaS vendor, corporate IT, storage providers, hardware infrastructure players, virtualization vendors, cloud-based services firms

31

ISSUES TO ENTER SAAS INDUSTRY (2)

Impact of SaaS deployments At risk

Hardware category, SaaS vendors, companies that is slow to evolve

32

IS SAAS A DESIRABLE NEW INDUSTRY TO ENTER?

Probably not. 1. Big players, i.e. Microsoft, Google, etc., are

already in place. Newcomers are not expected to have an upper hand in this face-off with the software giants.

2. Size of the total market might be increasing. But the expanding speed is still unclear.

3. Business model needs to be better understood before one enters the industry. Which business model for SaaS is better ought to be investigated.

33

WHY THESE REPORTS EXIST & “FREE”

For commercial purpose mainly, with a fairly hefty price tag Consulting firms serve as the insiders of certain

industry, especially emerging industry or commercial opportunity. The reports could potentially revoke people of other fields to consider entering the industry and lead to the consulting opportunities.

For research purpose, free Open to the researchers for intellectual

elevation. And in return, the fresh ideas within academia circle can be absorbed by the consulting firms. 34

REFERENCES

On demand evolution, volume II, Insights and Best Practices at Leading On Demand (SaaS) Providers RBC Capital Markets Corp., July 2008

SaaS and Cloud Computing Deutsche Bank, August 2008

Technology: Software & Services William Blair & Co., July 2008

35

LINDSAY BROWNSEPTEMBER 1 , 2009

Software-as-a-ServiceIndustry Update

2008

SaaS Industry Overview

Software-as-a-service (SaaS) is defined as a vendor who develops, rents and hosts software through a user interface, enabling customer activities on a subscription basis

SaaS, and the broader cloud computing marketplace, is one of the fastest growing segments of the information technology industry Garner Group estimates the SaaS market to grow to $19.3 billion

by 2011, a CAGR of 25% Access Markets International believes Saas adoption in the US

among small and midsize businesses has doubled since 2004 to 21% and 31% adoption respectively

Top SaaS performing companies include: Salesforce.com, Concur Technologies, Vocus, The Ultimate

Software Group, DealerTrack Holdings, Constant Contact, and NetSuite

Source: * Garner Group, forecast ** IDC forecast

SaaS Industry Economics

Total Revenue

YOY Rev Growth

Operating Margin

Non-GAAP Operating

Margin

Average Revenue

per Customer

Group Median $108.5 $39.3% 3% 10% $25,815

Group Average $147.7 43.59% -11% 3% $37,407

Salesforce.com $748.7 51% 3% 11% $18,261

Concur $149.2 39% 11% 18% $24,065

Vocus $58.1 44% 2% 13% $23,939

Saas SWOT Anaylsis

Strengths Lower up-front costs and

reduced investment risk. Users can get up and running quickly

Outsourcing of IT Ease of upgrading Larger total available

marketplace – can accommodate large and small companies

Opportunities Untapped international

markets Tying servers to social

networking sites to improve ease of use

More collaborative applications, easy integration interfaces

Weaknesseso Larger horizontal markets

represent a larger return to investors, yet new companies will have to target more narrow/niche industries

o Investors will demand greater profitability

o Fluctuating pricing models introduce financial volatility

Threatso Fluctuating pricing models

introduce financial volatility o Investors cautious because of the

economyo Not all SaaS companies deserve

premiums they are selling foro Potential security issues

Advantages of SaaS vs Traditional Software

SaaS Customer Benefits

Lower initial cost Lower ASP (Active Server Pages) More predictable expenses Reduced risk Quick implementation Minimal IT support Circumventing IT More frequent upgrades Security More relevant product enhancements

Vendor Benefits Better revenue and earnings visibility Lower cost of development Longer corporate life

Shareholder Benefits Less volatile revenue and earnings Longer public life Larger target markets

Traditional Software Customer Benefits

Lower total license costs Increased control Fewer performance

problems More customization

Vendor Benefits Faster growth Less complicated business Greater total available

market Shareholder Benefits

Lower valuation

SaaS Trends

Platform-as-a-solution (PaaS): Platforms that allow 3rd parties to build and run their own

software on it. allowing others to run their SaaS applications on it. Salesforce.com has changed from offering just a SaaS application to also selling its platform as a service, with important positive consequences for its growth and market opportunity (allowing core application to be expanded)

Companies charging per click or usage instead of selling upfront subscriptions

Architecture Multitenant vs Single Tenant Models Multitenant must be written from the ground up, should

maximize shared business logic

Future of SaaS

SaaS is a long term trend Excluding recession, SaaS has not been strongly cyclical

Desirable industry Loyal customers (85-95% renewal rates) More diversified customer base Quicker ROI Successful over traditional software Untapped international markets

Potential Risks Low industry margins Many companies selling at premium New companies may need to focus on narrow verticals (difficult

to compete with larger companies like Salesforce.com)


MBA 290GKevin Liu

International Competition in

Technology

What is it?

Software that runs on a browser and users subscribe to its services

Any Web 2.0 tool that you sign up for

How’s it Different?

ASP – Application Service Provider Servers dedicated to individual

companies High Operating Costs

Multitenanted Architecture A remote server runs the program Multiple users’ browsers connect to

the server

Pros and Cons

High Churn Rate ~90%

Quick and easy updates

backwards compatibility

Piracy protected Portability Low computing costs

per user Maintainability

Fewer systems to manage

Security more passwords twitter exec hack

Graphically Weaker/Slower

Javascript is weak Lack of windows/tabs Slower loading of pages

due to network Tied to WiFi More work for

developers robust servers, secure

data, user preferences, security

What should be SaaS’d?

Social interaction, networking Easy access Sharing of data Does not need fancy graphics

(people hate installing software)

Long Term Trend

“SaaS companies’ target markets will become increasingly narrow – and hence likely smaller – over time.”

-William Blair & Company

But it will continue to grow…

International Data Corporation predicts a 32% compound annual rate

to $14.8 billion by 2011 Gartner Group

expects $19.3 billion by 2011 Access Markets International has

observed 21% adoption in small businesses 31% adoption in medium sized

businesses

International Competition in High TechnologyClass 2: Development of the SaaS IndustryJeff Gordon, [email protected] 1, 2009

Market Overview

• Market expected to grow at 25% CAGR to $19.3B by 2011 (Gartner)

• Vast majority of this, $11.5B, expected in the enterprise• Small and mid-sized business segment account for only ~10%, with almost half of small and one-third of mid-sized business reporting no interest in SaaS (IDC)

• In the enterprise, CRM, ERP, messaging and conferencing still drive the majority of SaaS sales, but financial apps, payroll and document mgmt. are coming on strong

• Largest SaaS providers are expanding internationally, but sales are slow; only ~10% or less of sales are derived from international markets

• Domestic providers are still building/establishing US markets• Global expansion is costly (e.g., data centers) and time-consuming

• Providers are increasingly taking a vertical sales approach over previous horizontal approach to drive sales

Market Overview

• Major players:

• Major categories:

Opportunities and ChallengesO

pp

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sC

hallen

ges

Providers Customers

• High initial cost of data centers• Higher total management costs

(though distributed across customers, so still low marginal cost)

• Security perception of moving data to Web

• Customer discomfort with managed solutions

• Continually evolving Web standards and technologies

• Nascent (grow growing) market

• Relatively low overhead (despite data center capital requirements)

• TTM: Easy and cost-effective to deliver new and iterative solutions to market

• Highly scalable for different sized customers and needs

• Unique pricing models, subscriptions and potential customer “lock-in”

• Higher reliability than on-premise solutions

• More frequent updates: bug fixes, feature enhancements, etc., with little to no down time or additional cost

• High network and data storage resiliency

• Highly scalable, lower marginal cost per user (vis-à-vis, for example, CALs)

• Unique pricing models allow long-term cost deferments, price waterfalls, etc.

• Access data anytime, from anywhere• Trust, loss of control• Less/loss of customization• Broad availability, global localization

and geographic latency

• Data lock-in, can be handcuffed by recurring subscription pricing

• Crowded market place

A Few Top Trends and Issues

• Industry moving from “just” software to Platform as a Service (PaaS)

• Salesforce.com’s AppExchange, Force.com are examples• Microsoft entering with a big bet on Azure

• Fast growing number of market players (with consolidation)• 27 public SaaS providers in 2007, up from 8 in 2008• Market shakeouts making investors more cautious, despite most valuations are still above traditional software providers

• 3G/3.5G networking making mobile SaaS an attractive reality

• Not just wireless, but also compliance, risk mitigation and BI are helping to drive growth; still need to crack mid-market, however

• SaaS median growth margins are still less than traditional software gross margins (68% vs. 83%, respectively – RBC)

• Down economy can be good for short-term SaaS wins

Conclusions

Is SaaS a good market to be in?• Given relatively low opex, expansive potential market and

innovative new technologies driving growth, YES, SaaS is a good market to be in

But isn’t it too crowded?• At the enterprise level selling horizontally, yes, it’s a crowded place

to be. BUT selling vertically and finding niche markets can be potentially lucrative; the market is uncaptured. Moreover, the international market is still tiny with huge potential.

Why not the traditional software or ASP models?• Traditional software lacks the scalability, TTM and TCO benefits of

SaaS; ASP, in the traditional sense, requires huge capital for data centers to serve thin client applications

In sum, the SaaS market is crowded and competitive – tough in a down economy – but the long-term market upside potential is huge.

Industry Overview ofSoftware-as-a-Service (SaaS)

Alic [email protected]

MBA/ENG 290G Assignment – 9/2/09

mailto:[email protected]


• “Software Rental” on a subscription basis• Vendors host applications & provides

– Service-on-demand/On-demand Licensing– Standardized software– Feature updating

• Current SaaS vendors include:

1

1. L. Lederman et al., “Software-as-a-Service Upate: An Update on the Evolution of Software as a Service” (2008)

What does SaaS Provide?

Advantages Disadvantages

Lower upfront costs (Subscription) Lack of software customization

IT Outsourcing Outsourced control of data

Ease of Upgrading Lack of integration with non-SaaS apps

• Currently very popular with small & medium businesses that lack resources to implement enterprise-scale IT departments

• Most popular software services are used in• Sales & Marketing• Human Resources (HR)

How does it compare?Cost Implementation Customization Upgrade &

SupportServer/Data

Control

SaaS Low Easy N/A Easy Little

Commercial Software High Difficult Possible Difficult Complete

• Different types of SaaS:• Application Service Provider (ASP)

• Typically focuses on deployment of non-critical IT functions of a company; cost-savings usually due to off-shore of labor

• i.e. Oracle On-demand, Workday HR Software• Business Process Outsourcer (BPO)

• Outsourcer handles entire business process outside of IT system; usually processes such as sending paychecks and checking credit scores

• i.e. EDP Payroll, Fair Isaac Credit Score Services• Management Service Provider (MSP)

• Handles set of services for a company; Interacts with IT system• i.e. ScanSafe Virus Detection, Vercuity Telecome Expense Managment

The SaaS Industry

• Growing market– Customers not limited by company size– IDC Forecasted growth at 32% to $14.8B by 2011– Steady revenue stream due to subscription service– Opportunities in international markets untouched

• Current economic decline creates an opportunity to invest in SaaS companies

The SaaS Industry

• RBC– Recommendation: Outperform– Strong growth characteristics; > 20%– Technology lead-time advantage– High Revenue visibility– Market leading cash margins– Varies from company to company, but overall

industry outlook is strong

The SaaS Industry

• William Blair & Co.– Recommendation: Outperform– Expected growth of 32% to $14.8B by 2011– Diverse customer base– Can balance profitibility & growth– Platform as a Service (PaaS) is key to future of

SaaS Industry

Platform as a Service (PaaS)

• Application development platforms for 3rd party to build and run their own software

• Salesforce.com AppExchange– “iTunes of application code”– Central marketplace for software

• Allows for ease of implementation of SaaS software

The SaaS Industry

• Deutsche Bank– Recommendation: Outperform– Lower ASP/Operating budget– Diversified customer base– Higher success rates– Faster return on investment (ROI)– Current “beta-compression” is a buying

opportunity

Long-term Outlook

• Steady growth is certain markets• Not a one-shoe-fits-all software model

– Key disadvantages still limit widespread adoption• Push for Cloud Computing (i.e. Google) will

help improve acceptability• Growth of “ubiquitous wireless access” will

also improve adoption rates• Expect SaaS to evolve as the industry and

market matures

References

• R. Brenza et al., "On Demand Evolution, Insights and Best Practices at Leading On Demand (SaaS) Providers” (2008)

• L. Lederman et al., “Software-as-a-Service Upate: An Update on the Evolution of Software as a Service” (2008)

• T. Ernest Jr. et al., “SaaS and Cloud Computing” (2008)

• G. Gruman, “The Truth about Software-as-a-Service (SaaS)” (2007)

Assignment #1E 290G, Fall 2009

U.C. Berkeley Matt C. Kinne

[email protected] on: 9/2/09

The Software-as-a-Service (SaaS) Industry


Agenda

• Overview of the SaaS industry• Important terms within the SaaS industry• Important characteristics of the SaaS

industry• Trends of the SaaS industry• Should we enter the SaaS industry?


• Industry began ~1999-2001• Primarily based in the U.S.• SaaS as a method of software deployment

– Provider licenses an application to a customer for use as a service on demand

– Product is disabled after use or after contract expiration

– SaaS solutions incorporate web-native design structure (e.g. browser support, multitenancy)

SaaS Industry OverviewPlayers in the SaaS Industry

Source: Company Websites and WB&C SaaS Update Report


• Reasons why SaaS is implemented– The SaaS customer base are people who

• Are dissatisfied with current application solutions• Are looking to automate a manually performed task• Require an upgrade from old technology• Are tired of using out-sourcing and interested in

handling application tasks internally

SaaS Industry Term Definitions• SaaS : Software-as-a-Service

– Refers specifically to licensed distribution of applications (software) by a provider to its customers

• Software– A very broadly defined term– Typically used to describe the role of computer programs,

procedures, and documentation in a computer system– Examples of software include:

• Application software (such as word processors)• Firmware• Middleware• Operating Systems• Testware• Websites, web browsers, and other web programs• Files, information, and data

SaaS Industry Term Definitions

• ASP : Application Service Provider– A business which supplies computer-based

services to customers over a network.– ASP roles in SaaS industry

• SaaS is typically software offered via an ASP model

• Outside ASPs can act as third parties which renew, transfer, and/or distribute licenses between users and/or companies

SaaS Industry Term Definitions

• PaaS : Platform-as-a-Service– PaaS refers to application development platforms that

third parties can use to build and run their own software

– Recent result of horizontal SaaS development– Platforms allow SaaS providers to sell seats far

beyond the scope of the application(s) they offer– Proving successful for the few SaaS companies that

have thus far attempted it• Salesforce.com and AppExchange• NSBOS• Microsoft

SaaS Industry Characteristics

• Desirable characteristics– Nascent stage industry

• Competition not yet massive or firmly established• Opportunity for growth relatively untapped

– Barrier to entry is small• Technological requirements already achieved by

most major software suppliers• Small team of engineers, programmers, and

marketers can easily create and distribute a SaaS network

SaaS Industry Characteristics• Desirable characteristics

– Highly adaptable to varying markets• SaaS model has been found to fit almost any

market and segment

– High market value• Estimates (IDC & Gartner) place total SaaS market

value between $15-$20 billion by 2011

– Increasing market adoption• IDC 2007 survey of 412 midsize businesses

– 9% currently use SaaS solutions– 15% were planning to use SaaS solutions in 12 months– 17% were interested in SaaS solutions

• Small size businesses survey had similar results


• Undesirable characteristics– Poor performance in foreign markets

• Foreign/overseas sales performance poor compared to domestic distribution

• Selling overseas is expensive and requires significant investment before returns are seen

• Need for data centers within the vicinity of customer hurts foreign/overseas sales

– Remote data centers have proven effective but it is difficult to convince potential customers of their stability

• Additional cultural, regulatory, and security issues add to the expense.


• Undesirable characteristics– Long-term unpredictability

• Relatively new industry– Predictions and forecasts for SaaS markets are not yet

fully fleshed out– It will take time to establish trends and properly predict

market behavior– Short-term (year to year) analyses thus far have proven

reliable


• Undesirable characteristics– Slower growth than traditional, perpetual

software industry – More technically complex than traditional

software industry– Potentially smaller total available market

• Major customers of traditional software distributors (e.g., the U.S. government) are not likely to switch to SaaS

• Most large companies will prefer to handle applications internally

SaaS Industry Trends• SaaS companies are seeing steady growth

Source: Company Reports and RBC Capital Markets estimates

SaaS Industry Trends

IDC 2007 Survey of 412 Midsize Businesses

9%15%

17%34%

25%

Already used a SaaSsolution

Planning to use a SaaSsolution within 12 months

Interested in SaaS solutions

No interest in SaaSsolutions

No opinion

• More and more customers are adopting SaaS solutions

Should We Enter the SaaS Industry?

• In a word: “Yes.”• The SaaS industry

– Is relatively new and untapped– Is enjoying a growing market – Has massive potential for both domestic and

international growth– Requires only a minimal capital investment to get

started– Has the potential to lead to other lucrative business

opportunities (PaaS distribution, ASP, etc.)

Should We Enter the SaaS Industry?

• Some difficulties will have to be overcome– Competition is not insignificant

• Major players are involved in the industry– Salesforce.com, Netsuite, Microsoft, etc.

• Good news is that since the industry is a new one, no one company has a monopoly at this time

• The longer we wait, the more difficult it will be

– International market distribution is difficult and not frequently pursued by SaaS companies• It may be possible to get a head-start on foreign distribution,

since it is largely ignored by competition at this time

EXTRA CREDIT ASSIGNMENT

• Purpose of industry research reports– To inform readers of opportunities, trends,

characteristics and short-comings of a certain industry.

– To convey the aforementioned information in a quick, concise and easy-to-understand manner.

The question: Why do industry research reports exist and why are they relatively easy to access?

EXTRA CREDIT ASSIGNMENT

• Why don’t companies hide these reports so they can keep a competitive advantage for themselves?– Many companies do, in fact, have internal

research reports which are not made public.– Other companies, such as W.B.&Co. and RBC,

do the research and then sell the information by offering subscriptions.

– U.C. Berkeley students have access to these reports because U.C.B. subscribes to the appropriate databases which contain them.

The Software as a Service Industry

Ran Chen [email protected]

Definition of Software as a Service (SaaS)

A vendor rents and hosts software to users on a subscription basis

The user not only leases the software, but also leverages the vendor’s support and IT infrastructure

Differences between SaaS and the traditional software business model

Traditional software models

• On-premise software

• Single-tenant code

• Sales of software

• Updates in major releases (quarterly/annually)

• Updates handled by user

• Up-front revenue recognition

• Cyclical revenue streams

• Different solutions for small and large customers

• Narrow customer base

• In customers’ capital budget plan

SaaS

• On-demand software

• Multi-tenant code

• Lease of software

• Frequent updates

• Updates handled by vendor

• Revenue recognition over time

• Steady and predictable revenue streams

• Same solution for small and large customers

• Diversified customer base (vertical)

• In customers’ department operating budget

SaaS offers a number of benefits for both the vendor and the customer

Customer

• Lower initial cost

• More predictable expenses

• Reduced risk of purchase

• Quicker implementations

• Minimal internal IT support

• More frequent upgrades

• High levels of service from vendor

Vendor

• Better revenue and earnings visibility

• Lower cost of development

• Longer service life cycle

• Higher customer satisfaction

• Shorter payback period

• Reduced risk through more diversified

customer base

The SaaS market will grow at a CAGR of 25% to $19.3Billion in 2011

Source: Gartner Group

The SaaS market has already grown into a multitude of applications

Major players in the SaaS market

Source: William Blair & Company, L.L.C.

Long term prospects for SaaS are good

• SaaS is more immune to economic recessions than traditional software models, because SaaS solutions rarely fall into companies’ capital budget plan and therefore are less subject to budget cuts

• Brand names in SaaS (e.g. Salesforce.com) are becoming stronger and more recognizable by software purchasers

• The emergence of Platform as a Service (PaaS*) expands the vendor’s ecosystem and provides opportunities for revenue growth

• Today, international markets for SaaS are still largely untapped. Europe will be the growth engine for SaaS in 2-3 years and Asia in 4-5 years

• SaaS companies will be able to leverage social networking sites to expand their reach

PaaS: Application development platforms that can be used by third parties to build and run their own software . The vendor makes available its development environment to customers.

Development of the Software-as-a-Service (SaaS) Industry

John Waldeisen

Sept. 1st 2009

Homework 1

SaaS: A New Way to Deploy Software

• A revolutionary business model from previous software deployment methods

• Software product is licensed to the end user as opposed to a perpetual “bundled” one-product-fits-all scheme

• Often a focus on customization of the software to fit the uniqueness of the client– Sales force requires technical competence– Hunters and farmers

Saas vs. Software vs. ASP• SaaS (Software as a service)

– Product not only drives success, but also a complementary sales force

– Accounts for only $8.4 billion of $271 billion 2008 software market

• Software– Programmed computer applications which are

often a productive tool and sold to an end user• ASP (Application Service Provider)

– Third party extension provides the product to customers over a network

– Maintains up-to-date services, 24/7 tech support, and security for client’s customers

Industry Characteristics of SaaS• A very large, yet growing industry with plenty

of company case studies by analysts• Apparently not immune from recent economic

downturn, contrast to predicted immunity by Ernest, et al.– 2008 performance similar to NASDAQ

• Of 250 companies profiled by Breza, et al., only 24 were removed due to acquisitions &, IPOs and only one closed.– Addition of over 100 new companies in 2009

• Lederman expects hold on SaaS IPOs until market conditions improve, followed by flood of offerings

Attractions of SaaS• Lower up-front costs for infrastructure and

reduced investment risk for client (ASP)• Quick adoption times• Clients prefer outsourcing of IT efforts, more

focus on their own core business functions• Diversified customer base (revenue stability)• SaaS salesforces target marketing firms of

clients, not CIOs or large executives– Less prone to budget cuts during economic

hardships by “flying under the radar”• Annoyance of renewal fees proven not to be

a hindrance of market growth

Industry Predictions

• Analysts widely believe that the current software service providing industry is heading towards the “On Demand” model

• Industry leader Microsoft has initiated a recurring commission structure for its partners that sell hosted services

• Multi-tenant architecture enables economies of scale, lower maintenance costs, and reduced development time

MBA/ENG290 Assignment 1: Overview of SaaS

Becky Rutherford

9/2/2009

Industry Overview

Strong growth in industry up until 2008 Reports seemed optimistic about future

performance of SaaS companies despite the current downturn. IDC predicts 32% compound annual growth rate,

$14.8B by 2011 Large Market, but fragmented with many

companies operating in a specific niche Customers attracted to SaaS are generally

unhappy with current solutions or wish to automate their processes


SaaS: Vendor renting and hosting software to users on a subscription basisImproved Customer ServiceEnable Activities Through User-InterfaceDifferent Sized Companies Can Use the

Same Software

Differences from other Services

Application Service Providers: Host the Customer’s Software

Business Process Outsources: Minimal Customer Involvement

Software Sold on Subscription: Customers Operate In-House

Long Term Trends

SaaS is an attractive option compared to traditional software development More frequent upgrades Less reliance on in-house IT dept Better performance/analytic capabilities

Issues Internet/Cloud performance Security

Definitely an industry to watch, predicted to have large growth when economy recovers

Amr EL MeleegySeptember 01, 2009

International Trade and Competition in Technology

Software as a ServiceIndustry Review

AgendaSaaS a unique value propositionFragmented SaaS market offset by a larger

customer baseHigh barriers to entry and difficult

economies of scale balanced by low operational cost

SaaS a growing IPO and M&A opportunitySaaS an attractive industry

SaaS: a unique value propositionSaaS is the act of renting of software to users on a subscription

basisSaaS revenues are constant and recognized as the service is

consumed vs. upfront revenues for the traditional license modelSaaS costs fall under operational costs rather than capital

expenditure for traditional License Software making them more immune to economic downturns

SaaS costs are more predictable as they don’t involve the complex customization and implementation costs inherent in the license model

The SaaS model allows for lower ROI and TCO, traditional success metrics for software projects

SaaS is a form of outsourcing as it allows companies to focus on their core business while SaaS vendors run their software operations

Fragmented SaaS market offset by a larger customer baseMore than 27 publicly listed SaaS companies incl.

Salesforce.com, NetSuite, Constant Contact,…etc vs 4 big players in the traditional license based model (IBM, SAP, Oracle, Microsoft)

Incumbent license based leaders (IBM, SAP, Oracle) have all unsuccessfully ventured into the SaaS industry

SaaS Market Consolidation is inevitable where horizontal companies will focus on developing vertical expertise

Due to the low upfront capital investments required, SaaS has expanded the software market to include to SMBs, a sector left out by the traditional Software License Vendors

Gartner estimates marketsize at $19B by 2011, and market growth at CAGR 25%

High barriers to entry and difficult economies of scale balanced by low operational cost

SaaS is capital intensive requiring large upfront capital investments of software development and hardware purchases (Servers)

For most SaaS vendors adding customers involves adding additional servers making economies of scale more difficult to achieve

Operating costs for SaaS vendors tend to be lower than License based vendors as the later maintains several software versions over time

SaaS: a growing IPO and M&A opportunityCombined Market Cap of SaaS vendors

increased from $2 Billion in 2000 to $22 Billion in 2008 (RBC Report)

SaaS exits include 7 IPOs and 3 Acquisitions bringing total exits to 27, up from 8 in 200

The infancy of the SaaS industry makes it stock valuation more vulnerable to economic trends, i.e. steep inclines and declines

SaaS companies continue to be valued at a premium compared to traditional license based ones

SaaS: an attractive industrySaaS value proposition makes it the

inevitable long term trend of the software industry

The expanding customer base of SaaS creates plenty of opportunities for new SaaS vertical entrants

The capital intensive nature of the SaaS industry creates a competitive advantage for those with sufficient investments to increase their customer base and reach economies of scale

Existing SaaS players with horizontal focus will look to acquire vertical players as the industry consolidates creating more exit opportunities for SaaS startups

SOFTWARE AS A SERVICE (SAAS)

Aaron Kaluszka

ENG 290G

1 Sept 2009

What is SaaS?

Software as a Service Software licensed as needed

(subscription) Applications developed for standard

tasks – meant to work “out of the box” Accessed over the web Computing as a commodity Outsourcing of IT

Approaching SaaS Traditional software

Must be loaded onto each machine and updated separately

Each machine must be licensed for useManaged on-siteCustom upgrades

Application Service Provider (ASP)Provides computer-based services over a networkRemoves need for on-site support and maintenanceExperience and dedication of ASP provides a

guaranteed level of servicePredictable cost

Benefits of SaaS Lower cost for businesses to obtain software and

services – licensed as needed Uses web technologies – can be accessed from

anywhere Centralized management – no need to update

every machine to use it Faster release of new features Less development overhead Reduced investment risk Takes advantage of economies of scale Supports best practices

Business of SaaS Most traditional software is moving

towards SaaS Lower operating budget More diversified customer base Higher success rate – higher

satisfaction/renewal Quicker return on investment Consumer web influences SaaS

interface

Saas Market

Larger total available market than traditional software

Still a small fraction of total software market Growing international market Increasing market investment More often than not, software markets do

not contract during recessions SaaS companies can better weather

economic downturns than traditional counterparts

SaaS Concerns

SaaS is relatively new, so long term trends are uncertain

SaaS valuation is unclear New entrants will make market more

competitive Harder to catch up to established Platform as

a Service (PaaS) Consolidation creating larger SaaS providers Customers (especially international) must be

convinced of availability and support

Entering the SaaS Industry New SaaS companies work effectively by

starting small and growing with their clients rather than looking for large clients up-front

Market is fragmented, offering low barriers to entry

Success may depend on specific application Movement into adjacent markets possible SaaS companies now target higher up in the

executive chain

Summary

SaaS gives the benefits of software while removing overhead and uncertainty

Business operations are moving in the direction of SaaS

SaaS industry is still young and open to much growth


Alex Teran, Team 11Chemical Engineering

What is SaaS?

• Vendors host and rent software on subscription basis– One version of code used by all customers– No customization– Inherently web-native

Differs from other models

– Software companies sells software, hosted in-house by customers

– Application Service Providers (ASP) host other companies software

– Business process outsourcers take over entire process from customer

Benefits to Users

• Effectively outsources IT – Don’t have to manage software tech support in-

house• Effortless upgrades

– Handled by vendor, not user• Lower initial cost

– Subscription less expensive than license for software

Industry Outlook

• Strong growth over last several year expected for near future

• Many business processes are good candidates to utilize SaaS

• Untapped international markets

SaaS Industry

David Zats

What is SaaS?

• Software as a Service (SaaS):– Companies host software that clients can

purchase– Instead of purchasing a lifetime license (as for

traditional software), subscription pricing is used

Why would clients switch from traditional software?

• Lower upfront cost– Do not have to purchase lifetime license– Do not need to buy associated infrastructure– Quicker return on investment

• Ability to reduce IT expenditures• Higher level of data security than can be

achieved on site

Business Model Advantages

• Lower development cost than traditional software– Do not have to maintain multiple versions of code– Can focus on developing new features and target services most

commonly used by clients• More predictable revenue stream

– Traditional software companies have to “re-build” customer base with each product update and updates happen infrequently

– Successful SaaS companies have consistency because of high rates of subscription renewal (90%)

– As product matures, more clients willing to pay for year-long subscriptions, further increasing consistency

Market Opportunities

• Current penetration is low– 15% cited for Talent Management services– Very little foreign development/deployment

• Potential clients highly interested in SaaS– Recent poll shows 30% of those surveyed are

interested in using SaaS• Initial concerns are easing

– Security becoming less of an issue (11% of respondents vs. 16% earlier)

Example Area: Talent Management

• Services that aid clients in recruiting employees and measuring performance

• Robust to economic downturn– Subscription costs unlikely to be targeted by CFOs as a

cost cutting measure– Even during periods of reducing hiring, must maintain

info on perspective/current employees– Aging workforce makes talent management critical

• Example companies– Successfactors and Taleo

Concerns

• Barrier to Entry– Does not seem very high– May become highly competitive

• Customer Retention– Extremely important due to subscription model

• Client unease– Events such as a major security leak could reignite worries

• Lack of international diversification– Foreign countries have yet to embrace SaaS– U.S. economy may suffer from prolonged weakness

References

• SaaS and Cloud Computing: Talent Management category should weather the storm. Deutsche Bank. July 2008.

• Software-as-a-Service Update. William Blair & Company. April 2008.

• RBC/ChangeWave Q2/08 Global Disruptive Tech Survey: IT Spending Remains Soft – But May Be Stabilizing. RBC Capital Markets. July 2008

Introduction to SaaS

Yuichiro [email protected] 20740923


Executive Summary

• SaaS is a business model defined as “provider-site” installed software service offered through network under subscription fee scheme

ASP, as well as “on demand” or broader term SaaS is used for any network based software offering service

• Software as a service maintains differentiation and power among the value chain in the current setting as other players are commoditized

• Players tends to specialize in one business area, such as HR management

• Industry as a whole seems to have potential in growth, however, individual players may face competition

Advantages of the business model merit both customers and providers over traditional software services

Access to SMBs enable market potential of around 30 billion USD, with large room for upsides and growth

There are some future risks involved with the entry to the market, including low barrier to entry and resulting competition

Basic Definition of Saas Biz Model

Provider Site

System Offered Through Network

Customer Site

System Installati

on

Subscription Fee

Scheme

Transaction Fee

Scheme

SaaS: Software

as a Service

Variations and Vicinity Businesses

Provider Site

System Offered Through Network

Customer Site

System Installati

on

Subscription Fee

Scheme

Transaction Fee

Scheme

SaaS:

ASP*s= Broader Term

SaaS= On Demand

Variations in SaaS• Using SaaS internally to

serve customers• Manage customer

software on own server• Platform as a serivice,

enabling other players to do SaaS

Hosting

Software Licensing

Customers

Interface Technolo

gy Provider

•Network access software interface provider (web browsers)

Value Chain in SaaS Business

Network Infrastruc

ture Provider

Distributor*

•Value add resellers

•Internet access infrastructure providers (ISPs)

PaaS*

•SaaS platform provider

Saas

* Some SaaS players may do this process in-house

Valu

e A

dd

? Mid? Low LowHigh?

Key Players

Characteristics of SaaS Biz Model

Value To Customers Value To Service ProvidersA

dvanta

ges

Dis

advanta

ges

•Small upfront investment•Ease of change in use: modules & # of users

•Affordable for SMBs*•Minimum maintenance

•Clearer and stable revenue planning

•Efficient access to SMBs* and resulting customer diversification

•Scale merit in R&D, customer maintenance

•Ease of update of software•Ease of up sell / cross sell•Off the radar in IT investment cuts

•Security, handing over data

•Dependency on network stability

•Limited customization•More expensive, if in long term

•Un-established channel strategies

•Software capability bounded by interface (browser) capabilities

*Small and medium businesses

Market Potential

Company Type by #

of Employees

# of Firms Assumed Average Revenue

Estimated Market

Potential

<500 6,000,000 $1,000 $6 Bil

500-2500 14,000 $500,000 $ 7 Bil

2500 + 3,600 $4,000,000 $ 14 Bil

Estimated Total Market Potential of $ 27 Billion

Upside and Market GrowthSaas Adaptation by

Company Size (2007)Market

Forecasts

Risks of Entry

Internal

•Need to build scale due to small ARPU, but M&A will be costly to merge / maintain different systems, and best practices in channel use is not certain

•Migration from traditional business model is challenging, due to misalignment, cannibalization issues, for such players

Environment Competition

•Dependence on the development of 3rd party technology such as network and UI (browser)

•Localization and customization required in overseas market entry

•Significant visible data security lapse will destroy the credibility of the industry

•Low barrier to entry inviting competition, including internet giants and other software players

Software as a Service (SAAS)

Hannah Murnen

[email protected]

What is Software as a Service (SAAS)?

• The use of a software is provided to the user company based on a subscription or rental based agreement.– Can be hosted on a multi-tenant or single tenant

platform, usually at the server company

– Example: Dealertrack is a SAAS company that provides the software to keep track of the sales and inventory of a dealership. Each dealership pays a monthly subscription fee to continue to use the software

How is that different from regular software or ASP?

• Traditional software – A user pays a large fee to buy the software in perpetuity – The software is hosted at the user company and they are

responsible for most IT

Example: Oracle E-Business Suite

• ASP or Application Service Provider– The ASP hosts a user’s software in a data center– The ASP does not maintain the application and generally

operates in a single tenant manner

Example: Digital Network Systems provides virtual private network computing and application hosting

Is SAAS good for a customer?

Upsides• Lower upfront cost• Customer can focus

on its own strengths and not have to put resources into IT

• Less maintenance issues– Not responsible for

upgrades

Downsides• Less customization• Possibility for higher

total cost

What about for the SAAS company itself?

Upsides• More even revenue

stream as opposed to an upfront payment for traditional software

• Potential for relatively low cost scalability (simply add another tenant onto the platform)

• Could last longer than traditional software companies (won’t saturate the market)

• Generally low R&D budget

Downsides• Slower growth• Complicated business

model• Have to continually keep

customer happy as opposed to just wanting to sell them a one time deal

Is SAAS here to stay?

• SAAS has a huge untapped market potential, both nationally and especially internationally

• Platform SAAS companies are the most promising in my opinion as they have the opportunity to grow horizontally with minimal resource expenditures

• As the market becomes more saturated with SAAS companies, the newer ones will have to target much smaller vertical markets. These companies have a much smaller growth potential.

Conclusions

• SAAS is an rapidly developing field• It holds unique promises and difficulties

when compared to more traditional software companies

• The field is open for creative new competitors. However, be wary of the potential market size of niche application companies as the more mainstream software application needs are filled

Introduction to Software as a Service (SaaS)

MBA 290G Hiroshi ShonoSID: 20394068

The Trend

• “SaaS Spending Plans Improve from 08/Q1.” 30% of respondents indicate “Green Light” on SaaS spending; up from 23% in the first quarter, suggesting interest may be increasing for this service-delivery method.

What is Saas?

• Definition:– Business model in which a vendor hosts software to users on a

subscription basis.– Software supports users’ activities as a part of regular operation

through a user interface (e.g. Internet Explorer)– Multitenancy improves various efficiencies

• How is it different from…– Software: SaaS applications are operated on the SaaS provider

premises– ASP: Unlike ASPs that run custom programs for each customer,

SaaS runs essentially standard software of all customers

Why SaaS?

Customer Benefits• Lower up-front costs and reduced investment risk

– Companies do not have make upfront investments to offer new services hence lowering business risks

• Outsourcing of IT– Companies can avoid costly maintenance of their IT systems

• Ease of upgrading– Companies can rely on their SaaS providers for system upgrades and

improvements– Cost efficient upgrades are possible due to multitenancy

Why SaaS?

Vendor Benefits• Better revenue and earnings

visibility• Lower cost of development• Longer corporate life

Shareholder Benefits• Less volatile revenue and

earnings• Longer public life• Larger target markets

Why SaaS?

Customer disadvantages• Potential higher total

license cost• Loss of control• Potential performance

issues• Less customization

Vendor disadvantages• Slower growth• A more complicated

business• Potentially small total

available market

Shareholder disadvantages• High valuation• SaaS investments are

correlated

Business Prospects

• Market– Forecasts

• $8.4 billion in 2008 (BRC)*• $14.8 billion by 2011, CAGR 32% (IDC)• $19.3 billion by 2011, CAGR 25% (Gartner)

– Potentially larger than traditional software market• Does not discriminate small and large enterprises

• International market– Remains untapped

• Several years behind US market• Salesforce.com 27% vs Enterprise vendors 50%• High operation costs, Need for localization, Slow market growth

* total software market: $271 billion

Why Now?

• Changes in the environment– Proliferation of broadband -> better service level– Growth of portable internet devices (e.g. mobile

phones)

• Will it continue? YES!– Low ASPs– Early stage of the market– Longer-term secular trends (decreasing tenure of

workers, aging workforce, globalization)

Industry analysisIntensity of rivalry High • (-) Many existing providers

• (-) Many new entrants

Threat of entry High • (-) Barrier to entry is relatively low• (+) Large enterprise vendors maybe

reluctant to enter the market (technical, financial reasons)

Threat of substitute product

Low • (+) Not foreseen

Bargaining power of the buyer

Low • (-) There are infinite number of potential customers

Bargaining power of the supplier

Medium • (+) Number of hardware suppliers are limited but enough to ensure healthy competition

Key Success Factor

• Experience in hosting• High renewal rates

– Customer size (the larger the better)– Age of customer base (the older the better)– Product differentiation

• Effective sales force

End

INTRODUCTION TO THE SAAS INDUSTRY

September 2, 2009Jerry Hong

Overview of SaaS

SaaS = Software as a Service

A model of software deployment where users can choose to rent vendors and have their software hosted on a subscription basis

The SaaS model of renting and hosting allows vendors to differentiate through technology innovation and customer service.

What Can SaaS Do For Users?On demand business model where users

can get environments and software setup

quickly

Support + maintenan

ce

Terminate contract at any time

No need to buy

hardware!

Examples of SaaS Providers

Amazon Web Services

Virtual Private Clouds:• Scalable• Isolated network access• Reliable

Pay for what you use. No upfront costs• No need to pay for downtime

Sample pricing:• $0.05 per VPN Connection-hour• $0.10 per GB of VPN Data Transfer (In)• $0.17 per GB of VPN Data Transfer (Out) – First 10 TB per Month• $0.13 per GB of VPN Data Transfer (Out) – Next 40 TB per Month• $0.11 per GB of VPN Data Transfer (Out) – Next 100 TB per Month• $0.10 per GB of VPN Data Transfer (Out) – Over 150 TB per Month

Example of Amazon EC2 Usage

Pretend we are in a startup that focuses on resequencing DNA genome.

Dealing with millions of reads of length 60 long

Many algorithms that exist these days are at least O(n^2) if not worse.

Unless we can find a better algorithm, re-sequencing parts of the genome can easily take days if not

months and years

Parallelization to the rescue. If we can get 1,000 computers crunching data, we can reduce the time by

1000X.

Example of Amazon EC2 Usage (Continued)

It takes Amazon less than a few seconds to get these computers up at a fraction of the cost.

High Performance. Delivered.

SaaS allows this to be done within seconds. We just need to order what we need and pay on the go.

Getting 1000 computers running and talking to each other will take some time and definitely a lot of money.

SaaS vs. ASP

ASP = Application Service Providers

• Transfer customer’s application data to some data center

• One ASP hosts many different client’s data

• Consequence: Customers still need to have in-house experts to make sure everything runs smoothly

SaaS vs. Traditional Software Model

•Lower Initial Cost

•Reduced Risks

•Quick Implementations

•More Frequent Upgrades

•Security

Customer Benefits

•Better Revenue and Earnings Visibility

•Lower Cost of Development

•Longer Corporate Life

Vendor Benefits

Disadvantages of SaaS

Loss of Control

Possible Higher Total License

Costs

Potential Performance

Issues

Less Customization

Revenue Deferred and Most Costs Recognized

Upfront

Prospects of SaaS

The concept of SaaS is rather new

• In 2008, only $8.4 billion of the Software Industry’s $271 billion total spend is for On Demand applications.

SaaS industry is sub-cyclical and better

immune to recessions like we have now

• Lower ASP/Operating budget

• More diversified customer base

• Software Success• Quicker ROI

Prospects of SaaS (Continued)

Gartner Group

expects the SaaS

market to be $19.3 billion by

2011

In 2007, of the 611 small business that were polled:

1.3% already used a SaaS

solution

5.1% were planning to use a SaaS

solution within the next 12 months

16.2% were interested

in SaaS solutions

Conclusion: A lot of

potential for growth!

Appendix

Software-as-a-Service Update, Industry Report, April 11, 2008

Saas and Cloud Computing, Deutsche Bank, July 7, 2008

On Demand Evolution, Volume II, RBC Capital Markets, August 2008

http://en.wikipedia.org/wiki/Software_as_a_service

http://searchcio.techtarget.com/tip/0,289483,sid182_gci1216679,00.html





SOFTWARE AS A SERVICE (SAAS): CHALLENGES AND TRENDS

Iheb Triki 09/01/2009

SOFTWARE AS A SERVICE?

SaaS =

renting and holding a software to users on a

subscription basis

Business Process Outsourcers = Take over the entire business process from the customer.

• ASP (Application Service Providers)= Hold customers’ software

• Software = Sold as a subscription and operated in-house by the customer

SAAS VS TRADITIONAL SOFTWARE MODEL: PROS

Costumer’s wise : Lower initial costs:

renting costs Less than buying the software

Minimal IT support: managed by SaaS companies

More frequent upgrades More relevant product

enhancement and service: due to the increasing competition in SaaS market

Vendor’s wise Better revenue and

earning visibility: By selling subscriptions and service

Lower development cost: the same product is developped in one version and one infrastructure.

Longer corporate life: customer who want to use the same program has to continue paying for it.

EXAMPLES OF SAAS PUBLIC COMPANIES:

MARKET DESIRABILITY:

A slow but stable increase of the number of the companies willing to purchase SaaS.

Number of the companies having no plane to purchase SaaS or preferring the classic models is high (around 70%)

REVENUE AND GROWTH:

OPERATING EXPENSES

SAAS FOR INTERNATIONAL MARKET:

The highest international revenue does not exceed 30%

Reasons: Proximity issues. Most SaaS companies are US based where growth

opportunities are still available. New technology that hasn’t yet matured domestically to

be exported in a stable way.

TRENDS AND ISSUES:

Short term trends: The US market is still offering a great growth opportunities

Medium to long term trends: SaaS is in its infancy in the US and still hasn’t been exported as a mature service would = High growth market

CONCLUSIONS

“we believe SaaS vendors will represent the primary source of attractive new investment ideas over the next several years, as has been the case over the past several years” – William Blair & Co 04/08 report

Market growth and the simplicity of SaaS make it a desirable new industry that could be a platform for new ones or for the conversion of the classic software products.

SaaS: Software as a Service

Tania DuttaE-mail: [email protected]

Key Features -Single, integrated code base delivered as a service to multiple customers for use as a service on demand.

Low-cost way for businesses to obtain rights to use software as needed versus licensing all devices with all applications.

-Benefits of commercially licensed use without potential high initial cost of equipping each device with all applications.

Centralized (updating is also centralized)- Marginal cost of updates is zero.

Providers price applications on a per user basis.

The revenues are lower initially than traditional software license fee but are recurring.

Economies of scale.

Software SaaS ASP

Entire package of different applications bundled together and licensed to

customer.

-Single, integrated code base delivered as a service to multiple customers for use as a service on demand.

License a commercial software application or assume another company’s license as its own.

Application deployment

Software developed by vendor as a package.

Software is developed by the SaaS vendor.

ASPs deploy commercial applications from other companies: cost advantage low and customization capabilities limited.

Software SaaS ASP

Time Immediate availability of software package upon payment.

Immediate availability for all paid customers on demand within specific time limits.

Lengthy cycle to install and customize a commercial application built by some other company

Upgrades and enhancements

Expensive Inexpensive and immediate.

Expensive and time consuming

IT Support Variable (mostly exclusive)

Inclusive Exclusive

Software SaaS ASP

Scalability(economic growth)

Specific licenses for specific markets might not allow expansion to other markets.

Applications are designed from the ground up to be used in a multi-tenant environment.

Each customer application maintained within ASP environment. Difficult to scale it up.

Market Approach

Initial sales important.

Long-term relationship with customer required for increasing revenues.

Needs both approaches and trained personnel for providing customized services.

• Market Characteristics• On-demand market will grow 32% compound annual rate to $14.8 billion by

2011.)• Use doubled since 2004 for small and medium businesses. Number of

subscriptions increased over the individual licenses.• More than 70% of the market in United States.• Hunter-farmer approach: Hunters create leads for initial sale while farmers

become liaison to customers and determine future sell and cross-sell opportunities.

• Long-term sales strategy: relationship with customer extremely important esp. after sales.

• Start with Mid-grade sales people and move to high grade sales personnel• Retention of experienced sales team important, at the same time cut down 5-

10% of staff required from time to time.

Potential problems

• Lack of expansion in international markets (technical challenges and viral marketing approaches not adopted).

• Horizontal versus vertical approach: Horizontal approach more successful. Vertical approaches of relying on few specialized products could result in market failure.

• More companies would enter the market due to low entry barriers. Increased competition could result in established companies gaining a larger market share.e.g Taleo v/s Oracle.

• SaaS is a low-cost method to provide required registered services to customers. Services can be scaled up rapidly.

• Rapid expansion over the last five years indicates that it has a growing market share.

• Competition from firms in other countries could result in decreased market share of existing firms. Need to find methods of expanding sales at an international level.

• Successful implementation in developing countries would depend on deployment of appropriate infrastructure.

• To expand customer base in other countries existing firms could establish collaborations with companies in other countries and develop the software in other languages.

Conclusions

• The reports evaluate innovative cost-effective strategies for providing software to customers as subscription as compared to the traditional licensed software model.

• Educate about the opportunities awaiting companies who are looking to either enter the field or existing companies looking to find innovative ways to lower costs. Also educate about problems that could arise and how entering or existing firms should structure their market approaches.

• Allow the growing consumer markets in developing countries to take advantage of these approaches and adapt services that would address the needs of the individual country.

• Free availability of these reports would also allow adoption of this idea in different fields (besides software) to provide specific services or products.

Why these reports exist and are free?

SaaS Attractiveness

General Overview1. Industry characteristics 2. Defining differences: SaaS, Software, and ASP3. Is this a long term trend, what are the issues, is this a desirable new industry

to enter or will it be dominated by others?

A quick discussion: Free Investment Bank Reports?

James Bender – MBA 290G.1


• Multiple players• Relatively low barriers to entry• Each customer is accessible

(SMB, long tail, ect)• Ease of scale• Multi-tenant capable• Automation• Increased ability to push

upgrades

• Generally attracted to cost savings of SaaS

• Accept Saas as mainstream• Willing to migrate in

challenging economic times• Enjoy greater accounting

efficiencies (opex vs capex)• Low switching costs• Increased ability to push

upgrades• Ease of implementation• Enjoy increased

mobility/flexibility

Providers/Vendors Customers


SaaS Defined

SaaS = Software as a Service: network-based access to and management of software – “On Demand”RBC Claims: On Demand applications are hosted, serviced and supported by the vendor/provider and sold in a subscription model. Many are delivered on a pure multitenant platform in a one-to-many format over the Internet via a browser while others offer ahybrid or hosted model.

• This allows customers to remotely access company software via the web which leads to efficiency gains• Pricing models are generally on a per-user basis (rather than per machine), with recurring fees, and more

predictable• Centralized feature updating with greater frequency, usability, and functionality

Traditional Software: per-machine software seats – “On Premise”• Installed on machines located at the client site• Upgrades are infrequent, require the user to patch, and disallow “quick fixes” or production upgrades• Pricing model is inefficient: purchase price plus maintenance fee – all of which is cyclical (increasing expenses)• Lacks physical and solution mobility• Usually requires a heavy capital expenditure for data centers, IT support, ect


ASP = Application Service Provider: the network access to a single program or application• “On Demand” but on a lesser scale in that only a single application or company vertical accesses the program (CRM)• answers complexity and cost scaling issues for SMBs and small application requirements • think of this as SaaS lite in that an application would be a component of a suite of software products

Market Disruption? Or cost savings chasing?

Savings Chasing?The rapid rise of companies like SalesForce.com, Concur, and Omniture signals that Saas is a viable business decision. The consumer benefits are real and absolute. A popular place to enjoy efficiency gains and cost savings, SaaS is attractive to both large businesses and small businesses alike. In essence, SaaS enables the opportunity for both the vendor and customer to do more with less, be more agile, and take advantage of scale.Disruption?One fact cannot be avoided: Microsoft, the world’s largest and most successful software company, is paying attention and offering a solution. This is true market disruption, Microsoft knows it, and is adapting to the changing landscape.


The SaaS industry will flourish in that is creates value for the consumer. First movers advantage will encourage contract stickiness and future right to play. However, solution offerings must be good enough for full deployment. Barriers to entry are relatively low which increases competition – a good thing for the end user.

Why are Investment Banking Analyst Reports Free?


Analyst reports are important for several reasons:• knowledge dissemination, key insight• stickiness• attractiveness• future opportunity definition, awareness• industry partnerships, networking, key relationship mapping

Publishing Investment Banking Analyst reports signals that I-banks are knowledgeable about the industry• Banks are the brokers of all financial deals: equity, M&A, debt• Deals are worth Billions of dollars each year (RBC claims SaaS deals = $271B in ‘08)• Companies must use banks to access capital for growth, remain competitive• Banks collect (massive) fees for any financial transaction

Summary: it behooves a bank to signal intelligence and expertise with a free analyst report in order to generate large fees -- basic bank model.

SaaS

Piradee Tatiyakavee

What is SaaS?

Software as a service is a kind of software deployment which a provider licenses an application to customers for sue as a service on demand. Instead of one-time purchase of the software, SaaS’s customers usually have to sign a service contract with SaaS providers for a year or more.

The architecture could be either Multitenant model which customers share the same resources or Single-tenant model.

There are an increasing number of SaaS players everyday. Key players includes Salesforce.Com, Netsuite, Successfactors, Kenexa, etc.

What is the difference between SaaS and Traditional Software?

Nature of products:While traditional software company develop

and sell software to customers, Saas rent and host its software to users on a subscription basis.

To customers:SaaS offers lower initial costs, more

predictable expenses, quick implementation and IT support.

Traditional software offers better internal control, more customization of products, and may be lower total license cost.

To vendors (SaaS companies):SaaS offers a better revenue model, lower

development cost and longer corporate life.Traditional software offers faster growth, and

a more simple business model (just develop and sell).

To investors:SaaS offers more stable stream of revenues,

potentially longer public life and larger target markets.

Traditional software offers less premium, but more stable valuation.

SaaS industry Characteristics

The size of SaaS market is believed to be larger than one of traditional software. The size and shape of its target customers are unlimited. SaaS companies could serve both large and small customers at the same time and there are thousands types of service that they could provide and differentiate.

While many SaaS companies outperform traditional software company in the stock market, there are still high fluctuations of their stock values.

Even in an economic downturn, many SaaS companies received lower impact than expected such as a talent management group. This is due to the fact that some SaaS companies has such a diversified customer bases which allow them to have lower risks. Also, some kinds of services are still in need even in an economic downturn.

Current Trends

The SaaS market is growing so fast with 2 digits growth rate.

Types of services in this industry are increasing and expanding.

More and more traditional software firms are moving forward to adopt SaaS as their extension lines or transform their companies to be so.

While US market still have a room for growth, international markets can also be a highly potential markets in the future.

Current issues

It’s difficult for traditional software companies to transform themselves to SaaS due to many factors including…The change of sales and distribution

methods; SaaS requires sale force for direct sales.

The change of revenue recognition; SaaS recognizes revenue overtime instead of up front. Switching to SaaS, some companies can see a slower growth rate of their revenue.

The change of software codes and the ways of work; To serve customer remotely and promptly, a company has to modify the code and its working process.

Overseas markets and development is being held back.Most of SaaS companies are based in US.

They believe that there are still a room to grow in their home country; therefore, there is no need to be hurry to develop the market internationally.

Also, selling SaaS overseas is expensive. It requires localization and a huge amount of resources to invest in and maybe a lot of marketing expenditure to develop the markets.

Points for new entries

Though there are already numbers of players in the industry, there are still rooms for new entries. As broad horizontal areas of service are already covered by the existing companies, a new player needs to have a narrower target customers, serving a niche market to own a group of customers.

Since most SaaS companies are correlated, these companies has such a strong power in the industry in terms of customer’s network, financial resources to support one another and negotiation power over suppliers and buyers. Thus, a small new player who targets the same segment as them may faces a big trouble.

Thank you for the assignment

Software as a Service Industry

MBA/ENG 290GHeather Houston, MBA 2010

[email protected]

Agenda

• SaaS Overview• Players & Products• Value Proposition• Industry Characteristics• Future of the Industry• SWOT

What is SaaS?

Source: 1) William Blair & Co Report, “Software as a Service: An Update on the Evolution of Software as a Service,” April 11, 2008, p. 4.

• SaaS = Software as a Service– AKA “On Demand”, “Cloud Computing”

• Definition:– A vendor renting and hosting software to users on

a subscription basis1

• Related to:– Software: more general term covering any form of

written programs or procedures or rules for computers

– ASP: a business that provides computer-based services to customers over a network.

Public SaaS Companies

Source: William Blair & Co Report, “Software as a Service: An Update on the Evolution of Software as a Service,” April 11, 2008, p. 4.

Types of SaaS Offerings

Source: William Blair & Co Report, “Software as a Service: An Update on the Evolution of Software as a Service,” April 11, 2008, p. 5

• Development tools• Marketing automation• Content or document management• Contact center• Financial applications• Sales automation• Payroll• Conferencing applications• Messaging applications

SaaS Major Categories

Source: Faulkner Information Services, “Software-as-a-Service Market Trends” by Kathi Vosevich & James G. Barr, 2009.

• Company type:– "Pure play" providers, like Salesforce.com and

WebEx, whose principal business is SaaS– Mainstream software vendors, like IBM, Microsoft,

Oracle, and SAP, offering SaaS versions of products, or enable development of SaaS apps

• Product type:– Collaboration/Communication– Planning (ERP)– Customer Relationship Management (CRM) – Supply Chain Management (SCM)

SaaS Adoption

Source: IBM Presentation, “Upcoming market trend: software as a service,” 2007, http://www.europeansoftware.org/pdf/052907/Software_Service_Melinda_Matthews_IBM.pdf

Customer Value Proposition

Source: William Blair & Co Report, “Software as a Service: An Update on the Evolution of Software as a Service,” April 11, 2008, pp. 3, 27; Faulkner Information Services, “Software-as-a-Service Market Trends” by Kathi Vosevich & James G. Barr, 2009.

• Low investment costs / faster ROI• Outsourced IT• Upgrades easy• Costs more predictable• Less risk• Implementation quicker• Mobility

Seller Value Proposition

Source: William Blair & Co Report, “Software as a Service: An Update on the Evolution of Software as a Service,” April 11, 2008, p. 27.

• Better revenue & earnings visibility– Subscriptions vs. perpetual licenses

• Lower development costs– Common architecture allows SaaS companies to

spend 5-10% of revenue on R&D, well below the 10-22% at traditional software companies

• Longer corporate life– Continued interaction with customer extends life of

company

• Larger target markets

Industry Characteristics

• Projected high-growth• Large market potential• Fragmented market with many players• Frequent acquisitions in industry• Lack of standardization:

– Different revenue models– Different distribution channels– Different technology

SaaS Industry Still Developing

Source: RBC Research Report, "On Demand Evolution, Insights and Best Practices at Leading On Demand (SaaS) Providers,” August 2008, p. 5.

Large Market Potential

Source: RBC Research Report, "On Demand Evolution, Insights and Best Practices at Leading On Demand (SaaS) Providers,” August 2008, p. 11.

Large

(n=3,617)

Medium

(n=13,860)

Small

(n=5,966,069)

Employees

>2,499

500-2,499

<500

Market Size

$14.5B

$6.9B

$29B

Total Market Size Estimate at $50B

Uncertain Market Potential

• RBC = $50B• Gartner Group: $19.3B• International Data Corporation (IDC):$14.8B

Source: RBC Research Report, "On Demand Evolution, Insights and Best Practices at Leading On Demand (SaaS) Providers,” August 2008, p. 11.; William Blair & Co Report, “Software as a Service: An Update on the Evolution of Software as a Service,” April 11, 2008, p. 3.

Industry Outlook

Source: Deutsche Bank Report, “SaaS and Cloud Computing,” July 7, 2008, p. 2.

• May be protected from cyclical economic effects compared to software industry because of:– Lower ASP/Operating budget– More diversified customer base– Software Success– Quicker ROI

SaaS Industry SWOT

Strengths:• Adds value to customers (cost savings and efficiency)• Excitement of new technology• Less cyclical industry

Weaknesses:• Fragmented market• Lack of standardization• Security & control concerns may limit adoption

Opportunities:• Large market potential• High-growth projected• Expand market to smaller companies

Threats:• Market potential uncertain• Big players starting to enter the market• Recession

Thank You!

Appendix: Sources• Deutsche Bank Report, “SaaS and Cloud Computing,” July 7,

2008• RBC Research Report, "On Demand Evolution, Insights and

Best Practices at Leading On Demand (SaaS) Providers,” August 2008

• William Blair & Co Report, “Software as a Service: An Update on the Evolution of Software as a Service,” April 11, 2008

• Faulkner Information Services, “Software-as-a-Service Market Trends” by Kathi Vosevich & James G. Barr, 2009

• IBM Presentation, “Upcoming market trend: software as a service,” 2007, http://www.europeansoftware.org/pdf/052907/Software_Service_Melinda_Matthews_IBM.pdf

Software as a ServiceIndustry1

September 1, 2009

Allen [email protected]

1This presentation is based on industry research reports from Deutsche Bank, William Blair & Company, L.L.C., and RBC Capital Markets.


Outline

– What is Saas?– Industry Overview and Trends– Comparison to the Software Industry – Comparison to Traditional Software Vendors– Industry Analysis using 5 Forces– Valuing Saas Vendors– Selected Saas Companies

251

What is Saas?

– “. . . a vendor renting and hosting software to users on a subscription basis” (William Blair & Company, L.L.C, 2008)

– But concept is still evolving.

252

Industry Overview and Trends

• Saas still in early stages of adoption – International Data Corporation estimates on-demand will reach $14.8 billion by 2011 at a 32% CAGR. (William Blair)

• Growth opportunities still exist including:– Target opportunities where Saas value exceeds value of current solution

• Markets where installed solutions are not working properly• Opportunities to automate manual tasks• Upgrade required to existing system

– Expand into related software – Provide content as well as software (DemandTec)– International Markets largely untapped

• Leading Saas application still CRM but declining• Talent management “task” category expected to outperform overall software sector because:

– Cost saver– Low ASP within an operating budget– System of record– Declining employee tenure– Aging workforce

• Increasing importance of Platform as a service (Paas) (salesforce.com)• Equity markets

– due to market conditions, increased investor focus on profitability and not growth– IPOs on hold during market weakness

253

Comparison to the Software Industry

Saas is sub-cyclical to software industry• Lower ASP/Operating budget• More diversified customer base• Software success• Quicker ROI

254

Comparison to Traditional Software Vendors

• Higher valuations than traditional software companies• R&D expected to be below the 12-20% range at traditional software companies• Customer

– Benefits• Incremental buying (subscription and add-ons)• More predictable expenses• Reduced risk• Quick implementations• Outsourcing of IT function• Ease of upgrading• More frequent upgrades• Increased customer care• Increased security• More relevant enhancements

– Disadvantages• Potential higher total license costs• Loss of control• Potential performance issues• Less customization

255

Comparison to Traditional Software Vendors

• Vendors– Benefits

• Better revenue and earnings visibility• Lower cost of development• Longer corporate life• Larger target markets

– Disadvantages• Slower growth• More complicated business• Potentially smaller total available market

256

Industry Analysis Using 5 Forces

• Rivalry Among Existing Competitors-low to moderate

• Threat of New Entrants-moderate to high• Threat of Substitutes-low to moderate• Bargaining Power of Customers-moderate to

high• Bargaining Power of Suppliers-moderate

257

Rivalry Among Existing Competitors

• High Market Fragmentation: Currently, vendors have traditionally focused on certain market segments:– Task. Examples:

• sales force automation (salesforce.com)• financial application• marketing automation [Add companies]

– Industry. Examples: • financial companies• retailers• property management [Add companies]

• High Industry Growth• Dominant Vendors in Certain Sectors Already (salesforce.com and DealerTrac)• Capital Intensity varies per segment based on:

– Multitenant vs. single-tenant– Computational intensity– Amount of required data redundancy and storage

258

Rivalry Among Existing Competitors

• Customer retention is key to Saas business model due to low upfront cash flow to vendor

– Currently, renewal rates are between 85% to 95% for public Saas companies– Renewal rates factors:

• Customer size• Age of customer base• Comfort with Saas model• Value and service• Product differentiation

• Low Customer Switching Costs– Low upfront cost due to subscription based pricing models including:

• Long term contract with minimum service level• Per usage (HireRight—per employee screening)• Customer success• No contract, pay as you go

– Quick implementation of new software– However, Saas vendors acquire a deep knowledge of a customer’s business which may foster

customer loyalty. This wealth of knowledge may help foster entrenched rivalry when industry growth declines as customer retention is key to success

259

Threat of New Entrants

• Barriers to Entry (BTE)– Generally low but depends on complexity of required software

and if entrant was a traditional software vendor– Faced additional BTEs in adopting to Saas model

• Frequent updates• Changing sales and distribution• Running and scaling the service• Continuously satisfy customers

• High industry growth• High economies of scale if multitenant architecture• Proprietary software• But Low Customer Switching Costs

260

Threat of Substitutes

• From traditional software vendors-moderate to low. See Comparison to Traditional Software Vendors section above

• From new technologies-moderate to high– Rapid change in technology– Switching costs to new technology may be low

261

Bargaining Power of Customers

• Low switching costs• Ability to backward integrate for larger

customers (e.g., add IT resources)• Substitute products (some traditional

software)• But numerous buyers

262

Bargaining Power of Suppliers

• Software Engineers. Software Engineers are mobile and highly valuable, especially for complex software applications or for software requiring frequent updates or customer interaction– However, software engineers may have less bargaining power than at

traditional software vendors given lower expected R&D costs. But it is unclear whether this will be offset by weakness in the Saas business model that requires customer retention (and therefore likely frequent updates) for success. Retaining the same software engineers would reduce vendor’s costs of updating and customer care.

• Data Storage Providers. Saas vendors that outsource data storage of customer information to third parties risk forward integration

263

Valuing Saas Vendors

• Valuation models still developing– P/E not appropriate if no earnings– PEG– Price to revenue – FCF Variants

• P/FCF• EV/FCF• Modified EV/FCF• EV/uFCF/G w/ Lifetime Value and customer acquisition cost analysis

• Saas companies valued as an industry (second-tier companies may be overvalued)

264

Selected Saas Companies2

Concur Technologies, Inc. (www.concur.com)• Key Statistics 2007 2008E* Valuation

– Revenue (mil): $149 $216 YTD Price Performance: -20.4%– Year-over-year growth: 39% 45% Shares Outstanding (mil): 47.8– EPS*: $0.39 $0.49 Market Capitalization (mil): $1,379– Price-to-earnings: 81.2x 58.6x Fiscal Year End: September– * William Blair & Company estimates– ** Non-GAAP excluding FAS 123R option expenses

• Description. Concur is the leader in the corporate expense management market. The company’s strategy is to be the global leader in expense management, similar to what ADP is to payroll. Concur’s services include expense reporting, corporate travel booking and processing, corporate spend management, business intelligence, regulatory compliance, and vendor invoice processing. The company’s solutions enable clients to manage their indirect costs, increase employee productivity, reduce discretionary expenditures, and meet regulatory compliance for corporate expenses.

2From William Blair & Company, L.L.C. Industry Research Report.

265

http://www.concur.com/


HireRight, Inc. (www.hireright.com)• Key Statistics 2007 2008E* Valuation

– Revenue (mil): $63 $71 YTD Price Performance: -21.8%– Year-over-year growth: 20% 12% Shares Outstanding (mil): 12.2– EPS**: $0.60 $0.51 Market Capitalization (mil): $119– Price-to-earnings: 19.2x 19.2x Fiscal Year End: December– * William Blair & Company estimates– ** GAAP including FAS 123R option expenses

• Description. HireRight is a leading provider of on-demand employment background screening solutions that help companies implement, manage, and control multifaceted screening programs. Its solutions automate the background checks of today’s global workforce, enabling companies to increase effi ciency and reduce overall costs by reliably screening employees.

266

http://www.hireright.com/


salesforce.com, inc. (www.salesforce.com )• Key Statistics 2007 2008E* Valuation

– Revenue (mil): $749 $1,033 YTD Price Performance: 0.9%– Year-over-year growth: 51% 38% Shares Outstanding (mil): 123.7– EPS**: $0.47 $0.77 Market Capitalization (mil): $7,824– Price-to-earnings: 136.1x 81.6x Fiscal Year End: January– * William Blair & Company estimates– ** Non-GAAP excluding FAS 123R option expenses

• Description . Salesforce.com is the leading provider of on-demand CRM services to organizations of all sizes. With its services, businesses can streamline customer interactions and improve productivity. The company’s solutions are delivered over the Internet and can be accessed anywhere at any time through a standard Web browser. Customers subscribe to use salesforce.com’s services. From the introduction of its service in February 2000, the company’s customer base has grown to more than 38,100 subscribing organizations, representing 1,000,000-plus users worldwide. Its services include salesforce automation, customer service (call center), and marketing automation, as well as application development and applications hosting for third-party applications. Salesforce.com services a huge market: any company with sales, marketing, or customer support people. Further, AppExchange could change the way applications are developed and sold, just as the company has changed the way CRM software is developed, sold, and delivered.

267

http://www.salesforce.com/

Software as a Service: A Primer

Devang Parekh

Group 4

09/01/09

UC Berkeley, Devang Parekh 269E290

Overview

Software as a Service (SaaS) Software that is vendor-hosted and rented to the end user

Large projected market size $19.3B by 2011 (Gartner Group) 21% of small and 31% of mid sized companies use SaaS

currently 27 public companies as of 2007

Targets multiple markets Sales Human Resources Communications Education


Customer Benefits

Lower initial cost No large upfront cost No hardware outlays

Less risk Risk is on vendor side Ability to switch vendors

Smaller IT department Vendor provides support No in-house setup

Always new software Frequent updates Resolves issues faster


Vendor/Shareholder Benefits

Better revenue stream Revenue is always generated No large end of term revenue

Low cost development Single technology platform Few versions to keep supported

Longer corporate life Longer time till market saturation Easier to add markets

Bigger target markets


SaaS Disadvantages

Customer Higher overall license cost Little control of software (features/support) Less customization

Vendor Total revenue is delayed->slower growth Host + develop software

Shareholder Stocks are frequently overvalued SaaS companies values intertwined


SaaS Companies


Desirability of Saas

Easy to implement Low overhead Constant upgrades Use for as long as needed (possibly lower cost) Well established companies


Definitions

Software - general term for the various kinds of programs used to operate computers and related devices

ASP (Application Service Provider) – Vendor that provides application software

SaaS (Software as a Service) - Software that is vendor-hosted and rented to the end user

Host – Server where the software resides Perpetual licensing – Right to use software forever Subscription licensing – Right to use software for certain

period of time


Long Term Outlook

Individual SaaS companies will be sustainable for next 5 years

Consolidation will occur with weaker companies absorbed by larger SaaS companies

Traditional companies will dominate market within 10 years through acquisition and product launches


Extra Credit

To provide quick market summaries Give news services sound bites Provide information to base trades on Entice people to buy it when its not “free”

MBA290G

First assignment

Describe the desirability or not industry characteristics

• Saas is a model of software deployment whereby a provider licenses an application to customers for use as a service on demand.

• Network-based access to, and management of, commercially available software

• Activities managed from central locations enabling customers to access applications remotely via theWeb

• centralized feature updating, which obviates the need for end-users to download patches and upgrades.

• frequent integration into a larger network of communicating software - either as part of a mashup or as a plugin to a platform as a service.

What is the difference between SaaS, Software, ASP, etc.

• Software: is a general term used to describe the role that computer programs, procedures and documentation play in a computer system.

• Saas (Software as a service): SaaS software vendors may host the application on their own web servers or download the application to the consumer device, disabling it after use or after the on-demand contract expires.

• ASP (Application service provider): An application service provider is a business that provides computer-based services to customers over a network. The on-demand function in a Saas may be handled by a third-party application service provider sharing licenses between firms.

Is this a long term trend, what are the issues, is this a desirable new industry to enter or will it be dominated by others

• Long time trend: More and more companies use Saas. This market is estimated at $5 billions now, twice as much in 2011.

• Better control of the technical charges. Acquisition and maintenance costs are lower. Time necessary to implement the solution lower.

• Confidentiality problems• This is a desirable industry to enter

Put together a presentation explaining how/why these reports exist and are "free"

• It’s written on P299-Report number 1: ‘ This publication has been approved by RBC Capital Markets Corporation’

• ‘This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it’

MBA290G – Assignment 1

9/1/09Michael Schump

What is going on with SaaS?

“The software industry is undergoing significant consolidation (think Oracle), and more importantly, experiencing a dramatic shift to the On Demand or SaaS business model” (1)

Why? What is SaaS?

Market potential on the order of $14 billion annually for ASPs [application service providers] (1)

Essentially, it is a way of providing the use of software over networks (subscription based) instead of the old point-by-point implementation (each computer, one time purchase)

Who?

Advantages (2)

• Lower up-front costs and reduced investment risk. Users can get up and running quickly

• Outsourcing of IT.

• Ease of upgrading. Upgrading becomes easier since the process is handled by the vendor

How is it sold?

“In the typical Hunter-Farmer model, a company will use one team to generate the leads and create the framework for the initial sale, while another team becomes the liaison to the customer and builds a relationship to determine future up-sell or cross-sell opportunities.” (1)

“Magic Number” for Sales (1)

If above 0.75 – further investment is “prudent”Popularized by Omniture – for assessing:• Sales and marketing effectiveness• Market saturation and competitiveness• Up-sell and cross-sell strength of existing

customers.

Distribution

According to one report (1), SaaS vendors tend to use a direct sales model in North America and channel distribution internationally.

Common Characteristics

• Multi-tenant architecture (1)• R&D *not* outsourced (1) median of 13% of

revenue• Contract based sales – typically one year (1)

Biggest challenge

“Establishing a relationship with a reseller that has become accustomed to large up-front payments from an initial sale.” (1)

Trends - future

So far, SaaS seems to have gained momentum since its first widespread notoriety beginning around the year 2000.

I my opinion (MS) I think that the industry will become dominated in a territorial way. That is, I think that leaders will emerge in specialized fields (e.g. healthcare IT) but that no one company will monopolize all of SaaS.

References

• (1) "On Demand Evolution, Insights and Best Practices at Leading On Demand (SaaS) Providers"Published: August 2008 Senior Analyst: Robert Breza

• (2)"Software-as-a-Service Upate: An Update on the Evolution of Software as a Service" Published: April 11, 2008 Senior Analyst: Laura Lederman

What is cloud computing?

Cloud Computing is a computing service provided over the Internet which uses online information and can be adjusted according to the emerging needs over the time.

Cloud used for Networking Complex structure of the Net

Cloud Computing

Users do not need to have control over the cloud supporting them.

Cloud Computing covers the followings: Infrastructure as a service (IaaS) Platform as a service (PaaS) Software as a service (SaaS)

Software-as-a-Service

Software : Computer components other than hardware.

SaaS is a model by which software vendors rent and host a software to the users on a subscription basis. (On Demand)

Who provides these on-demand softwares? Application Service Provider (ASP)

Pros

For the users : It removes the software capital expenditures

ASP owns, dynamically operates and maintains the servers that support the software

Softwares are kept up to date and managed by experts with no long term commitment

Service level agreements ensures a certain level of service for the users.

For the vendors : Costs for the software are spread over a number of clients More application experience

Cons

For the users : Must accept the service as provided by vendors May rely on vendors at critical moments (limited/no control)

For the vendors : Integration with the client's system may be problematic Security risks

Is this a long term trend?

Did traditional software licensing failed? Why?

Considering the costs for maintenance, upgrade and support, the utilization factor is very low.

% 20 – capabilities, % 80 maintenance cost

While there is no guarantee that failure won't be replicated for SaaS model, however, the risk dramatically decreased with on-demand and subscription delivery model.

Software-as-a-ServiceChristian Niebuhr, Sept 1st /2009

‚Software as a Service‘ is an on demand business model in which software is distributed, operated and cared for as a full service using internet technology

Not the software license is sold, but it‘s operation as a whole. The consumer does not need to provide or look after computer hardware

and instead receives the results of software processes that run on the service providers hardware.

The consumer faces increased flexibility and cost transparency (e.g. constant leasing rate)

The service provider is liable for and in charge of the service level and the functionality of IT systems

While facing a higher risk the service provider enhances his customer value creation

Definition of S-a-a-S

01.09.2009 302

C. Niebuhr

¹ Source

Software (general)

computer programs, procedures and documentation play in a computer system

the product which is used to produce the desired services

In combination with the required hardware, the software is the means used to deliver the service

01.09.2009C. Niebuhr 303

Distiction of SaaS

ASP (Application Software Provider)

An ASP is a service provider who offers his software programs e.g. via the internet (for sale or lease)

The ASP usually also offers services throughout the software lifecycle such as administration and data backup

The software however is run by the consumer

SaaS

The software is used by the service provider in order to fullfill the customer needs

Customer only needs minimal IT infrastructure while accessing the provided software via internet

On average cheaper than ASP so that nowadays ASP is often given up to the benefit of SaaS

The software industry experiences a dramatic shift to the On Demand or SaaS business model¹

On Demand business models yet remain in infancy with an estimated $8.4 billion share of the Software Industry’s $271 billion total spend in 2008¹

Because of the difference to other businesses regarding the time of cash flows, the “Magic Number” was introduced as a metric to assess Sales and Marketing performance.¹

01.09.2009C. Niebuhr 304

Overview: The SaaS Industry I/II

¹ Source: RBC Research Report “On Demand Evolution, Insights and Best Practices at Leading On Demand (SaaS) Providers”, Robert Breza , August 2008

Application of most common categories of On Demand services ¹

01.09.2009C. Niebuhr 305

Overview: The SaaS Industry II/II

¹ Source: William Blair & Company's Industry Report “Software-as-a-Service Upate: An Update on the Evolution of Software as a Service”, Laura Lederman, April 2008

The transformation requires a re-thinking of business strategy, and for investors, a re-thinking of investment strategy¹

There exists no unique law for success but instead multiple best practices from experienced On Demand providers ¹

Prerequisits¹ :◦ Establishment of a Sales Force: (e.g. “hunters and farmers”

method: separation in new deals vs. renewals/ up-sells) ◦ Establishment of Channel Strategy (direct sales<>ISV)◦ Establishment of Billing Model (contract setup)◦ Knowledge of target audience (SMB vs. enterprises)◦ Further Considerations: Build vs. Buy (Technologies), International

Expansion (integrated approach), sustainability, software platform management

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Introducing SaaS Systems

¹ Source: RBC Research Report “On Demand Evolution, Insights and Best Practices at Leading On Demand (SaaS) Providers”, Robert Breza , August 2008

SaaS is a growing market The SaaS industry is sub-cyclical (less sensitive to

macroeconomic situation than widely believed) due to¹:

Lower ASP/Operating budget More diversified customer base Software Success Quicker ROI

Due to the reduced consumer problems and increased transparency in software maintenance, updating etc., the SaaS business model will be applied in an increasing number of companies.

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Perspective and Properties

¹ Source: Deutsche Bank Research Report “SaaS and Cloud Computing. End game clearer in '08: Legacy checkmate”, Tom Ernest Jr., June 2008

+ Customer: Low initial cost, reduced risk and minimal IT

support Vendor: Better earnings visibility, control and longer

corporate life Shareholder: Less volatile revenues and wider market

application range

- Customer: Loss of Control and higher initial license cost Vendor: Slower growth and business complexity Shareholder: High Valuation and Correlation of SaaS

investments

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Advantages/ Disadvantages

¹ Source: William Blair & Company's Industry Report “Software-as-a-Service Upate: An Update on the Evolution of Software as a Service”, Laura Lederman, April 2008

SOFTWARE AS A SERVICE

Claudius Jablonka

S-a-a-S Executive Summary

Technology: On demand remote access software hosted by an IT service

provider Central management of distribution, operation and maintenance

using internet Performance and risk pooling

Business model: No copy of software or license sold but pay-per-use or operation

as a whole Software and corresponding hardware, full service

Advantages for consumer Higher flexibility Higher transparency Faster rollout of software upgrades Hardware outsourcing economies of scale

SaaS Industry Development

Strong demand for SaaS All major players are involved

Fragmented market Financials

Heavily hit by financial crisis Flood of IPOs expected as soon as situation

improves Total software market: $271 bill (in 2008)

SAAS: $8.4 bill (in 2008) Timelag between investment and cashflows,

therefore high multiples

SAAS is capable of delivering almost any office application

¹ Source: William Blair & Company's Industry Report “Software-as-a-Service Upate: An Update on the Evolution of Software as a Service”, Laura Lederman, 2008

Most prominent: Customer

Service Messaging Conferencing

But also increasingly Payroll (HR) Sales

Strategic implications of SaaS SaaS allows companies to focus on their core

competencies, leveraging on the trend to higher vertical distribution of work

SaaS stock prices have been hit strongly by the financial crisis in spite of its solid, fundamental business model: Lower operating budget Quicker ROI Diversified customer base

In the long run SaaS will therefore become the main type of software distribution especially for companies, who take a total cost approach

In private use it will cater to the increasingly less computer savvy users and therefore have a positive outlook for the future in personal computing

Documents

International Trade and Competition in High Technology