Delivering software as a service

Adam Bosworth has an interesting post on the evolution of software and why software delivered as a service will be the business model of the future. As you know, I have always been interested in this trend since my first post in October 2003 and since I invested in a number of companies in 1998 and 1999 like LivePerson and Expertcity (GoToMyPC) that subscribed to the ASP business model. What I have learned and what Adam points out is that it comes down to the customer experience, making a product easier to use for a customer and evolving it as quickly as possible to meet the customer's needs. Software delivered as a service enables that and packaged software does not. In the time it takes Microsoft to deliver an application (went from 1 year to 5 years), a company delivering software as a service can deliver 60 iterations of its product. As Adam points out, "things that breed rapidly more quickly adopt through natural selection to a changing environment." I have never thought about software in evolutionary terms, but it certainly makes sense.

From an evolutionary perspective, the ASP business model is quite interesting to examine. While every piece of software should not and will not be delivered as a service, it is also quite clear that customers are tired of buying expensive software products with large upfront licenses, expensive hardware to purchase, manange, and maintain, followed by expensive professional services to get the product up and running. From this backdrop, it is easy to see why reducing complexity and simplifying technology for customers is a big driver to more rapid adoption of products. It is also easy to see why reducing complexity for the customer also helps reduce complexity for the vendor, lowering the friction to sell and deliver its product. This means a more capital efficient business model, one which would hopefully scale much quicker and cost less to build product, sell, and support customers. For the vendor, it makes it:

1. Easier to sell
-shorter sales cycle-do not have to test extensively in a customer's environment
-lends itself to telesales, can demo over phone and web, do not need a huge sales infrastructure to close deals (just need quota bearing reps without a huge staff of sales engineers and professional services guys to get the job done)
-not a capital expense, usually sold as monthly or annual subscription which can many times be taken out of business budget as opposed to IT budget

2. Easier to install
-no messy installation process, long testing process, or even waiting for hardware to be delivered to customer
-can leave a customer and simply point them to a URL, train them over the phone, and get them up and running
-all of this means that the business can scale rapidly

3. Cheaper to support
-browser-based delivery and richer client interfaces like DHTML make it easy to use for the customer=less training=less customer support costs

4. Easier to integrate
-standard APIs make it easier for software delivered as a service to integrate disparate systems
-once again, reduces costs to deliver product to customers and also removes obstacles to getting customers

5. Cheaper to build
-versus a few years ago, you now have much cheaper bandwidth, storage, servers, and software
-think Linux, Intel boxes, cheap bandwidth, commodity software stacks, and smarter entrepreneurs changing the economics of building and delivering software as a service.
-the economics speak for themselves

Given this, it seems to me that the ASP business model will only get more attractive with time. The ASP model makes it easier for vendors to sell and get customers up and running, lending itself to a more scalable and profitable business model. While I am not suggesting that every product will evolve this way, it is clear that simplicity rules. The ASP model is certainly one way of accomplishing simplicity. Appliances are another way. Packaged software with huge installation costs is not.

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This post was written by who has written 358 posts on BeyondVC.

12 Responses to “Delivering software as a service”

  1. Matt Nov 5, 2004 at 12:11 pm #

    Ed, Great post. It’s so true, I guess the only point that could be added is the fact that having a subscription revenue model rather than a traditional software license opens up your potential target market significantly.

    As an example, the leading ERP vendors main software products cost millions in license and maintenance fees as well as for services for installation and customization (not even counting the costs to upgrade the products!). SAP and others have introduced separate products to serve the SMB market. More R&D costs to simply open their target market. But by having a hosted, subscription model, the same product can be used by the Fortune 500 and the 250 person firm! No separate code bases, no upgrade issues (though that is interesting from an ASP model, different customer pay for different features…). It’s a win for everyone.

  2. John Campbell Nov 6, 2004 at 7:27 am #

    Logic is on your side, but whether the mass market accepts it, or not, is unproven. I suspect that for this to happen there will have to be changes in a number of factors.

  3. kerberus Nov 7, 2004 at 12:25 am #

    All good points, except… anything that is easy to install is easy to uninstall and hence I would expect to see large churn rates for companies such as salesforce.com. Besides, since we all believe IT DOES matter, common, undifferentiated service-based delivery models do not work — my IP would/should be encoded in the software processes and I do not want to share it with others by permiting my ASP to deliver “one size fits all”.

  4. Steve Shu Nov 7, 2004 at 1:22 am #

    As having been a user of salesforce.com, Quickbooks ASP, and blogging stuff, I can say that I (generally) like ASP services. ;)

    Will be interesting to see if the integration space itself can go the route of ASP. Companies like Grand Central Communications, link to grandcentral.com, come to mind. Also will there ever be an Information Builders company analogue to emerge for the ASP space?

    Steve Shu
    Managing Director
    S4 Management Group
    Email: sshu@s4management.com
    Web: http://www.s4management.com
    Visit Blog at link to sshu-s4.tripod.com

  5. Dan Cornish Nov 8, 2004 at 10:17 pm #

    Great Post. There is a lot of built up friction in companies who are used to expensive client server systems to switch. This is starting to change.

  6. Steve Shu Nov 9, 2004 at 3:13 pm #

    Hot off the presses in Information Week. Benioff’s (Salesforce.com’s CEO)Big Bet … link to informationweek.com

    Steve Shu
    Managing Director
    S4 Management Group
    Email: sshu@s4management.com
    Web: http://www.s4management.com
    Visit Blog at link to sshu-s4.tripod.com

  7. Marcelo Nov 10, 2004 at 10:37 pm #

    I think the ASP model can’t be applicable in some big markets such as the telco segment. And i don’t see that it will change in the near future, although the model can be great for both parties.
    Maybe the financial market is another good example of how conservative can be a vertical market to avoid innovative solutions.

    The telcos don’t want the software as a service; they want to have complete control of it, because such software is controlling their core business. Same thing in several financial areas.

    On the other hand, in the big software companies there are a plan to catch you, so the software architecture is deliberately a part of such plan.
    In the small companies, flexibility, innovation and low cost are the premises, so you generally won’t find there a monolitic or captive application (otherwise they won’t survive), and software as a service is just so good as the current model.

    I think that the driver is the real software needs of the market rather than the software design and architecture itself.

  8. Charlie Crystle Nov 23, 2004 at 9:19 am #

    This is an oversimplification, Ed. Some markets don’t respond well to the ASP model–ours, for instance. 80% of our market is very skeptical of putting their data somewhere else, which is understandable given it’s their lifeblood (nonprofits). We built our prototype as a web-based app, but after researching the market further, switched to a rich-client piece, with hosted services to complement the offering. We offer a much richer user experience, the software responds much better than ASP software, and we offer ASP services nicely integrated with the rich client where it’s appropriate–and palatable for consumers. And we’re all coming from the server software world, and would have loved some of the aspects of server software, but we love selling software more than building it, and the ASP model just ain’t what it’s cracked up to be for a lot of markets and functions. The hot format to us isn’t the one the venture world loves, it’s the one that serves customers best. And before I hear any further denigration of the desktop world, I’d ask ya’ll to look at what you’re running on your PC as you type this–Outlook, Excel, iTunes–desktop software that you likely paid for. You validate the rich client model every day. Hey, maybe I’m wrong–you could be using HotOffice.

  9. Sanji Fernando Dec 7, 2004 at 7:51 pm #

    I think the ASP model works only to an extent. Customization is really where the model starts to break down. Living through a number of ASP releases, we continue to struggle to be able to customize ASP software(and subsequently differentiate the software to support our competitive advantages) and manages those customizations through subsequent upgrades. In some cases, ASPs with poor architectural design are incented to limit the customization you request in their products.

    As noted above, I think the power of a hosted model is when ASP’s truly offer services that I can combine and integrate easily to match my business needs and processes. I do not have first hand experience with Grand Central, but if it works the way they describe it, I believe that will be key to the future of the ASP model.

  10. George Moody Dec 22, 2004 at 5:46 pm #

    One reason ompanies are buying software delivered as a service is the low barriers to entry. To address the comment about low exit barriers – that is technically true. But, the model requires the software vendor to deliver excellent SERVICE. Many software companies getting into the ASP delivery model are really just changing the financial arrangments with their customers (ie pay as you go vs upfront license fees), but not changing their service models enough to make a big difference. If the software companies provide a great customer experience, they have high retention.

  11. darren rose Jun 6, 2005 at 2:53 am #

    For us, it makes total sense. Software upgrades are experienced by all clients immediately, no installing new versions of software. Clients environment requirements are simplified – simply need a web browser, and finally, training can be provided remotely.

  12. Jay Brooks Jun 15, 2005 at 10:50 am #

    Agreed. Software as a service is the way to go because of many reasons. Time, Money, Effeciency, Customer Service, Increased sales for ISV’s. I know of a company that is doing an excellent job of it, http://www.coaxis-asp.net. Give them a call at 850-219-5731 and get the solutions that you need.

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