Ann All spoke with Jeff Kaplan, managing director of THINKstrategies, a strategic consulting services company which maintains the Software-as-a-Service Showcase. The firm recently published an Executive Report on SaaS in conjunction with the Cutter Consortium.

All: In the most recent SaaS survey, you found that interest in SaaS has grown since the first survey in 2005. To what do you attribute this growth?
Kaplan: The adoption rate is going strong. It is all about ROI. Many organizations both large and small have been frustrated with the poor ROI they've received in the past from traditional on-premise legacy applications. Those applications cost a lot up-front, took longer than [companies] expected to implement and maintain, and they were seldom able to get the level of utilization from them that they expected. So along come these new online, on-demand services, which are much easier to adopt and don't require a large up-front investment. [Companies] are able to test them, in fact, with the single user or even a trial or free option. That allows them to get comfortable with it, and then subscribe for a fuller or longer duration.

The first time around, we found approximately a third of the respondents were already using some form of SaaS. Now this was in the fall of 2005, long before most people thought this thing was for real. About another third were considering SaaS. In the latest survey, conducted in the fall of 2006, we found an equal percentage were using SaaS, but 43 percent were considering it. That's a pretty dramatic jump. Part of it is the growing amount of press attention. Also, other analyst firms have done their own surveys and endorsed the idea.

The third and most important reason, I think, is that we as individuals have become so comfortable with on-demand services in our personal lives; that's being transferred to our professional lives. Companies like Salesforce.com learned a long time ago that if you designed software that's aimed at the user, and you sell it to the user, that user can adopt it as an individual and promote it within their department, and then gain corporate acceptance of it — and bypass IT along the way. That phenomenon is happening more and more often, in a broader range of application areas.

All: Where are the pain points that those currently using SaaS solutions are experiencing? And is there anything CIOs in the planning stage can do to avoid them?
Kaplan: In our first survey, over 90 percent of the folks already using SaaS were happy enough with it that they were planning to buy more and they were willing to refer others. However, in the past year, that number dropped to about 80 percent. There are two halves to that story. First, a lot of people are jumping on board, maybe with not the same level of expectation or education about what they should be looking for. At the same time, there are a lot more SaaS providers jumping into the game. Not all of them can offer the same level of quality.

Users have to do a thorough job of investigating what is available so they can set the right expectations for themselves. The concept of on-demand is a relative term. There are many SaaS solutions that you can point, click, procure and use instantaneously. But there are many others that refer to themselves as on-demand which really do demand a certain amount of time and effort to deploy. They do still require some customization, some integration with existing applications, or they may require migration of data that might entail time and effort not only on your own part, but you may even need a consultant or integrator to help you. The other term that is a relative term is pay-as-you-go. Many of the services are genuinely pay-as-you-go, while others will require a certain amount of up-front commitment. Some require a first year commitment. So that kind of thing has to be carefully evaluated. [SaaS will] still be more flexible than the traditional approach, but they may not be as on-demand or as easy to pay for as you think.

All: Where do you see the biggest opportunities for SaaS vendors right now: replacing existing applications, or creating solutions for unmet needs?
Kaplan: We asked survey respondents how many were using SaaS simply to replace an existing application and how many were using it to fill an unmet need. Sixty-two percent were using it to fill an unmet need, and 38 percent said they were replacing existing software. The story plays in both directions. The myth is that SaaS is only aimed at small businesses who couldn't afford the luxury of more complex applications in the past. To a certain extent, that is true. Companies both large and small are using SaaS to fill an unmet need. But they are also seeing an opportunity to replace costly or cumbersome applications that they've used in the past and just aren't satisfied with. So it appeals on both sides of the ledger, which is a reason to believe that it is going to continue to grow.

I think there are a number of reasons that [SaaS] is going to take root that are different from what we saw with the ASPs of the past. Number one, we're living in a different time. When ASPs were born, they were telling people to outsource their applications. But other people were telling them IT was a competitive advantage. The customers had money back then to afford IT. Today's economy and competitive environment doesn't permit them that luxury any more. Number two, ASPs were simply reselling legacy applications. The cost and cumbersome nature of the applications just weren't that appealing. It was more of the same, just a different delivery model. Number three, ASPs had to put their own up-front investments in place. They couldn't afford the carrying costs, and they collapsed.

Today we're dealing with a different form of application. It has a different level of functionality because it is Web-based. It's more cost-effective. It's more flexible. And the fundamental reality is, people are more inclined to outcast this kind of IT to get more business benefit from their applications. IT, in and of itself, is viewed as more of a commodity. But people realize if they can get better utility from IT than their competitors, they can gain a competitive advantage. So many companies have failed to properly deploy and leverage technology that has proven not to be the competitive advantage they were hoping for. If they use SaaS solutions to better utilize the functionality, they can gain the competitive advantage they are seeking.

All: Are there any new trends in SaaS that you are seeing?
Kaplan: In the past, the focus has been on horizontal applications. Now there is a growing interest in industry-specific vertical applications as well. Every day, I have more vertically oriented companies asking to join my SaaS Showcase.