On the Scene: On Demand Is in Demand

Software as a Service (SaaS), or on-demand applications, is gaining momentum, but reports say vendors need to do a better job of proving their worth. A study by IDC shows worldwide spending on SaaS reached $4.2 billion in 2004, a 39 percent increase over 2003. That growth will continue over the next five years and reach $10.7 billion in 2009. Buyers from small and medium-sized businesses and divisions of larger companies are leading the charge as the most frequent SaaS adapters, according to Erin Traudt, SaaS research analyst at IDC. A separate study by AMI Partners is more narrow, focusing only on U.S. SMBs, which Laurie McCabe, the report's author and AMI's vice president of SMB insights and business solutions, says are increasingly demanding such services and projects the demand will grow at a 40 percent CAGR over the next four years. Still, analysts at both research firms agree more education, consolidation, and overall awareness are needed. Traudt describes SaaS as an umbrella with two buckets--the ASP bucket and the Software on Demand bucket. The former leans more toward a one-to-one delivery model whereas the latter is a packaged one-to-many application provided over the Web with little customization. People want to know the solution will give them a good return, is worth the price, can be customized and integrated, and that using software service over the Web is safe, analysts say. What's happening now is that vendors are frequently updating their offerings to incorporate customer needs. "Basically, it's about value," Traudt says. "Value lies in a positive customer experience with software. [Vendors] need to demonstrate that value on a monthly basis." McCabe agrees such providers must have a much higher level of responsiveness or they risk having customers cancel their subscriptions. SaaS is also more affordable over time than buying packaged software because there is no need for IT support, and software delivered as a service is fairly easy to integrate because most of the applications are built on open standards. "The flip side is the packaged software industry has gotten on the defensive," McCabe says. Siebel came out with its OnDemand product because "they realized they can't stop it. Salesforce was totally taking market share from them. They realized they can no longer pretend this is just a blip on the radar screen." Salesforce.com has shined in the SaaS space with others like NetSuite and RightNow Technologies sharing some time in the spotlight. Several smaller vendors like Concur Technologies, Employease, and Intuit are showing success. McCabe says Concur wants to orient its business the way people want to conduct business. "Siebel came kicking and screaming, versus Concur, [which] said, 'This makes a lot of sense, not just for customers, but for us.'" Concur has captured more than 1,800 accounts and more than 3.5 million users; achieved a 100 percent year-over-year growth of new annual recurring revenues; and have more than 95 percent customer retention, according to AMI. McCabe believes some smaller companies will merge or form significant partnerships and that eventually a trusted brand like IBM will come out with an offering to get smaller businesses more comfortable using this type of software. "As these players expand their footprint and their customer base, they'll begin to get bigger and their brands will grow," she says. "If today's big players don't move forward enough, Salesforce.com could become the center of this universe, too." Executives who don't know what they're getting don't buy. Vendors like Marqui are holding Webinars to educate people about the topic; McCabe expresses a wish that an organization would emerge as a place for SaaS providers to communicate. "There's no consortium for them. There's no focal point that gets the word out," she says. "We have a bunch of small players trying to beat drums, but eventually the noise adds up." BI Does Not Equal PA The SPSS summit underscores the difference between analyzing the past and predicting the future. Accessing information about what your customers have done in the past is not the same as having tools to predict what they'll do in the future. The point, driven home by executives at the recent SPSS Predictive Analytics Summit 2005 in New York, is that business intelligence (BI) is not synonymous with predictive analytics. Gareth Herschel, research director at Gartner, says, "[BI] is a very broad concept that has to do with empowering people by giving them the ability to go get information themselves." Predictive analytics is not about the aggregation of historical events, it's about creating new data as opposed to rearranging existing data. A classic example of BI would be finding out how many times customers who bought beer also bought diapers, he says. "There's a lot of comprehensive tools out there that will do this, but they're manual and they're very much a rear-view mirror approach," says Colin Shearer, vice president of product marketing for SPSS. Predictive analytic tools delve deeper. To spot which customers may defect, companies can take people who defected and stayed loyal in the same time period, and feed the information into an algorithm that fires out a predictive model that gives individuals defection-risk scores. Applying that model to all current customers can help identify a target list. "These are the people who have a high risk of leaving and crucially are most worth keeping," Shearer says. "You then take some sort of marketing action, [like an] attractive new deal to keep these people loyal." A similar system can be used to target and reward gold-star customers. It all boils down to wisdom. "Nobody really wants data," Herschel says. "What they want is information and insight."

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