This Briefing Paper explores the concept of hosted services, a fast-growing form of software outsourcing often known as ‘Software as a Service’ (SaaS). Instead of a customer purchasing a software system, implementing it and running it in-house, in a hosted model the supplier runs the software on the customer’s behalf on its own systems – and the customer simply accesses it over the internet.
The Paper argues that:
- The SaaS model offers a range of potential benefits. It relieves organisations of much of their IT hassle, gives them access to up-to date software, and offers flexibility in terms of location, growth and choice of software partners. In a challenging economic environment, it also enables customers to make better use of their cash by reducing the upfront investment associated with traditional on-premise systems.
- At the same time, potential challenges – real and perceived – include loss of IT control and accountability; concerns over security and privacy; lingering worries about system availability; and integration complications.
- Hosted services have traditionally been seen as a software-specific offering – the whole point being for a provider to run the software on the client’s behalf. But Webster Buchanan Research believes the next generation of SaaS will see this software-based service wrapped in an additional layer of services. Instead of simply offering business intelligence software, for example, providers will offer consultants to carry out the analysis for the customer.
- Business relationships between SaaS providers and their customers are not as mature as they need to be. Many SaaS providers do not yet provide service level agreements (SLAs) for their customers, denying them accountability, and do not fully document commitments and procedures in the event of a service failure.
- The SaaS model may be instrumental in changing the relationship between vendors and buyers, putting greater emphasis on continuous business results. In part this is caused by shifting to a model where users make regular payments and expect ongoing rewards in return.
- Service providers are experimenting with new pricing models, including ‘metered’ services where fees are charged according to usage, just as consumers pay for electricity. Some are experimenting with models based on agreed savings or an income target, with fees determined by how well they perform against that metric.
- Businesses are approaching hosted services with a strong dose of pragmatism. Because the model lends itself to discrete business disciplines – such as recruitment – as well as managing enterprise wide software systems, it can easily be adopted in a ‘mix and match’ way.