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What Traditional Software Companies Can Learn from SaaS Start-ups

SaaS Start-ups vs Traditional Software Companies

The emergence of Software as a Service or SaaS has revolutionized the way in which packaged software like financial software, operations management software and software used to automate tasks are offered to the customers. Instead of a network-based solution where the customers buy the packaged software and host it on their own servers, SaaS offers the convenience of subscribing to a vendor's cloud offering and hence utilizing the software offered as a service by the vendor. The name SaaS derives from the fact that unlike traditional product-based software like Microsoft Office and SAP, SaaS companies offer it as a service like any other service. The implication of such a software bundled as a service offering is that it lowers the costs associated with using such software since the customers do not need to pay for hosting, maintenance, implementation and training and retaining experts who are proficient in the software. Further, with the advent of cloud computing in a big way, more and more customers are turning to SaaS model which utilizes the same principles that underpin the cloud model. Some of the companies that are in the SaaS space include Right Now, Net Suite, Workbooks and Work stream.

Though the SaaS industry is growing at 11% a year and boasts of a market size of $30 billion, it is early days for the on-demand software space as traditional software companies have the upper hand still. This is because the margins in the SaaS space are likely to be 20-25% lower than in traditional software because of the combination of high margin software business with low margin software hosting. However, there are many things that traditional software companies can learn from SaaS vendors if they are to retain their competitive edge in the market and grow in the same way that they have been doing all these years.

The first thing is to make the implementation of packaged software easier so as to lower costs associated with implementation and integration. If the degree of customization can be limited as well, then the configuration costs would come down. This also ties in with making the operational aspects of packaged software scalable and reduces the cost associated with maintaining the software. Though one of the attractive features of packaged software is the ability to customize and configure it according to the needs of the users, it has been found that many customers do not customize or configure in a distinctive way and they are content to use the basic version as it is. Hence, by targeting these customers by lowering the implementation and operational costs, traditional software companies can succeed in retaining these customers and not losing them to SaaS vendors.

The next thing has to do with the licensing fee, upgrade costs and the replacement costs. The way in which the traditional software companies can enhance the time-to-value offering as well as vendor-support offering by spreading out the license fee over a multi-year period, reducing versioning costs by rolling out combined upgrades and finally, by offering discounts on replacement costs. The point here is that one of the unspoken benefits of the SaaS model is that customers can stop paying the vendor if the software does not perform as desired and this is something that traditional software companies can incorporate in their value offerings. This can be done by offering free upgrades and tinkering with the licensing per seat and licensing per product mechanism. Since SaaS companies typically charge customers on a per user basis, the traditional software companies can offer hybrid models to combine their traditional advantage with that of the emerging trend.

Finally, the issue of secure access can be highlighted by the traditional software companies. Since SaaS essentially depends on data being sent over the public internet as the hosting is remote, traditional software companies can emphasize this angle as well as incorporate things like single-sign-on that SaaS depends on for security and reliability as well as scalability. The point about scalability is that traditional software companies can commoditize the packaged software products by industrializing them and making them scalable. This would lead to higher margins since economies of scale kick in here. The economies of scale are something that SaaS is hoping to capture and traditional software companies can pre-empt this by incorporating it into their business model. In conclusion, the emergence of hosted software and cloud computing has altered the software business landscape and it is in the interests of traditional software companies to evolve with the times rather than perish.

More Stories By Preetam Kaushik

Preetam Kaushik is a 'prolific' 'professional' freelance writer who has been writing online for the last 5 years and has gained a significant experience in writing articles, blogs and contents online. Much of his expertise lies in the writing world. He writes articles, web content and blogs on various assigned topics under almost no supervision, for various clients across the globe.

Anything that is related to creative writing and requiring the fashioning of blogs, articles or content to make them well packaged for the world wide web inspires him. He is also an avid researcher and a voracious reader.

He has extensive experience writing articles on a freelance basis on Finance, Business, Management, Entrepreneurship, Writing and Publishing, Technology and E-Commerce topics. He also specializes in academic writing which enhances his analytical and research capabilities.

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