evaluating the software as a service business model - CiteSeerX

IADIS International Conference e-Society 2005

EVALUATING THE SOFTWARE AS A SERVICE BUSINESS MODEL: FROM CPU TIME-SHARING TO ONLINE INNOVATION SHARING Markku Sääksjärvi Department of Business Technology, Helsinki School of Economics P.O.Box 1210, FIN-00101, Helsinki, Finland

Aki Lassila Department of Business Technology, Helsinki School of Economics P.O.Box 1210, FIN-00101, Helsinki, Finland

Henry Nordström Department of Business Technology, Helsinki School of Economics P.O.Box 1210, FIN-00101, Helsinki, Finland

ABSTRACT The evolving literature on the new Software as a Service (SaaS) concept gives a coherent picture of the technical arrangements required between the vendor and the customer in order to enable the new online renting of applications. Many of these articles describe the new SaaS model as a new and customer-friendly way of IT outsourcing, where the vendor will own both the software and the IT infrastructure required for the online service, and where both parties will benefit from simple and attractive revenue logic, which is no longer based on the application development investment. What is not clearly observed yet is that the SaaS model will ultimately change the supplier-customer relationship from one-to-one to one-to-many. Therefore, it will also change the customer-vendor relationship to a typical utility based ecommerce relationship. Better understanding of the Software as a Service model will therefore require applying an ecommerce business model. In this paper we will use the value creation model of Amit and Zott (2001) to analyze the value drivers proposed in the research articles and software industry organization reports of the SaaS concept. We will synthesize the benefits and risks of the major stakeholders and discuss the types of value sources covered. We conclude that the promised customer benefits are not easily realized as many of them are at the same time major risks for the provider. Therefore, the SaaS model will require both an effective supplier network and an innovative and fair revenue logic involving lock-in in order to enable a continuous flow of shared software innovations and to succeed in transforming the software product business into service business. KEYWORDS

Software, service, business model, value source.

1. INTRODUCTION 1.1 Software as a Service: The Next Generation ASP? In their landscape for the future of the software, Hoch et al. (2000) depicted that the current customer IT solutions portfolio will evolve to complete serviceware offerings due to the increasing number of outsourcing decisions combined with the componentization of software, productization of the custom software services and servicization of software products trends. Hoch et al. called this development the “servicization” of

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products. Taking the view that commercial software is a form of general industrial innovation (Utterback 1994), one could claim that Application Service Providing (ASP) is just one passing phase in the IT outsourcing market and in the evolution from products toward the new software service markets. Following Utterback’s model, we should then assume that software industry is moving from the fluid phase (radical product innovation, tailored products) to the transitional and specific phases where the focus is on process technologies. In the proposed Software as a Service (SaaS) models, the service is no longer only just an application provisioning service but integration of valuable application software into an online service infrastructure. If so, then we could see the SaaS model not only as one way to outsource the application development from user companies but rather as a radically new networked process innovation where a certain set of networked (partnering) players collectively enable time and location independent online application access to a continuous flow of new software applications. Therefore we think that the SaaS model should be viewed as an example of one-to-many e-commerce with digital products. As such, the problems involved in digital products e.g. durability, easy copying, experience product characteristics, and difficult price-setting (Shapiro and Varian 1999) should be taken into account. In relation to the SaaS model, we have to be aware of the known risks involved in e-commerce with digital products and services. Among these risks are the price competition that may ruin the business, the importance of product customization to achieve the required lock-in of customers in order to enable sustainable business, and extensive marketing costs needed in the creation of a winning brand that will attract enough customers in order to benefit from economies of scale. To understand correctly the benefits and risks involved for all stakeholders we have to apply a (networked) e-commerce business model framework instead of a more limited bilateral IT outsourcing framework. Our overall aim is to better understand the SaaS phenomena, especially the value propositions for both the customers and the providers, propose a definition of SaaS based on the network model, and to make conclusions regarding the critical success factors of the evolving SaaS business in general.

1.2 Objectives and the Structure of the Paper We start by reviewing the recent literature on the Software as a Service model in order to find out the benefits and risks proposed for the major stakeholders of this new model. The objective of the paper is to identify if there are any sustainable value sources that can be shared between the major stakeholders – the customer and the service provider – without too high risks involved. In order for SaaS to be a relevant and realizable concept and an e-commerce business model, the value creation must be balanced between the customer and the provider when all four value creation sources (Amit and Zott 2001) are taken into account. The structure of the paper is as follows: in the next chapter we review a selected set of relevant, recent articles about the Software as a Service concept in order to identify and synthesize benefit and risk issues of the major stakeholders. In chapter 3, we describe shortly our methodology used to synthesize the resulting issues into four tables. In chapter 4, we present our findings from analyzing the collected information. On the basis of these, we propose a new business model definition for the Software as a Service model. Finally, in chapter 5 we summarize our conclusions and present our suggestions for both future research and practice.

2. EVOLUTION OF THE ASP CONCEPT IN THE LITERATURE 2.1 The Original ASP Perspective Originally, an IDC White Paper (IDC 1999) defined the following criteria for an application service provider (ASP): 1) application centric, 2) only application access (not ownership) providing, 3) centrally managed, and 4) one-to-many service, that 5) is delivered on the contract. In this original ASP concept the customer could, besides remote usage of an application software, also rent the required data center infrastructure and application support. The ASP concept was offered as a new and competitive form of remotely hosted and outsourced application service for the customers. In the late 1990s, many industry analysts forecasted explosive growth for the ASP market. So far, early studies on the success of ASP companies have shown only a modest rate of success (e.g. Desai and Currie

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2003, Cherry Tree 2000). More recently, both significant ICT market analysts and software industry organizations have presented an improved and extended version of the ASP model, called “Software as a Service” (Cherry Tree 2000, SIIA 2001, Hoch F. et al. 2001, Mizoras and Goepfert 2003).

2.2 The Application Outsourcing Perspective Mizoras and Goepfert (2003) positioned Software as a Service in the evolution continuum of the application outsourcing palette, which consisted of application outsourcing components from the user (customer) organization perspective. They launched the term “appsourcing” for the whole palette, application management and SaaS being the two main classes of the components. Their taxonomy identified characteristics that distinguish SaaS from application management. The main value of SaaS for the customer (outsourcer) was based on: (1) the provisioning of network-based access to and management of (2) a commercially available (non-custom) application, and (3) as a one-to-many service. According to Mizoras and Goepfert (2003), there are several potential players in different parts of the ICT industry that could act as ASP contractors. They noted that the industry is evolving from traditional application management to the direction of providing software as a service. Thus, application outsourcing activities are moving toward a utility and one-to-many model. In their paper, Ekanayaka et al. (2003) introduced a framework that companies who are considering application outsourcing could use for evaluating application service providers. Their framework for evaluating ASPs consisted of six factors: security, integration, pricing, customer service, service level analysis and RAS (Reliability, Availability and Scalability). The article also listed value propositions for the customers e.g. that small businesses will gain access to technical expertise and best-of-breed applications at a lower cost of ownership, scalability of applications over time, access to better IT expertise and to state-ofthe-art technologies, rapid implementation time, reduced downtime, and free upgrades.

2.3 The Software Industry Capital Funding Perspective Cherry Tree (2000) defined an ASP as a third-party service firm which deploys, manages, and remotely hosts a software application through centrally located servers in a “rental” or lease agreement. According to Cherry Tree, the ASP value proposition should be based on excellent application domain knowledge and several complement services such as cross-application integration, wireless device integration etc. In other words, ASP businesses should be able to differentiate their service offering from competitors in order to create a more sustainable business model. Cherry Tree also stated that in the second generation of ASP services both the customer switching costs and barriers to entry for competitors should be higher than in the “old” ASP model. The value-adding drivers mentioned were faster time-to-market, no technology obsolescence, utilization of best-of-breed applications, and access to technical expertise. Cherry Tree stated that other primary drivers behind the ASP market were macroeconomic and outsourcing drivers such as IT staffing shortage, minimization of up-front costs, predictable cash flows, and improvement of internal efficiencies. While emphasizing the third party role of the ASP between the software developer and the customer, Cherry Tree also addressed application solutions whose development was controlled by the ASP itself. For these applications, they used the term “proprietary software” to point out that the ASP companies who had originally developed their software themselves were better positioned from the standpoint of the ultimate performance and scalability of their (underlying) technology.

2.4 The New Service Market Perspective In their strategic backgrounder paper, the Software & Information Industry Association (SIIA 2001) presented arguments for considering the next generation ASP model as a service concept, as well as reasons why the Software as a Service concept was promising for both the service provider and for the customer. The paper also emphasized that the implementation of SaaS solutions requires partnering to get the whole palette of special skills and competences seamlessly coordinated in order to deliver the promised online service. The SaaS backgrounder paper (SIIA 2001) basically accepted the earlier IDC (1999) definition of ASP as basis for SaaS implementation. In short, also SaaS should fulfill the simple characteristics of ASP: it is application centric, restricted to only access, is centrally managed, one-to-many service, and delivered on the

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contract. The ASP contractor is responsible to the customer for the whole service, despite that several partners work together to provide the service. The paper also presented a variety of licensing revenue alternatives: subscription-based, usage-based, transaction-based, value-based, and fixed-fee models. The general assumption seemed to be that if the customers will get an easy access to valuable software service and the payment is not directly related to the real costs of development, the market will grow and thus the vendor will also benefit. What constituted a “service” was not defined explicitly, but it seemed that one should count the ex-ante application development and implementation plus integration of all components of the online service infrastructure to accomplish the SaaS. In this backgrounder paper, also SIIA (like Cherry Tree) proposed that in the emerging SaaS market the “pure play” ASPs are beginning to get into application customization because their customers require it. This was a clear deviation from the traditional ASP model in which the focus was more on standardized applications aimed at a large number of customers in order to keep the costs as low as possible. According to SIIA, the benefits for the vendor included substantial reductions in the costs of code delivery, the possibility to apply appealing and simple revenue charging models as well as the possibility to expand the potential customer base. By using SaaS services the corporate IT departments could move resources from application developers to application usage, freeing valuable resources to other critical areas. Outsourcing a service to a specialist firm could also provide a superior IT infrastructure, as well as offer an efficient and cost-effective outsourcing process that enables the customer to focus on its core competencies.

2.5 The Software Ecosystem Perspective The White Paper of the SIIA eBusiness Division (SIIA 2001) proposed a service initiative as well as introduced the term “Software as a Service”. The aim of the paper was to change the perspective from outsourcing to that of network-based service, exploring important issues and critical success factors for the software vendors seeking to introduce new online software services. The paper also presented strong statements about the tasks for which the responsibility should be moved from the user organization to the vendor. Among the most important issues discussed were the new skills and resources needed by the vendors in order to be able to ”SaaS enable” their existing products. This could e.g. mean building new versions of the software products and/or forming partnerships to enable the SaaS offering. From the practical point-of-view the ISVs need to take into consideration e.g. back office systems (to enable user authentication, to monitor usage, and to handle billing), support services, service provisioning, supplier management, management of customer data, integration to other applications, etc. when planning and creating their own SaaS offering. Most of these items were collected under the concept of “SaaS service platform”, which showed an example infrastructure needed in enabling SaaS solutions (Hoch F. et al. 2001). Since even the largest firms were not assumed to be able to provide all of the components needed in SaaS solutions, partnering was seen as the only realistic solution in order to be able to offer software as a service. The ability to manage partnerships will therefore be important amongst the new set of skills needed by the companies offering SaaS. Among these skills were also alignment of resources and abilities and management of the new channel paradigm with implications for the new information required to manage the rearranged distribution channel relationships. Interestingly, the paper (Hoch, F. et al. 2001) used the term “alignment” for the fit of the software and infrastructure firms to act as partners, and also aligning business objectives and resources. In its original context, this term was proposed to solve integration of technology and business strategies at the firm level. Clearly the SaaS concept will require tight synchronization of the technology skills needed and the business model applied, over the partner network. Ekanayaka et al. (2003) introduced a model of an ASP ecosystem, which consisted of platform enablers (who provide infrastructure, data centers and network services to ASPs), solution developers (application developers, ISVs), and business service providers (e.g. system integrator firms, professional services and consulting companies). In the ecosystem, anyone of these participants could act as the ASP for the customer. Partnerships between all three players were seen necessary in order to provide an effective and secure service. Ekanayaka et al. also noted that potential customers of ASPs should also evaluate the capabilities to create and manage partnerships as well as the financial stability of the ASP contractor. Walsh (2003) noticed that the ASP model is built upon technologies, economies, and strategies and it also introduces uncertainty as it redistributes responsibilities among organizations. Among the key benefits Walsh saw economies of scale that allow the ASP to operate a secure, reliable data center at a lower price per user,

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allowing for the small and midsize organizations greater level of security and reliability. These could be obtained by spreading the costs of innovative solutions over many customers who in addition will derive strategic benefit from the ASP relationship in that the ASP keeps them up-to-date on the latest technologies. According to Walsh (2003), the ASP model’s stakeholders are the customer and the user organization, the software developers, and the ASP itself. He claims that many of the benefits (such as reduced costs of software, installation and management, reduced data storage costs, and more flexible user access) are shared among the customer organization and the ASP. The software developer will benefit from increased software use volume and reduced software distribution costs, and the user organization from making use of more software. Outsourcing of inter-organizational computer systems can also be seen as a strategic benefit. Just as the ASP can be a distributor for applications, it can also become a distributor for data, providing e.g. an interface between the systems of trading partners.

2.6 Summary of the Articles The reviewed articles discussed the SaaS model from several different perspectives, also listing their arguments accordingly. Despite the fact that the original (technical) ASP propositions (IDC 1999) seemed to survive to constitute the SaaS model, the benefits and risks seemed to be biased depending on the view taken (customer or vendor). In many articles, it was clearly proposed that realization of such a demanding online service required a complex new infrastructure, which was not seen possible without building a partnering (supplier) network in order to achieve the complete palette of skills needed.

3. EVALUATION OF THE SAAS CONCEPT 3.1 Framework Our definition of the term business model follows the definition presented by Amit and Zott (2001): “A business model depicts the content, structure, and governance of transactions designed so as to create value through the exploitation of business opportunities”. Basing on their empirical study, they propose that the value creation potential of e-business is based on four independent dimensions: efficiency, complementarities, lock-in, and novelty. Value creation opportunities may result from combinations of information, products and services, innovative configurations of transactions, and the reconfiguration and integration of resources, capabilities, roles, and relationships among suppliers, partners, and customers. We use the Amit and Zott’s model as a framework for our analysis in order to better evaluate the created value’s distribution and also to better understand the pre-conditions required to successfully implement the SaaS model in practice.

3.2 Methodology All three authors independently identified and documented the benefits and risks of the SaaS model that were explicitly documented in the articles referred above. These articles were chosen on the basis of their topic (either SaaS or ASP related), coverage of different perspectives and their contribution (relevancy, quality and breadth and depth of analysis). Papers that were dealing explicitly only with either the customer or the vendor perspective were not accepted. In order to gain a rich and thorough view of the emerging SaaS phenomenon the articles were chosen from several different authors and sources: research articles, white papers and serious strategic initiatives from software industry organizations, and reports from software market analysts. We think that this increased the external validity and the generalizability of the SaaS value attributes collected and conclusions drawn. There are some empirical research articles published e.g. on the customers’ perceptions of ASP services (Note: not SaaS, e.g. Kern et al. 2002, Susarla et al. 2003, and Currie et al. 2004). Since these were based only on partial view (outsourcing from customers’ point-of-view) regarding our aim and the Amit and Zott’s (2001) framework, we did not include them in this literature analysis.

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Several rounds of iterations were needed to gather and unanimously construct all the relevant value generation issues from the chosen articles. This was necessary because the Software as a Service is a new and emerging phenomenon and hence the terminology used varied in the reviewed articles. All the issues constructed from the reviewed articles were categorized into benefits and risks concerning either the customer or the vendor and dealing with at least one of the four value creation sources of Amit and Zott’s model (2001). As the outcome four summarizing tables were created, where the issues were classified as “value issues” or “risk issues” for the customer or the vendor accordingly. During the identification and construction process these issues, which were sometimes expressed in slightly different terms in the articles, were articulated into full verbal statements that described the meaning of the issue covered. During the iterations, some value issues were separated into two, and sometimes several value issues were combined into only one. This was also done to classify the qualitative findings as objectively as possible in order to increase the construct validity and the overall reliability of this study (Yin 2003). Finally the gathered issues were arranged into four tables from A to D according to the coverage of their occurrence in the reviewed articles. In tables A and C the value issues are presented for the customer and the SaaS provider, in tables B and D the risk issues accordingly for both parties. We will shortly review the tables and our observations in the following chapter.

4. RESULTS 4.1 Analysis of the Value Generation in the SaaS Model 4.1.1 Customer Value and Risk Sources The general impression from table A is that the articles share a dozen significant benefits (value propositions) for the SaaS customer. First half of these (CB1 to CB6) were repeatedly presented in almost every article and the next three (CB7 to CB9) were found in at least four of the six articles referred. Many of the top six benefits were traditional IT outsourcing benefits: better focus on core competencies, easier to get access to technical expertise, and predictable and/or lower costs. As such these could not be directly attached to any of the four value creation sources efficiency, novelty, complementarities, or lock-in. Rather, they seemed to be conditional benefits, which could be achieved only if the provider would fulfill the expectations of successful outsourcing: the provider should be more skilful than the customer to run a service infrastructure and business applications on that. For most small and middle-sized non-IT companies this may be realistic but not for large IT infrastructure oriented user companies. The rest of the top six customer benefits were related to the novelty of the SaaS model directly, namely shorter application implementation time (due to the sourcing network), the elimination of software version management, and the possibility to get an aggregated package of software applications from the same vendor. These could be attached to a broader set of value sources enabled by the new model of operation itself, namely efficiency, novelty, and complementarities. The next three customer benefits (CB7 to CB9) having less coverage in the articles were dealing with the (in principle) unique way to get an economic access to the valuable (and expensive) software application, at anytime and from anyplace. Clearly, this is very dependent on the providers’ ability to achieve economies of scale. It is not apparent that all SaaS providers will succeed in this. There were only three risk issues raised (and shared in majority of papers) for the customer (Table B): less application tailoring and integration options, increased risk of losing business-critical data, and probable online service performance related problems. The least mentioned risk issue was that the customer would be bound with a long-term contract in order to make the low prices possible.

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Table A. Occurrence of the benefit issues for the customer in the articles reviewed ID

Description

CB01 SaaS enables the customer to focus more on core competencies CB02 SaaS makes it easier and/or less costly to get access to required technical expertise CB03 The system implementation time is shorter with SaaS CB04 SaaS enables a wider and more flexible array of payment methods (predictable and/or lower costs) CB05 SaaS makes version management easier for the customer (free upgrades, no technology obsolescence etc.) CB06 SaaS provider aggregates software applications from several sources and builds a complete service offering CB07 SaaS enables the customer to get access to ”best-of-breed” applications that would be too expensive to buy CB08 SaaS makes it possible to access the software independently of location and time CB09 The initial/investments and costs are much lower in SaaS CB10 With SaaS, the customer can get access to a superior IT infrastructure regarding reliability, security and scalability CB11 SaaS broadens the selection of potential applications available to the customer CB12 SaaS enhances the available customization options of applications to the customer Number of customer benefit issues in each article

Cherry tree 2000

SIIA 2001

Hoch et al. 2001

X

X

X

X

X

X

X X

X X

X X

X

X

X X

Ekanayaka et al. 2003

Walsh 2003

X

X

X

X

5

X X

X

5 5

X

X

X

5

X

X

X

X

5

X

X

X

X X

Mizoras et al. 2003

X

X

X

X

X

11

10

X

X

X

X

X

X

9

4

X

8

Occurrence of the benefit

6

4 X

4

X X

4 3

X

3

9

Table B. Occurrence of the risk issues for the customer in the articles reviewed ID

CD01 CD02 CD03 CD04

Description

There are less tailoring and integration options available for the customer SaaS increases the risk of losing business-critical data or exposing it to third parties Availability, reliability and performance-related issues are to be expected, depending on the technological solution of the SaaS provider In exchange for the lower price, the customer is typically bound with a long-term contract (switching costs) Number of risk issues for the customer in each article

Cherry tree 2000

SIIA 2001

X

Hoch Mizo- Ekanaet al. ras et yaka et 2001 al. al. 2003 2003

X

X

X

X

4

X

X

3 X

X 0

3

Occurrence of the risk

4

X

X X

Walsh 2003

3 2

1

3

1

4.1.2 Supplier Value and Risk Sources The number of benefit issues found for the supplier (Table C) was much smaller than for the customer. Almost all articles shared these two: economies of scale in both production and distribution costs (efficiency) and more predictable cash flows than in the traditional software licence sales. Other widely shared suppliers' benefit issues were the expansion of the potential customer base (novelty, efficiency) and the shortened sales cycle (efficiency).

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Table C. Occurrence of the benefit issues for the supplier in the articles reviewed ID

SB01 SB02 SB03 SB04 SB05 SB06

Description

SaaS enables economies of scale in production and distribution costs (one-to many offering) The cash flows from SaaS are more predictable than in traditional software sales SaaS expands the potential customer base The sales cycle of SaaS is shorter than that of traditional software sales SaaS lowers version management and maintenance costs If supplier succeeds in integrating good product and service into a SaaS offering, this creates a barrier to entry for competitors Number of benefit issues for the supplier in each article

Cherry tree 2000

SIIA 2001

X

X

X

X

X

X

X X

X X

Hoch et al. 2001

Mizoras et al. 2003

X

Ekana Walsh -yaka 2003 et al. 2003

X

X

X

X 4

5

X

3

1

2

Occurrence of the benefit

5

4 X

3 3

X

2 1

3

Among the six risk issues documented (Table D) the top four were the following: 1) the difficulty to manage the complex network of suppliers required for integrating the product and service businesses, 2) reduced software application turnover when moving to the SaaS model (service fees instead of license and consultation fees), 3) possible performance and scalability problems depending on the technical solution, and 4) high initial investments when starting the SaaS business. It is interesting to notice that these provider risk issues are related to several customer benefits. This implicates that in the value generation significant part of the customer value is in fact not realistic for the provider to accomplish alone because the palette of competences required is so extensive in order to fulfill all the components of the service (software, complements, infrastructure, customer service, management, etc.). From this perspective the proposed SaaS model seems not to be a coherent business model. Table D. Occurrence of the risk issues for the supplier in the articles reviewed ID

SD01 SD02 SD03 SD04 SD05 SD06

Description

It is difficult to manage the complex network of suppliers, which is required for integrating the product and service businesses Moving to the SaaS model initially reduces the turnover as the revenue comes from service fees instead of license sales and consultation fees. Performance and scalability issues are to be expected, depending on the technical solution used High initial investment in starting SaaS business (Building and maintaining the IT infrastructure required and buying 3rd party software) The customization of SaaS applications typically requires extra costs Requires commitment to a more frequent release/upgrade cycle Number of risk issues for the supplier in each article

Cherry tree 2000

SIIA 2001

Hoch et al. 2001

X

X

X

X

X

X

Mizoras et al. 2003

Ekana -yaka et al. 2003

Walsh 2003

X

X

X

X

X

X

X

X

X

4

X

4

X

4 3 2

X 5

3

Occurrence of the risk

1 5

0

3

2

4.1.3 Discussion Looking critically at the distribution and the types of the benefits and risks presented and shared in the articles we can see that the picture given looks overoptimistic for the customer, based on the number of benefit and risk issues proposed. Importantly, many of the benefits are only efficiency based and conditional, based on the pre-condition that the SaaS provider could overcome the listed significant risk issues. All in all,

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these observations make the SaaS model problematic for the provider, as the entry barrier can be high. The SaaS concept is proposed to be realistic only if the provider is able to offer immediate customer value. Even then customization and/or lock-in may be required to make the business sustainable and to reach the critical economies of scale. Only then the other “promised” benefits for the customers could become true. Building a SaaS offering will require more concrete models of how the continuous flow of product innovation (novelty for the customers) could be arranged, and how these new applications could be integrated into scalable IT infrastructure, still keeping the transaction costs low. Evidently, no open and market driven software ecosystem based on bilateral market relations between the partners will work effectively enough. Therefore, well-coordinated and managed collaborative network arrangements (semi-hierarchies) should probably be established to promote the promising SaaS supplier network. This will require more complex business models than proposed, based on effective lock-in mechanism, continuous flow of complementary applications from the innovator network, hybrid revenue models responding to requirements of experience products, and risk and compensation sharing among the players of the network. We noticed that the ASP/SaaS literature does not yet react to the fact that the SaaS model, when changing the one-to-one (business-to-business) relationships into one-to-many relationships, will transform the market relations and the traditional software licensing model to the one-to-many utility e-commerce model. This will require the creation of a strong brand, either enabling hybrid revenue logic where low priced software offering is still possible or requiring customization and lock-in to justify higher prices for the software. Apparently the types of new application innovations made for the SaaS will be critical to the success. Not much is yet said of the possible application areas.

4.2 The New Definition of the Software as a Service According to Walsh (2003), the term “the ASP” could substitute “time-sharing” in Ziegler’s definition from 1967: “Time-sharing is a communications-oriented method of using computers. It is a technique that permits concurrent utilization of the same installation by two or more persons working at remote devices capable of direct, online access to the data processing equipment”. In his opinion, while CPU costs were the dominant economic driver for the 1960-era time-sharing, support costs are the key economic factor for ASPs and therefore, the economy-of-scale benefits should be shared among the customer, the software developer, and the ASP. On the basis of the value driver analysis we think that instead of efficiency like in time-sharing, the sustainable value driver for the SaaS should be the easy and low-cost access to innovative and useful software applications, based on a broader set of value sources (novelty, complementaries and efficiency). Therefore, we conclude by presenting the following definition for the Software as a Service: “Software as a Service is time and location independent online access to a remotely managed server application, that permits concurrent utilization of the same application installation by a large number of independent users (customers), offers attractive payment logic compared to the customer value received, and makes a continuous flow of new and innovative software possible”. In addition it will also be important to be able to organize and manage the application innovation network well in order to realize the SaaS model as described in the current literature.

5. CONCLUSION On the basis of our literature survey, the proposed benefits and risks of the Software as a Service model seem to be quite biased and give at least somewhat unrealistic picture of the customer benefits. In fact, the SaaS model did not come very far from the original ASP definition given by IDC (1999), based on the view that ASP is one form of IT outsourcing. On the other hand, the literature has probably underestimated the difficulties and risks caused by the SaaS service’s requirement to be able to transform the software product business into the software online service business. Most importantly, according to many articles, the SaaS provider’s role has to radically change from remote application hosting to that of an active agent managing the new complex software supplier network (software ecosystem) where all the required IT capabilities are coordinated in order to create and maintain the value creation sources to all parties involved. It is unclear what might be the managerial and economic means to make such an ecosystem effective.

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ISBN: 972-8939-03-5 © 2005 IADIS

We propose that instead of the limited outsourcing perspective the SaaS model should be understood as a typical e-commerce arrangement dealing with digital products. If so, then we have to accept that considerable initial set-up investments are required in e.g. marketing and brand formation. We recommend that empirical studies should be targeted (instead of customers) at the SaaS providers and their partner networks in order to survey the best types of network arrangements, applications delivered, and revenue logic used.

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