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Software as a Service (SaaS) and the enterprise

Some people believe that SaaS will be adopted only by small-and-medium-size businesses (SMBs), but not the enterprise. I disagree with that. In fact, SaaS will soon become the primary mode of consuming software for many of the mundane applications, regardless of company size.

The usual argument is that SMBs, because they are small, cannot achieve the economies of scale, and so they far prefer to outsource, or consume applications on demand, like a utility. No one would dispute this. But I believe the enterprise too will fall to SaaS for many kinds of applications.

The critical issue is not customer size, though initially SaaS and other hosted applications have had issues with scaling to the enterprise. (On the other hand, does anyone question whether Google Apps could handle a company of 100,000 employees?) Over time, the critical issue will become whether the application itself is, as Geoffery Moore describes Core or Context. In Moore's terms, core activities are those that differentiate a company, the activities that create and sustain the company's competitive advantages. Apple, for example, is differentiated by design.

SaaS will soon become the primary mode of consuming software for many mundane applications

Context activities are those activities that are necessary for the company to survive, but they do not create or sustain the company's competitive advantage. We have a receptionist in the office, and while she does important work, she does not make our company what it is in the competitive market place. To use an example closer to home, your company uses email, but do you use it in such a unique way that it adds to your competitive advantage?

Moore says that the truly great companies will essentially outsource all context activities, and focus only on the core. Apple will not outsource design, but does it really need to host its own email system? Does your company need to host its own email system?

Which brings us back to SaaS. For too long the enterprise has spent precious up-front capital and person-energy deploying all sorts of context activities and IT projects. Some argue that large companies, because of their size, can achieve economies of scale in IT, and so it makes sense to host their own applications.

But Moore says that this is a distraction, and I agree. In 5-10 years, it will appear quaint to be hosting your own email / communications server, and many other applications. SaaS is not just a delivery model, and it's not just a consumption model. It's a model that allows companies to invest in their core differentiators, and leave the rest to specialists.

Of course, it won't happen over night.

Alan

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