Software as a service (SaaS) is an interesting new business model. It is touted as a game changing development that is going to challenge the traditional software players? business model. However, if it is so big and obvious, then why has it not taken off in a major way, despite Bill Gates talking about it way back in the early 2000s through Microsoft?s Next Generation Windows Services (NGWS) initiative?

My hypothesis is that SaaS will take off much faster and in a more meaningful way in the SMB market. Enterprise market will lag in any meaningful use of SaaS. To better understand this view, let us analyse the three critical players in SaaS: software IP vendors, customers (both enterprise and SMB) and the enablers (3rd party system integrators, consultants, telcos, etc.)

While almost all the software vendors recognise the importance and implications of SaaS, most of them have entrenched business issues and revenue streams, which tends to slowdown wholesale shift to SaaS. Most of the current software is not architected to be delivered as a service. They work well when installed, run and managed within a firewall, but not so when many users access it as a service. With the advent of new tech like Web services, XML, ASP etc, it is getting easier, but is not where it needs to be to become ubiquitous.

Most vendors have comprehensive licence offerings for traditional play, but are still figuring out licensing for ?software in a tap?. Complex issues like defining usage, how to bill, how to reconcile, etc are key roadblocks. SaaS has revenue implications especially in the short-run for big vendors. A potential $1 million deal will become $200 K every year for the next several years because it is now a service. It is the classic capex versus opex issue.

Large enterprises have to deal with several internal hurdles and contradictions, while looking at SaaS. At the minimum, SaaS will reduce their influence and at worst make them redundant.

It is hard to deliver customised software ?in a tap? because the whole scale issue is undermined. Finally, fear of the unknown prevents most enterprises from experimenting especially in mission critical areas.

Cost economics is one for sure. Any meaningful SaaS delivery requires very good infrastructure?big pipes, good metering software, access to regular software upgrades and a robust collection mechanism. Not many can make this investment, especially when the market is nascent. Yet, without the right infrastructure, the market cannot grow. Exit barrier is very low and customers can switch with minimal costs. And in all this, the long-term cost is largely unknown. Vendors will always highlight to customers that the long term cost will be lower with SaaS, while their own strategy would be to increase long term revenue from the same customer.

My crystal gazing for SaaS growth in India in the next five years shows software architectures will become open and lend itself better and better to be offered as a service. CRM is proving this and more mainstream software will take this path. Licensing will mature as this is one of the easiest to fix and totally in vendor control. Vendors will transition their revenue from the product to service model gradually to smoothen out impact. They will do so by focusing on SMB for services, while keeping product approach for enterprises. SMB customers will be the pacesetters. Lack of IT sophistication and clear benefits of ROI and low initial investment makes them perfect candidates for SaaS.

Enterprise customers will implement SaaS for peripheral areas, both to test the model as well as to get bragging rights. Few will move mission critical areas to SaaS. Enablers will be more followers than be real pacesetters, pushed more by software vendors. Ultimately SaaS will find its niche but like most ?big things? in the IT industry, it will pale behind the ?next big thing?.

The writer is manager director, Quest Software (India)