Written by Jennifer Granger

In recent years, technology trends have exponentially grown more favorable to hosted application models. This is a paradigm shift from previous years. As recently as the beginning of the decade there were no more than a dozen organizations that referred to themselves as Application Service Providers (ASP). They formed a small, niche group of service providers. A bold combination of aggressive build outs of sophisticated data centers stacked with hardware, expensive enterprise software agreements, ISO and ITIL certified practices and talented developers many from leading consulting firms was a powerful formula. However, there were few early adopters, customers, ready to embrace the model and see the operational freedoms and capital benefits at reach.

The software applications hosted by the ASPs were enterprise solutions including ERP, SCM, CRM and eCommerce. These applications were powerhouses and bolt-on options such as HR and Finance modules allowed for departmental permutations but any significant customization required extensive developer time and lengthy engagements. The cost and time to go live was prohibitive.

Many businesses also found the service model too "uncomfortable." The hosted applications were rigid, the applications and infrastructure resided outside of their tangible enterprise and it was still a time when IT outsourcing was viewed by many as taboo. Within a couple of years most ASPs ran out of funding and were unable to sustain operations. The reason for their failure was lack of customization and unsupportive business models to allow providers to take advantage of economies of scale. Subsequently many of the application pioneers were acquired. Oracle now owns some of the largest including PeopleSoft, Seibel and JD Edwards.

Fast forward and there is a fundamental change in how business gets done. Software as a Service (SaaS) became the successor to ASPs, simple and economical, the model works. SaaS works because as technology improved so did the ability to efficiently provide the service. SaaS is a software application hosted by a third party service provider and delivered to the end user. Many SaaS applications have reached critical mass and are affordable to nearly all segments, Saleforce.com for CRM and WebEx for video conferencing and Citrix for desktop collaboration are examples.

With SaaS, software applications are available as a network based service and users gain access rights to the use of the license. Users simply access the software through a WAN connection. The WAN connection can be as simple as a wireless Internet connection or as sophisticated as a layer two VPLS connection over GigE. WAN connectivity has improved as more technologies are increasingly more abundant with rich geographic coverage and increasing affordability. SaaS applications are also very adaptive to mobile and remote work forces. The SaaS provider is responsible for ensuring the security, data integrity, availability and performance of the application. Rapid technology refreshes and advancements are made available as they occur often. SaaS supports the physical separation of users from the applications, addresses concerns for latency issues related to geographic distribution of users from their applications.

Businesses clearly saw the value of SaaS because it allowed them the freedom to avoid the operating and capital costs they would have otherwise assumed by supporting the software applications themselves. Businesses avoid the cost of securing enterprise licenses, maintaining the application and performing ongoing patch and version upgrades. Also the technology infrastructure to support business applications requires substantial investment with many fixed costs including full time IT staff resources, power along with the capital requirements including servers, storage, and network to support the application(s). With SaaS, businesses minimize their risks, realize a faster implementation and with low start-up costs. Even more, users are guaranteed application access, processing speed, storage, development and network resources on demand all scalable with competitive service commitments.

The value proposition is simple and straightforward. Users transparently access their business critical applications without worrying about the back-end and simply pay by consumption. Similar to a utility, telecommunications services for example, SaaS is simple but works very well. Businesses can free staff, operating and capital budget to invest in growth initiatives. They are able to move the focus of their IT operations from a cost center to a revenue center, optimizing cost structures and adding greater levels manageability and control of costs. It adds a much richer level of simplicity.