Software as a Service (SaaS) is a broad term that refers to a model for hosting commercial software that is delivered remotely to customer organizations. Creating a SaaS offering is a significant undertaking because nearly every aspect of the SaaS business is different from the standard software-licensing model. Beyond the business model, the technical team must also deal with issues of security, multi-tenancy, and manageability that are of much greater concern than in a typical commercial software product. Independent Software Vendors (ISV) and other Microsoft partners that want to take advantage of the growing SaaS market face considerable business and technical challenges, but the efforts can be rewarding.

Register now for these On Demand SaaS Webcasts: Overview of Solution for Windows-based Hosting for Applications Microsoft Monitoring and Reporting and Software Update Services Server Building and Service Provisioning

SaaS Offerings
Organizations have many reasons to consider SaaS solutions. Many will be intrigued by the projected cost savings when eliminating the burden of maintaining, operating, and supporting software. Others will see SaaS as an opportunity to refocus IT resources on strategic initiatives. Still others will appreciate the increased availability and 24x7 support that hosting organizations can provide. Customers appear to be warming to the idea of SaaS and the market is growing. According to a recent IDC study, the size of the SaaS market will grow from $2.3 billion in 2003 to $8.0 billion by 2007. Other studies cite similar numbers and refer to an annual growth rate of 25 percent. SaaS offerings currently take one of three different forms: managed services, hosted applications, and software-on-demand.

Managed services is the simplest scenario. In this scenario, a vendor may manage the operations for a particular application given them by a customer organization. The hosting provider will manage the infrastructure to support the software, and may also configure, customize, or patch it. IBM is the world's largest provider of pure managed services with everything from Web sites to complete company infrastructures under their control, but there are many other providers that are qualified to provide this service.

In another model, a vendor will host a commercially available set of software applications and offer it to customers under a pay-as-you-go pricing model. In this scenario, vendors offer access to the application using Terminal Services. This model mirrors the old Application Service Provider (ASP) model that was a favorite child of the Internet boom.

The software-on-demand model is similar to the ASP model, except that the hosted software is specifically designed for a one-to-many (called "multi-tenancy") environment. These applications are typically Web-based and focused on a narrow offering such as project management or customer relationship management (CRM). Salesforce.com, a provider of Web-based CRM software, is a classic example of an on-demand provider, but there are others that follow a slightly different model and may not immediately come to mind. For example, the MSDN knowledge base and Microsoft's Hotmail are both on-demand offerings.

SaaS Business Challenges
As with everything in business, the primary driving factor behind the growth of the SaaS market is money. Without a doubt, potential customers perceive significant cost savings in the SaaS model, but they may also perceive a loss of control, which means some will choose not to adopt SaaS. Recently, during price negotiations with a customer over an intranet project, I was informed that our price for the project was too high because "we [the customer] can get a hosted SharePoint site for less than $100/month." In the end, however, we won the business based on the customer's need to have control over the customization and integration of the data contained in the intranet.

The bigger challenge to the ISV is the change to the internal business model. Not only does SaaS impact the way revenue is realized and collected, but it also changes the way in which the vendor interacts with the end customer. In the SaaS model, vendors are responsible for providing service 24 hours a day from a data center, which means that the mix of skills and people must change, often dramatically.

To help overcome these challenges, Microsoft is gearing up to provide new tools and programs to its partners. At the Convergence 2006 conference, which is the major conference for MBS partners, Bill Gates spoke about SaaS and its impact on partners and customers. Referring to SaaS as a "change of relationship between us and our customers," Gates acknowledged the challenges facing Microsoft and MBS partners trying to adapt to the SaaS market. For example, Microsoft will offer versions of MBS products suitable for traditional deployments and SaaS offerings, including a hostable CRM solution, which is already available.

SaaS Technical Challenges
SaaS presents many technical challenges to go along with the business challenges. The typical ISV or MBS technical team is not used to dealing with the issues of usage and support that go along with the SaaS model. These issues can be broadly categorized into provisioning, security, monitoring, and support.

Provisioning issues involve the initial infrastructure build out for new customers as well as the reuse of equipment when a customer is upgraded or lost. Most ISVs and MBS partners do not have strong networking components because the traditional software-licensing model does not require it. In most cases, ISVs and MBS partners rely on the customer's infrastructure team. The customer typically builds out the servers and operating systems while the ISV or partner installs the software and walks away. ISVs and MBS partners wishing to enter this space must find a way to acquire significant networking skill either directly or through partnering with hosting vendors.

Security issues are especially significant in the SaaS model. Providers must deal not only with authentication, but also with issues of multi-tenancy. In other words, not only do providers have to keep unauthorized people from accessing the software, but they must also keep authorized users from seeing one another's data. Some providers solve this problem by creating a separate security domain, but increasingly users want to integrate their own security systems with that of the hosted software. In other cases, such as hosting Microsoft Exchange, Active Directory domains are a requirement. Therefore, a design must be implemented that provides separate organizational units for each customer. Again, this is not a typical skill set for either an ISV or MBS partner.

Monitoring is a broad category, which encompasses the daily operational aspects of SaaS. Providers must be able to respond to server or service failures within an acceptable time frame. In fact, providers will need to define a service-level agreement (SLA) with each customer that spells out the response time and action plan for restoring service. In my experience, very few organizations have well-designed SLAs relying instead on a "fix it as fast as you can" strategy. Along with these daily operational concerns, providers will need a formal disaster recovery plan should a catastrophic event impact the hosting site.

Support is a key category that often determines the level of customer satisfaction. A strong support plan will address software updates, patches, intrusion protection, and customer service. For most ISVs and MBS partners, this is an area of some expertise. Organizations looking to enter the SaaS space should be able to leverage their experience in this area.

Microsoft is addressing the technical issues through the Microsoft Solution for Windows-based Hosting For Applications. The solution relies on existing Microsoft products to create a set of modular components that can be deployed as needed. The foundation of the solution is Windows 2003, but also includes special tools for site creation and support. The DotNetNuke Web application framework is also part of the solution. For those interested in learning more, Microsoft is hosting a seminar series and associated Webcasts. You can get the details at http://www.microsoft.com/serviceproviders/hosters.mspx.

The Impact of SaaS
SaaS offerings will continue to grow and impact all vendors. While ISVs and MBS partners will be affected sooner, traditional platform partners will also be affected as customers try to decide between buying, building, and SaaS options. Therefore, every organization will be forced to sit back and think about their relationship to the SaaS market. Microsoft has indicated that future product releases will often have both a traditional and SaaS version, which is a recognition of the fact that customers will choose to deploy software in their own infrastructures in combination with solutions delivered through SaaS. Like any emerging market, SaaS will have winners and losers. To be successful, all vendors and partners must decide if and how to change their current business model to take advantage of this new market.

Scot Hillier is an independent consultant focused on creating solutions for Information Workers with SharePoint, Office, and related .NET technologies. He is the author of 8 books on Microsoft technologies including 'Microsoft SharePoint: Building Office 2003 Solutions' and 'Advanced Windows SharePoint Services.' When not writing about technology, Scot can often be found presenting to audiences ranging from developers to C-level executives. For information on Scot's Microsoft books, visit www.sharepointstuff.com.