Software on tap

Software-as-a-service providers are back with new and more popular offerings

Government executives soured on the idea of outsourcing software operations when most of the pioneering application service providers (ASPs) went belly up during the dot-com bust. But some have decided they are ready to give it another try.

The stigma has not completely faded, but ASP outsourcing has reinvented itself in a more user-friendly and efficient guise as software as a service (SaaS). Some people use the term on-demand applications. Just as telephone customers pay to use a service and don’t buy the telephone network, SaaS customers pay to use software developed, operated and maintained by a service provider.

Market analysts say a covey of SaaS providers is poised to take off, having taken heed of their predecessors’ painful lessons and benefiting from some recent industry trends. If that happens, government agencies might finally accept a fee-for-service, utility-based computing model, a vision Defense Department officials and others strongly endorse.

“We’re living in a world where organizations have decided that they don’t want to deal with the hassles of technology and software any longer, or they can’t afford to deal with them,” said Jeff Kaplan, a senior consultant at the Cutter Consortium, a global information technology advisory firm. “What they really want is functionality without the technology, and SaaS is increasingly making that happen.”

Private-sector organizations have led the way so far, embracing SaaS enterprise applications such as sales and marketing tools, Web content management and enterprise resource planning systems. Early government adopters included the Defense Information Systems Agency, the Military Health System, and many state and local agencies.

More are likely to follow. Spending on business process outsourcing and application services will be the fastest-growing segment of a federal outsourcing market expected to grow 5.9 percent annually, from $13.3 billion in fiscal 2007 to $17.7 billion by 2011, according to a recent Input study.

“A lot of the pieces are falling into place that might set this up for some significant growth within the government,” said John Slye, a senior analyst at Input. “It’s really a matter of when, not if, government agencies will embrace SaaS.”

A new paradigm
The ASP companies of the late 1990s were often network infrastructure firms that licensed enterprise software from other companies such as Microsoft, Oracle and SAP. The ASP then hosted the third-party software on its servers and sold use of it to customers. Those customers gained access to the software via a private network.

Unlike the older-generation ASPs, the new SaaS providers are also software developers. They design software for Web-based operations and maximum flexibility. Those differences are important.

“The traditional enterprise applications like SAP and Oracle were designed really to accommodate the IT architecture and database structure of the traditional data center environment and really weren’t user-friendly,” Kaplan said. “The new, net-native applications were actually created to reside on the Internet, so they’re more user-friendly, they’re more flexible, and they’re less expensive.”

Major software developers such as IBM, Microsoft, Oracle and SAP are becoming SaaS providers, along with a host of smaller, niche players such as Avue Technologies, CrownPeak, dbaDirect, ESI Information Technologies and RightNow Technologies.

Much of the recent SaaS uptick can be traced to the success of, a SaaS company founded in 1999 by a former Oracle executive. That company stood out from most other application outsourcing firms at the time because it hosted and sold access to its own enterprise customer relationship management (CRM) application. Clients got all the benefits of the application without the back-end infrastructure costs and maintenance hassles of traditional enterprise software.

Companies soon discovered the easy-to-use service, and today has more than 30,000 clients, 625,000 subscribers and revenues topping $500 million. Its largest customer is financial-services powerhouse Merrill Lynch, which recently increased its subscription to 25,000 seats, essentially its entire workforce.

“The success of has really helped legitimize the SaaS marketplace,” Kaplan said. Since then, however, other major players such as IBM, Oracle and SAP have entered the market, and people are recognizing that this is not just a fad. It’s a fundamental change in the marketplace.

A 2006 survey conducted by the Cutter Consortium concluded that 31 percent of private-sector organizations are using SaaS, and another 43 percent are considering it. Moreover, SaaS buyers are not limited to small and midsize businesses that are unwilling or unable to pay for traditional enterprise applications. A surprisingly large number of them are well-financed enterprises weary of their existing applications’ low return on investment, Kaplan said.

Getting in the game
Many government agencies also find it unappealing to maintain traditional applications and handle tasks such as storage, data administration and security. And that is a trend that bodes well for SaaS providers.

Support fatigue is one reason why DISA, the most high-profile federal agency to embrace SaaS so far, awarded a contract last year to IBM for an on-demand subscription to the company’s Lotus SameTime Suite of collaboration tools, which include application sharing, text messaging, electronic whiteboards and audio/video services.

That contract, part of DISA’s Net-Centric Enterprise Services strategy, calls at IBM to host and maintain all hardware, software and unclassified data at its own facility in Herndon, Va. Classified data is hosted by IBM on-site at an undisclosed government facility.

“The government really has no responsibility other than to pay for what is truly a service,” said John Thomas, a DOD delivery executive at IBM. “They’re not burdened with responsibility for software licensing, implementing new user requirements, keeping up with the current state of technology. That’s our job now, and they can focus on more mission-critical tasks.”

Other issues are driving government agencies to consider using SaaS, such as shrinking IT budgets, an aging workforce and a trend toward lengthy competitive-sourcing procurements. The Office of Management and Budget’s Line of Business Centers of Excellence program is also pushing federal agencies toward the SaaS model. That program requires agencies to act as an application host for other agencies or have their own applications hosted by someone else.

“I think it’s forced a lot of agencies to say, ‘As I do my application upgrade, I want to have more control over who’s going to be providing that service to me — as opposed to OMB forcing me in some direction,’ ” said Wayne Bobby, vice president of finance and administration solutions at Oracle.

The potential cost benefits of the SaaS model provide additional strong incentives. Applications can be deployed quickly, and the total cost of ownership of a typical SaaS application is 20 percent to 40 percent less than the cost of a traditional customer-installed application, said Rob Rose, vice president of marketing and product strategy at CrownPeak, which sells a SaaS Web content management service. Other vendors claim overall savings of as much as 80 percent.

Service a key factor
In the end, the tipping point for many agency decision-makers often has less to do with money and more with the level of service a vendor can provide via the SaaS model.

“It’s not this massive IT deployment,” said Mike Goodrich, director of administration for the Arlington County, Va., Economic Development Department, which subscribes to’s CRM application to help manage its customer contact and outreach activities. “We don’t have to spend a lot of time engineering it. We simply use it. And if we need something changed, they take care of it in minutes and deploy it out to all our users.”

Deanna Boehm, director of marketing at Virginia Interactive, reported a similar positive experience. That organization has been relying on CrownPeak’s content management system service to manage the state and local agencies that use the Web site. “We always have an immediate, expert response to solving problems and implementing portal changes,” she said.

The Military Health System is also reaping the benefits of enhanced service. The agency asked Oracle to provide its Federal Financials application in a SaaS environment two years ago.

“In those two years, they haven’t had one minute of unplanned downtime,” Bobby said. “They don’t even see any bugs in the system, because we’re able to identify them and fix them before they even know they’re there. We can do upgrades, new software releases and patches much, much quicker than they could ever do on their own.”

That kind of service can be appealing to resource-strapped state and local governments. For example, IT managers in Butler County, Ohio, buy hosted services for virus scanning and remote PC access. The latter, which is provided by, relieves the IT department of an administrative burden and gives the county another level of security that doesn’t have to be managed in-house, all of which helps reduce its overall risk exposure, said Greg Sullivan, the county’s management information systems director.

“We are now on the lookout for other hosted services that will also be beneficial to us,” Sullivan said. “If a SaaS application can help us reduce costs or provide us with less risk than we have now, then we’re interested in taking a hard look at it.”

Hayes is a freelance writer based in Stuarts Draft, Va. She can be reached at [email protected].
SaaS is not your grandfather's ASPIt’s easy to assume that software as a service is just an application service provider with a fancy new name, but that’s not the case, industry analysts say. SaaS has roots in the old ASP model — some even call it ASP 2.0 — but at least three significant differences distinguish the two.


Third-party network and server infrastructure vendors host popular applications developed by other companies.

SaaS: Software developers such as IBM, Microsoft, Oracle and others host their own applications.


Applications developed originally for an enterprise client/server architecture are modified for deployment in a Web-based hosted environment.

SaaS: Applications are developed specifically for deployment in a Web-based, hosted environment.


ASP mostly relies on a single-tenant model, meaning each application runs on its own server infrastructure.

SaaS: SaaS relies on a multitenant model, allowing for greater scalability and economies of scale.

— Heather B. Hayes
Do homework before signing a SaaS contractAs with any outsourcing arrangement, contracting with a software-as-a-service provider requires some preparation and due diligence. Business experts recommend these seven steps.
  • Plan an educational campaign for senior managers to inform them of the differences between the SaaS and application service provider models.
  • Ensure a strong business case by making sure that your SaaS vendor can frame costs within an annual budget cycle and bill accordingly.
  • Carefully evaluate the true costs of a traditional application versus SaaS, including hardware, related software and administrative costs.
  • Investigate a potential vendor’s track record of performance and financial health. The better ones will be certified under SAS 70, an auditing standard developed by the American Institute of Certified Public Accountants.
  • If security is an issue, make sure that the vendor can also provide on-premises hosting of data deemed too sensitive to move off-site.
  • SaaS applications tend to be standardized, but if there are agency-specific needs that require customization, check that the provider can accommodate those necessary modifications.
  • Consider all issues associated with hosted services, including service-level agreements, data access, business continuity and security.

— Heather B. Hayes
9 popular SaaS applicationsSoftware-as-a-service advocates say the outsourcing model will work with just about any application. Here are nine applications government and private-sector organizations use most often.
  • Customer relationship management.
  • Enterprise resource planning.
  • Procurement/supply chain management.
  • Web content management.
  • Project management.
  • Accounting/finance.
  • Human resources.
  • Productivity and collaboration tools.
  • Unified messaging.

— Heather B. Hayes


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