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The Pros and Cons of Software as a Service

By Dale Troppito, The Gantry Group
June 14, 2004 12:00 PM ET

Computerworld - The software industry is in a critical state of metamorphosis. Much like a butterfly emerging from its cocoon, software is spreading new wings as a service. The trend began to take hold back in the mid-1990s with the introduction of the application service provider. ASPs were the first to capitalize on the Internet as an interactive delivery channel for application software and data exchange. But the ASP fell victim to the dot-com bust and became a pariah of the investment sector.
Today, we don't often mention the ASP acronym; instead, we speak of "hosted" or "managed" services and "outsourcers." But the underlying premise is the same: Software is being delivered as a shared service.
The Downside of Perpetual Licensing
For decades, the prevailing purchase model for software has been the perpetual, on-premise license, priced by the total number of enterprise user seats or by the site as a whole. For software vendors, this meant that the initial sale was the big revenue opportunity. Aftermarket revenue came from the sale of annual maintenance contracts, software upgrades and, possibly, add-on capabilities. But perpetual licenses have brought vendors perpetual heartburn because they fail to accommodate a desire for recurring revenue streams. The sales force must constantly forage for new customers in order to sustain revenue growth. Software vendors have longed for a model that would allow the business to flourish from an established, loyal customer base.
Buyers of software applications, on the other hand, were faced with making a large upfront investment -- and taking a large upfront risk -- with the perpetual license model. Unsure of the delivered business value, concerned about the software's ability to meet enterprise expectations and worried about cash-flow impact, buyers often refrained from signing contracts. Prohibitively costly license fees made enterprise systems inaccessible to many small and midsize companies. The perpetual license is now recognized as an inhibitor to software sales.
The Downside of On-premise Software
Buyers drove the requirement to have both the software and the associated corporate data on-premise. The prevailing concerns over enterprise control of the software and corporate data security made it impossible for buyers to consider any other licensing or delivery model. This meant that software vendors -- and buyers -- were condemned to continuous maintenance, software update and asset management activities. Software license management proved to be highly complex, and enforcement of companywide compliance was difficult.
As the effects of the stalled economy swept over enterprises at the beginning of this decade, resource-challenged IT departments, out of necessity, creatively looked for new models to reduce the internal



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