Q&A: Understand the Shift From Traditional Offerings to Cloud Computing and SaaS

IT and sourcing professionals need to understand specific cloud computing services, such as software as a service, and what it could mean for their businesses, before they can assess whether to adopt the service or remain with traditional IT offerings.

ANALYSIS

Many IT professionals know that they will or may need to adopt software as a service (SaaS), but often feel unclear about the difference between the cloud and SaaS, and the impact these services will have on the IT industry and business in the future. IT professionals need to understand these issues before they can accurately assess whether SaaS is the right option for their enterprises.

A workshop at the 2009 Gartner Outsourcing and IT Services Summit in London on 16 June explored whether using SaaS over traditional IT offerings would be appropriate for the participants. The workshop clarified these issues by answering the questions addressed in this research.

What is cloud computing?

It is a style of computing that provides scalable and elastic, IT-enabled capabilities "as a service" to external customers via Internet technologies. The five attributes of public and private cloud computing are:

• Service-based: Well-defined service interfaces abstract consumer concerns from provider concerns. The interfaces hide the implementation details and enable the service provider to deliver a completely automated response to the consumer of the service.
• Scalable and elastic: The service can scale capacity up or down as the consumer demands, at the speed of full automation (which may be seconds for some services and hours for others). Elasticity is a trait of shared pools of resources.
• Shared: Services share a pool of resources to build economies of scale. Providers and clients use IT resources with maximum efficiency. Consumers of the service share the underlying infrastructure, software or platforms.
• Metered by use: Usage metrics track services to enable multiple payment models. The service provider has an accounting model to measure the use of services, which it can use to create different pricing plans and models.
• Internet technology use: Providers deliver the service using Internet identifiers, formats and protocols, such as URLs, HTTP, Internet Protocol (IP) and representational state transfer Web-oriented architecture.

Gartner divides cloud computing services into six layers or categories:

• System infrastructure services: System infrastructure services are the most basic and fundamental form of cloud computing service, and parallel the infrastructure and data center initiatives in IT. System infrastructure services include system-level capabilities, such as server/computing, server operating system (OS), client OS, storage or networking on which the consumer can run a variety of applications. Although virtualization is a key enabling technology, not all such platforms depend on a virtualized architecture.
• Application infrastructure services: Application infrastructure services parallel the application infrastructure, middleware and development environments used in-house. Services include development, integration and business process management as a service. The minimalist approach is for vendors to enable enterprises to run application software in the cloud on a shared system infrastructure. However, providers must build optimized cloud application infrastructure services to exploit Web-centric architectures and global-class design principles. These services should also support multitenancy environments and enable development of multitenant applications. A new category, application platform as a service (APaaS), is emerging, with vendors providing integrated development and runtime environments or rapid application development (RAD) platforms.
• Application services: Providers base application services on global-class principles, and deliver them as a service via Internet and Web-centric architectures to a browser or rich Internet application front end. Cloud application services usually require a multitenant architecture, where one application supports many companies but provides a unique view for each. Customizations, extensions and data are isolated among tenants and companies by default, but may be shared selectively.
• Information services: Information services offer search services or other mechanisms to provide access to external data or content. Unlike other cloud service categories, information services do not require consumers to move any of their data or business process logic into the cloud. The information service simply delivers information that is already in the cloud. An internal enterprise application may consume this information or mash it with other services to create a composite application. Information services are typically accessed via a simple Web-based application programming interface or delivered as feeds using Really Simple Syndication or the Atom syndication format.
• Business process services: Business process services refer to any business process (for example, payroll, printing or e-commerce) that providers deliver as an elastic service via the Internet with access via Web-centric interfaces and Web-oriented architecture access mechanisms. These services are distinct from cloud application services. Cloud application services may include business process logic as an aspect of the service being consumed. For example, using a cloud application service for sales force automation will likely include business process workflows. The distinction is that a business process service includes some business process activity that the service provider performs. The provider performs some real-world activity (for example, order fulfillment) and/or interfaces with another company on behalf of the service consumer (for example, ad placement).
• Ecosystem management and security services: Ecosystem management and security services refer to services that manage the access, configuration, consumption, delivery and security of cloud-based services and information, as well as the service-level agreements associated with the services. The application, information and process services provide the primary and direct business value of cloud services insofar as they are the services that touch the end user directly. Ecosystem management and security services deliver value by making it easier, less risky and more cost-effective to use other cloud services. These services are critical for consumers that plan to integrate multiple cloud services from multiple vendors, or plan to build applications in the cloud.

What is SaaS?

In the enterprise realm SaaS, which is one aspect of cloud computing services, is best understood in contrast with traditional on-premises applications. External service providers (ESPs) own and remotely manage software, which is delivered on a set of common code and data definitions, on a pay-for-use or subscription basis. This can potentially save time, money and resources in the traditional approach of deploying packaged applications to automate functions supporting prospects, customers, internal staff and partners.

We examine the three characteristics of SaaS, also known as on demand, in which ESPs:

• Deliver, own and manage an application remotely
• If the vendor requires user organizations to install the application on-premises using the user's infrastructure, then it isn't SaaS.
• SaaS delivery requires a vendor to provide remote, outsourced access to the application, as well as maintenance and upgrade services.
• The infrastructure and IT operations supporting the applications are also outsourced to the vendor or another ESP.
• Deliver an application based on a single set of common code and data definitions, which contracted customers consume in a one-to-many model at anytime:
• The ESP may supply configuration tools that enable the customers to extend the data model without altering the source code.
• This contrasts to the traditional application hosting model, in which the ESP supports multiple application codes, multiple application versions or customized data definitions for each customer.
• Provide a service based on pay-for-use or subscription pricing.
• Clients purchase a subscription (for example, per-user, per-month fee) or usage (for example, allocating a certain number of transactions for a fixed time period).
• A perpetual license purchase isn't considered SaaS.
• Many application outsourcing models support the first and third characteristics of SaaS, but the capability to leverage a common code base and data definitions in a one-to-many environment is the key differentiator for delivering low-cost SaaS that ESPs can support.
• Not all SaaS offerings classify as cloud services, based on
• Scaling constraints: Some SaaS solutions do not have many users and thus lack the high-volume characteristic of a cloud service.
• A lack of true multitenancy: The solution contains technology elements that are dedicated to a specific customer.

We estimate that 75% of the current SaaS market classifies as cloud services and expect this percentage to increase to 90% by 2013.

How significant will SaaS and other cloud computing service categories be during the next five years?

Cloud computing represents the most-hyped aspect of this evolution toward IT as a service. Although not all these investments will pay off, we maintain that ESPs will deploy an entire set of new delivery models in the next three to seven years. This will significantly affect the IT market and deliver new categories of industrialized services that client organizations will access on a per-user per-month or per-unit per-month basis.

This will accelerate the shift of client interest from direct investments on IT "means of production" to paying for "what they really get out of IT." Users of IT-related services can focus on what the services provide, rather than how the services are implemented or hosted. Just as utility companies sell power to subscribers, and telephone companies sell voice and data services, ESPs can deliver IT services (such as network security management, data center hosting or even departmental billing) as a contractual service.

This relatively simple shift and the apparent simplicity of the pay-per-use approach will force all types of ESPs, including traditional outsourcers, to move toward the new pricing model, at least as an alternative to a more traditional pricing scheme. Macroeconomic conditions that emphasize cost cutting will accelerate this shift.

The market for cloud services is worth $46.4 billion. By 2013, this will grow to $150.1 billion, but the growth of different types of cloud services will vary.

Cloud application services, which are broadly synonymous with SaaS, will continue to represent a larger proportion (about 13%) of the overall cloud services market than infrastructure through 2013.

Although the scale and growth of cloud services will be significant during the next five years, it will not be revolutionary in the overall context of the IT industry. The growth of cloud services will lead to a period of accelerated evolution in IT, but cloud services will represent no more than 14% of the IT services market by 2013.

In what functional areas will SaaS make the most impact?

Gartner's "Hype Cycle for Software as a Service, 2009" illustrates the dynamics of the SaaS formative delivery method and associated technologies. SaaS is the most mature (functionally capable and widely adopted) worldwide in applications in these areas:

• Collaboration
• CRM
• E-mail
• HR
• Procurement

SaaS is often associated with CRM applications in domains, such as sales automation, marketing automation, and customer service and support. CRM's popularity is likely a result of the media exposure of high-profile vendors, such as salesforce.com.

In which European countries will SaaS make the most impact?

In Germany and the U.K., CRM is the most-popular application, followed by ERP; content, collaboration and communications (CCC); and supply chain management (SCM). In France, ERP was the leading application, followed by CCC, CRM and SCM.

SaaS applications, such as ERP, CCC and SCM, focus on specific areas of business process support, such as expense management, talent management, recruitment, Web conferencing and procurement. Although many more vendors are offering SaaS in these domains compared with CRM, media exposure has generally been less conspicuous. However, enterprise buyers of IT services should not underestimate the penetration and use of CCC, ERP and SCM applications as many enterprises have some use of these applications in parts of their businesses. It's also taking hold in other software categories, such as SCM (procurement and transportation management), and in domains, such as the high-performance workplace.

Enterprises should expect to see even more diversity of SaaS applications in 2009 and beyond, as cloud-based delivery models increasingly become the option of choice for new software startups, and as more established independent software vendors migrate elements of some of their existing portfolios to a SaaS-based delivery model.

What are the business drivers for adopting a SaaS model?

The top three business factors driving enterprises to adopt a SaaS model are:

• Cost: Lower total cost of ownership than an on-premises solution
• Speed: Easier and/or faster to deploy than an on-premises solution
• Resources: Lack of resources to implement an on-premises solution

This is according to "The User Survey Analysis: Usage Plans for SaaS Application Software, France, Germany and the U.K., 2009."

Company size dictates business drivers, with large enterprises very interested in the speed of deployments (and not necessarily happy about the overall cost and the lack of agility due to limited customization). By contrast, small or midsize businesses are often satisfied with the overall cost, but find that the offering is not adequately robust and has a limited ability to integrate with their existing systems, which leads to additional cost.

Enterprises often use SaaS to quickly unify or automate commodity business processes, such as expense processing, recruitment and sales force automation, which were usually very manual or disjointed before introducing the solution.

How ready are organizations to adopt SaaS?

The workshop participants completed a self-assessment survey to understand if SaaS was right for their enterprises. Gartner recommends that all clients use this survey to judge how ready they are to adopt SaaS and which specific applications they should choose. IT professionals can download this survey from "Software as a Service: Understanding Whether It's Right for You."

Most clients that complete this assessment fall into two categories:

• Score between 31 and 50: These enterprises should start experimenting with SaaS solutions in some limited, low-risk areas.
• Score between 51 and 75: For these enterprises, SaaS solutions will probably play a significant role in the application portfolio.

During the workshop, all participants completed the survey. Forty percent of them scored between 31 and 50, and saw SaaS as a complementary addition to their IT environments, with the delivery of new functions and/or support for business processes. More than half of the participants scored between 51 and 75, and saw SaaS as a viable alternative to an existing on-premises solution. The majority of workshop participants fell into the higher class, which shows an increasing interest in alternative delivery models during the downturn.

Enterprise buyers should see SaaS as a new option that presents a different series of trade-offs because SaaS is not a panacea. Firms can't count SaaS applications as assets on a balance sheet, for example. Enterprise requirements need to be extremely simplistic if sourcing IT from a SaaS ESP will absolve IT management from taking any responsibility for IT. Nevertheless, SaaS will change the nature of this responsibility, but factors such as security and integration will continue to pose major challenges for all involved.

How should IT and the business work together to get the most from SaaS services?

They should consider SaaS solutions in the context of already-deployed, on-premises applications. Although many SaaS solutions begin as isolated islands of functionality, requirements ultimately expand because of emerging business processes and/or business strategies (for example, acquiring a new company). These changes often require the SaaS solution to become more integrated with the fabric of established, on-premises applications. Therefore, organizations must assess the complete business processes that users need to accomplish their jobs to determine potential on-premises integration or interoperability requirements. IT professionals can use this understanding to weave SaaS into a much-broader application deployment strategy.

IT and the business must also carefully look at the role and management of IT, and about the relationships between "central" IT and users in the lines of businesses (LOBs). Gartner estimates that LOBs that have not involved IT purchased 50% to 60% of the SaaS applications in use in enterprises. LOBs often buy SaaS because they have sufficient budgets and authority to "do their own thing," and feel dissatisfied with the support they're getting from central IT. Central IT management has, arguably, been slow to notice these dynamics, but the time is right for IT management to resist the pressure to build one more "company unique" application for specific LOBs when there are products available that, with minor customization, will be "good enough."

IT management and the business must jointly evaluate SaaS, even though this may raise thorny political tensions in many enterprises, and challenge existing power bases. However, IT and business professionals must work together to make decisions that best serve the overall needs and goals of the enterprise.