McKinsey on Software as a Service

Excerpts from a rather insightful article in the latest McKinsey Quarterly, “Delivering software as a service“:

On how traditional software companies will have to change to tackle the challenge on SaaS:

To be successful, vendors will have to understand the rules of the new game, especially how customer service and sales models differ, and adjust accordingly. They’ll need to grasp why software is moving to this model and how the new economics affect customers, intermediaries, and providers—not only software developers, but also IT and business process outsourcing providers. They will have to make changes in their own organizations by ramping up their ability to deliver software from large data centers and by developing new ways to sell to and service their customers. The sooner software companies embrace the change, the better access they’ll have to top talent and new markets and the better off they are likely to be in the long term.

It’s the data center bit that caught my attention – this is one fundamental resource that any next-generation software firm will need to deliver its applications, regardless of the firm’s size. In the short term, access to large, reliable storage and bandwidth will be a source of competitive advantage. In the intermediate term, though, I see hosted bandwidth and managed storage becoming a healthy business in itself, so any firm, regardless of size, will be able to get the infrastructure it needs.

On the four “waves” of traditional software that will migrate to being served “hosted” rather than “deployed”:

The first wave: “… human-resources applications such as CRM and payroll and for collaboration tools that aren’t mission critical, involve relatively low data security and privacy concerns, have a distributed user base, and require little integration with on-premise applications and little customization”

The second wave: “… transactions between buyers and suppliers, including procurement, logistics, and supply chain management.”

The third wave: “… applications (that are) more critical to business, such as hosted environments for software development”

Finally, the fourth wave: “… new classes of applications which are actually better suited for online delivery and seamlessly integrate with on-premise applications… (such as) spam- or virus-protection applications, which are superior to e-mail filters because they stop junk e-mail or harmful viruses before they enter a company’s fire wall.”

I’m surprised the authors chose to ignore data security and privacy concerns. In my opinion, this is the single biggest issue that could hinder widespread adoption of the SaaS paradigm. Google’s repeatedly come under flak for its ability to peek into users’ mailboxes. If there’s such a ruckus over personal email, it’s going to be a long long time before corporate data will be moved online.

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