The Business Case for Software as a Service

August, 2006

Software as a service (SaaS), sometimes referred to as “software on-demand,” is becoming an increasingly popular way to implement business applications. This article is an executive summary of our full report, Software as a Service Shows Attractive Payback, which provides a brief overview of SaaS and analyzes the current adoption rate and ROI/TCO for this technology for users.

What is Software as a Service?
The concept behind software as a service is simple. Instead of a software vendor selling a software license that the client then implements and maintains in its own data center, the vendor (or, more properly, the service provider) hosts the system on its own computers in its own data center and provides access to the system on a subscription basis. In a nutshell, software on-demand turns software from a license sale to a subscription service. The term software as a service may be new, but the concept goes back to the early days of business computing, to the time-sharing systems that were run by service bureaus and more recently to the application service providers (ASPs) that came to being in the late 1990s.

There are two important variations in the model for software as a service today: the service provider may host a separate system for each customer (the “single tenant” model), or, the vendor may host multiple customers on the same instance of the system (the “multi-tenant” model). It is a relatively simple matter for most software vendors to deploy software as a service in a single tenant model. But only vendors that have specifically designed their systems from the ground up to host multiple clients on a single instance can deliver software as a service under the multi-tenant model.

Everyone’s favorite example of software as a service is, which is built with the multi-tenant model. offers complete sales force automation and CRM functionality for a flat per-user, per-month fee of less than $100. There is no upfront license fee, and small deployments can be up and running in days or even hours. There are other examples of providers of CRM on-demand, including Siebel (now part of Oracle), which offers its traditional CRM offerings on a single-tenant hosted basis as well as a pure on-demand CRM product now called Oracle CRM On Demand.

There are hundreds of providers of software as a service. Examples include ADP, the long-time provider of payroll services; Netsuite, a complete ERP system offered as a service; Rightnow, another CRM provider; and Webex, the familiar provider of on-demand web conferencing.

Adoption Trends for Software as a Service
According to our IT Spending, Staffing, and Technology Trends 2006/2007 survey, software as a service is already well established as a means to deliver business applications. As shown in Figure 1, 30% of all organizations in the U.S. and Canada have already implemented some form of software as a service. Of this number, 15% plan to increase their use of this technology, while 14% have no further plans for it. Only 1% of respondents say they are cutting back their use of software as a service.

Software Fig1 - The Business Case for Software as a Service

Furthermore, there are another 18% of organizations that are either researching or in the process of implementing some form of software as a service. About half of organizations report no activity.

The full version of this report documents the differences in adoption rates for SaaS by size of organization: small, mid-size, and large companies.

The Economic Characteristics of Software as a Service
Among organizations that have implemented some form of software as a service, the economic results are positive, according to our 2006/2007 survey. This is, no doubt, a strong factor in the high adoption rates that we have seen thus far.

The full version of this report provides the percentage of firms that report positive, negative, and breakeven ROI for SaaS and the percentage of firms that report total cost of ownership (TCO) as less than, the same as, or greater than budget. It also provides recommendations concerning the types of applications that are best suited for deployment under SaaS.

Our research finds that software as a service is still in its early stages of adoption and it is growing quickly. IT managers will be well advised to investigate this model for business applications where appropriate.

June 2006

This Research Byte is a summary of our full report, Software as a Service Shows Attractive Payback, which may be found on our website at (click for pricing).