Is SaaS a disruptive innovation?

Software as a Service (or SaaS) is relatively new on the scene and rapidly gaining traction in the market.  I think it is safe to say that it is an innovation in the technology industry, but is it a disruptive or sustaining innovation?  In Clayton M. Christenson’s Innovator’s Solution, he draws a distinction between the two.  In a nutshell you can think of a disruptive innovation as having the power to displace more established competitors, and the potential for great profits, and a sustaining innovation as having the power to help an established firm maintain its current trajectory but not necessarily improve it.

The Innovator’s Solution uses a few litmus tests to tell whether the innovation is truly disruptive, namely:

·         Does the innovation make it easier for those who were previously non-consumers of a product or service to enter the market?

·         Is it price-competitive with established firms and can pick off less demanding customers at the lower end of the market?

If you read Gartner’s 2009 predictions about SaaS, a “Disruptive” diagnosis jumps off the page for at least the “low end”.  The first generations of SaaS applications are provided by smaller vendors, and they tend to be less complex in terms of the functionality they currently offer.  Gartner’s analysis shows two other telltale signs of a disruptive innovation:

1.       The established enterprise software firms (Oracle, SAP, Microsoft, etc) are economically incented to NOT offer a SaaS model to their customers at this time

2.       The “disruptive” entrants will be moving up market and  offering more substantial functionality (they actually predict functional equivalence by 2013)

Gartner does predict that by 2013, 7 of the top 10 SaaS offerings will be made by the established enterprise software players, but that still leaves 7 of the 10 slots for less established firms. 

The potential Long Tail market for SaaS should improve its disruptive potential.   

First, we have probably only scratched the surface in terms of the breadth of the typical enterprise application portfolio that has a SaaS offering.  Currently Customer Relationship Management (CRM), Human Resources, and Collaboration applications are SaaS strongholds, but there is room for growth into other enterprise applications such as finance and Enterprise Resource Planning (ERP).  There is also a huge set of industry specific or other niche solutions yet to be offered.   

Second, have the current set of SaaS vendors / solutions really reached low enough in to the “low end” of the enterprise software market?  How well have they done at creating an offering that they can earn new customers that have not previously used enterprise software?  I have personally heard anecdotes about companies who are customers of a CRM SaaS offering, yet maintain “prospects” in spreadsheets and other home grown systems until they become paying customers because the cost per “contact” is still too high for them.

In order to get a clearer vision for how “disruptive” or successful SaaS based solutions will become, there are some key questions left to answer that likely don’t have a single straightforward answer:

·         How easy is it to migrate from one proprietary SaaS based solution to another, or to an on-premise system?

o   To win over some of the most conservative enterprises, they will need assurances that they can get their data out of the system and are not locked in. 

o   This seems like a key feature that SaaS vendors should be competing over unless data standards already exist or are developed.

·         What kind of an innovation is SaaS for system integrators? 

o   On the surface, it seems like a good opportunity for sustaining innovation, but is it?

o   How well will the SaaS vendors partner with integrators as they grow?  Will there be an economic incentive for them to do so?

·         What are the financial accounting implications of investing in SaaS? 

o   I.e. How are the costs/capital expenses amortized for a pay as you go SaaS versus traditional enterprise software investments? Would this incent or dis-incent a company from using SaaS?

In summary, it is my opinion that the SaaS movement in general is clearly a disruptive one.  Some established players will eventually start to offer SaaS based solutions, but the economic temptation to fight this off in the short term will cost them.  Time will tell whether the new comers can continue to move up the value chain in the enterprise software market, and whether the incumbents have learned how to cope based on the history lessons that are out there from other markets that have already been changed by disruptive innovations.

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1 Comment

Filed under Enterprise Architecture Vision

One response to “Is SaaS a disruptive innovation?

  1. I do not know whether SaaS is disruptive or not but do I understand is form of evolution of SOA. Visit my blog entry (http://architecture-soa-bpm-eai.blogspot.com/2009/03/soa-evolution.html) for details.

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