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The software as a service (SaaS) or “on-demand” software model continues to gain popularity as organizations find efficient ways to leverage these service offerings.

With SaaS, commercial software applications such as customer relationship management (CRM) and enterprise resource planning (ERP) are delivered to organizations via the Web for a subscription fee. A vendor develops and hosts the software for customers. The most obvious benefit to organizations is that they don’t have to pay a licensing fee for the software.

Typically, large enterprises are more likely to deploy ERP and CRM applications using the SaaS model, says Liz Herbert, senior analyst at Forrester Research. In a survey Forrester conducted of services decision-makers at enterprises in North America in 2006, the firm found that about one-fifth of the respondents were making use of software services. Another 22 percent were strongly considering or preparing to adopt a SaaS application, Herbert says.

Of the organizations using or considering SaaS, nearly three-quarters (73%) told Forrester they had no intention of bringing those applications back in-house. SaaS adoption by small and midsize businesses will continue to be slow in 2008, Herbert says.

Companies can benefit from SaaS in a number of ways. The delivery model is especially attractive to organizations looking to streamline and focus their core business processes, because SaaS lets a company turn the development and management of non-key assets over to a vendor, Herbert says. “SaaS empowers the business unit by enabling ownership of the buying cycle, eliminating dependence on IT, and facilitating ongoing collaborative development,” she says. “In the end, SaaS provides a quicker-to-deploy, lower-risk alternative to traditional licensed software.”

In addition, Forrester has found that early adopters of SaaS have been able to receive big price breaks and wield heavy negotiating power during the contract phase. Even with large, established SaaS vendors, big enterprises that are seen as strategic to the vendors still have significant leverage over price and contract negotiation, Herbert says. “Early adopters in a particular industry or geography in which a vendor is trying to gain traction will also have more power over price and contracts,” she says.

While the benefits of software as a service are clear, there are also risks associated with giving up control of an IT asset. “Part of the appeal of the software-as-a-service model is that it enables companies to leave the management of their IT framework to someone else,” Herbert says. “However, one of the problems with this is that companies can lose control over things like data, source code, planned maintenance windows and uptime.”

Forrester has found that many of these issues can be preempted during the contract and negotiation phase with the vendor. “We recommend that [companies] maintain control of their environments by drafting a full-service contract that demonstrates clear, measurable and enforceable metrics,” Herbert says. “This includes protection against future price increases, uptime guarantees and payouts for SLA [service level agreement] misses, and requirements for security and backup.”

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