As I always say, the most important thing about software-as-a-service (and managed services in general) is not the technology, but the new business models the technology makes possible.  It can be hard to think about new business models - especially in an industry where you have spent your whole professional life and may not be able to see the forest for the trees - so let's look at an example from an unrelated industry.

Today's example: dry cleaning.  The first dry cleaning business was established in France in the 1840's, and the business has not changed much in the subsequent 160 years.  The typical dry cleaner is a large retail store front, with complex equipment and lots of storage space (since they have to keep 1000's of customers' clothes on hand) and a 2-3 day cycle time to clean & return your clothes.  Although the method of cleaning has changed over the years - switching from dangerous chemicals like kerosene and benzene to more friendly stuff like carbon dioxide - the basic business model has not changed too often.

One significant change was a shift from on-premises cleaning to off-premises.  In the prior model, many dry cleaners had the equipment and chemicals in the storefront or nearby, and did the actual cleaning work themselves.  Although this allowed the fastest turnaround time (I once had a shirt "emergency dry cleaned" in only 10 minutes) the economics were wrong - picture 100 dry cleaners in a city, each with a large capital expense for buying the equipment, each needing to train people to use the machinery and chemicals safely, special permits from the city, expensive insurance policies ... a difficult situation.

A generation ago, most dry cleaners switched to being storefronts only, and sent the clothes to a cleaning plant somewhere across town to be cleaned and returned to the retail location later.  This was a classic "economy of scale" play and has some parallels to SAAS.  You can make a good living as a dry cleaning plant - owning, operating and maintaining your own equipment & specialist staff - but only if you operate at volume (preferably 24 x 7).  If you aren't prepared to operate in this highly scalable and efficient way, you are better off buying the service from someone who is already doing it. You can succeed either way, but need to know which role you want to play in the dry cleaning supply chain.

How this relates to software - if a software title is available from a large-scale service provider (including vendors who offer their own software in a SAAS model), they can sell you the service for less than you can do it for yourself, if you consider the total cost of ownership.  Be careful to not look at just the price of the software (like $1.00 per shirt cleaned) while ignoring the surrounding costs (your time, gas to and from the dry cleaners, time delay etc.)  If you take a dispassionate look at what it costs you - in real dollars and opportunity cost - to run your own software, the value of SAAS becomes obvious.

More recently, some dry cleaners have changed again by eliminating the retail storefront altogether, by picking up and dropping off at your front door.  One example, the company my family uses, is 1-800-DryClean.  When I first heard of this service, I was elated.  Although our previous dry cleaner did a great job, the logistics of getting clothes to and from them were tough.  I travel a lot for work, and sometimes work odd hours, so I often could not get to the dry cleaner for many days.  When I was able to visit, I had to park, get in & out of the car, maybe walk thought the rain, stand in line ...

When I heard that 1-800-DryClean would pick up & drop off at our home, I thought "wow, but how much will that cost". Surprise: it costs less (sometimes much less) to have your dry cleaning hand-delivered to your front door. That is counterintuitive and kind of amazing. Think about it - in the traditional model, you are doing half the work and paying more for the privilege.  How can a dry cleaner do more for you (delivery) but charge less ???

The answer is pretty simple - by eliminating other expenses.  The dry cleaner no longer needs an expensive retail storefront, just cheap office space in an industrial park somewhere and a few delivery trucks. By rethinking who-does-what, and questioning some basic assumptions of their industry, 1-800-DryClean offers more, charges less, makes me happier and (presumably) makes more money in the process.

How this relates to software - SAAS allows vendors to reduce their expenses in many categories.  For example, in the traditional model, software teams need to design, develop, test and release products for many different environments - typically several operating systems (Windows, Solaris, AIX, HPUX, different flavors of Llnux ...) and different versions of each; several different database management systems (Oracle, SQL Server, DB2, Sybase, MySQL ...) and different versions of each; and multiple combinations of these (Oracle 9 on Windows 2000?  Oracle 8 on Solaris 9?) etc.  This might have made sense in the old model where every customer made their own "equipment" purchasing decisions, but in a service-delivered world, the software vendor can choose just one platform and use it for every customer - since the customer doesn't see or care about what is back at the "dry cleaning plant".  All the customer cares about is, clothes cleaned and back on time (or software that works from the end-user's perspective) and a reaonable price.

The same is true in many other categories.  No tech support required for old versions of software - because there are none (just one hosted version used by all customers). No need for huge test labs and software testing mechanisms - because you have 100X fewer environments to test.  Which leads to fewer bugs - happier customers and less tech support.  I could go on and on ...

That's the challenge facing the software industry.  How can we do more (useful) things for customers while reducing (non-value-added) expenses?  Can we charge less and make more money in the process?  I think we can, but not by working harder - we need a new business model - in my mind, a combination of SAAS and managed services.  Those who understand this will be able "clean up" (sorry) in the market.

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