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There is a profound transformation taking place in the IT industry today, impacting Software vendors, Services providers, and – by extension – their partnerships with each other and their channels.

In the Software sector, more and more suppliers are adopting the “Software-as-a-Service (SaaS)” approach: the online, pay-as-you-go business model for packaged software. Recent examples include SAP’s CRM On-Demand introduction and Microsoft’s announcement of Dynamics Live CRM, following Oracle and SaaS pioneer salesforce.com. What’s the transformation? The SaaS model is turning Software suppliers, in part, into Services providers.

In the Services sector – with less fanfare, but at least as much transformational impact – suppliers are moving slowly but steadily toward what I call a “Services-as-Software (SaS)” approach: delivering more and more of their services (and underlying IP) in the form of packaged software and “solutions”. CSC recently discussed with us its plan to invest tens of millions of dollars each year to develop a new portfolio of solutions. Accenture recently announced plans to invest $450M over three years to accelerate the development of SOA-based applications. And IBM is in the midst of transforming more and more of its Global Services business into an “asset-based” business, building software based tools that encapsulate its consultants’ know-how. The SaS model is turning Services providers, in part, into Software suppliers.

The core motivation for SaaS and SaS is economic: suppliers need to take costs out of product and service delivery, taking advantage of technologies that offer operating leverage. In the case of Software vendors, the key technology is the Internet. For Services providers, it’s code (which – like for traditional software vendors – will, in turn, be increasingly delivered via the Internet).

At a more fine-grained level, there are many forces driving the SaaS and SaS transformations, including Software suppliers’ need for greater speed and simplicity of delivery (to accelerate customer adoption), and Services providers’ need to address cost pressures from offshore competitors. But as we’ve discussed in a prior post, a critical driver for both sectors’ transformation is the growing desire to reach the “SMB Long Tail” – the very large number of low unit-spend customer accounts that have been traditionally very hard to serve profitably through traditional software and service delivery models. Tapping into the small and medium business segments will be an essential ingredient for growth-oriented strategies over the next several years; case in point: in emerging markets, such as China, India and much of Latin America, SMBs account for a higher proportion of customers.

If SaaS is making Software vendors more like online Services providers, and SaS is making Services vendors more like Software vendors, what does it mean? On the surface, the SaaS and SaS trends will make it easier for software and services suppliers to edge into each others’ businesses. But for many executives I’ve talked to, that’s the last thing they want: some in the Services industry worry that leverage from software-based offerings mean “fewer billable hours”, while some Software executives cringe at a services model’s fewer large up-front payments and fear decreased leverage in their operating model. In addition to these reservations is my own observation that companies, like products, have “design points”, which makes it extremely hard to suddenly shift into entirely new businesses successfully. So it is highly unlikely that Services vendors will become full-blown, traditional packaged software vendors, or that Software vendors will become traditional services providers.

But we will most certainly see both types of company reach out to the market more and more through a new fusion of software-based services, increasingly delivered online. It will be a little harder to sort out, through a traditional IT industry lens, just where a Software vendor ends and a Services provider begins, and vice versa. The new services and software market fusion will require that Services executives think more expansively about the net impact of software (i.e., leverageable IP) on their business, and that Software executives reconsider their views about the net impact of on-demand, services-based pricing on their own growth and profitability. Most importantly, this new market fusion will demand that Services and Software suppliers rethink, and sharply define, their own competencies, their value to customers, their selection and prioritization of customer segments, and – of course – their shifting relationships with each other.

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2 Responses to ““Services-as-Software”, the Long Tail, and the New Software and Services Fusion”

My question is how will SaaS drive internet bandwidth needs especially upstream. I think this is particularly important in the SMB segments. SMBs are a large part of the broadband market (specifically DSL / Cable) and would be reluctant to quadriple their spend on internet connections.

What do you predict the cable companies and telecos will do. Granted Vz is deploying FiOS and Cable is looking to DOCSIS 3.0 but FiOS won’t be everywhere (how big is Vz’s appetite beyond $28b) and DOCSIS 3.0 isn’t cheap to deploy either. What do you see happening in the DSL arena regarding upstream? Will the telecos have to increase upstream speed to keep up with SaaS and other user generated content being sent upstream?

[...] and presence, to become a much more services-led IT supplier, and to leverage the “services-as-software” trend to make its services as asset-based and “industrialized” as possible. All [...]

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