The Case for Saas - Part I

Saas is widely touted as the one big driving force that will expand the market for business software by satisfying the latent demand among SMBs at rates that they can afford. The promise, though, hasn’t been fulfilled yet, especially in emerging markets. Saas adoption is still largely driven by large enterprises which are essentially simply diverting budgets from legacy systems to Saas.

For Saas to really find adoption among SMBs, it is important that one understands the nuances of this segment. I believe that SMBs, like enterprises, have vertical-specific needs and creating vertical-specific Saas products is critical to managing data and processes.

Saas essentially brings in two advantages:

1.       Productivity: Saas is a hosted model seeking to replace legacy data and process management software and I believe that the evolution and adoption of Saas among SMBs should logically follow a path similar to the one followed by legacy systems in large enterprises.

2.       Productivity + Network: While the hosted model helps reduce TCO, it would be a terrible waste of the potential of the internet if Saas products didn’t simulate business relationships online.

In Part 1 of this analysis, I will largely be focusing on the Productivity aspect alone and will discuss the network aspect in a follow-up blog post.

Information Technology, in the pre-networking and communication days, evolved out of the need for better data management. The basic use cases that any information system seeks to solve are the following:

1.       Data Storage

2.       Data Search and Retrieval

3.       Data Mining and Analysis

From the early days of IT, the industries consuming maximum IT infrastructure have been industries which had to deal with large volumes of data and large churn in these data volumes. I believe that SMBs which so far could not afford legacy solutions would need Saas to solve similar needs that were and still are solved by legacy IT at large enterprises.

1.       Banking and Consumer Financial Services:

a.       Rationale: Banking continues to be the largest consumer of IT. Not only do banks manage huge amounts of data, they also experience high churn in data in the form of daily transactions. Data storage is critical but so is retrieval. Also, financial services firms (even the smaller ones) are usually run by well-educated managers who are more likely to understand the importance of Saas.

b.      Risk: The challenge is that most banks require the data that they manage to be stored within their environment and may not be very open to Saas.

c.       Recommendation: Saas could be an important model for non-banking service providers which could include brokerages, MFIs and other smaller players in less regulated FI verticals.

2.       Healthcare:

a.       Rationale: Healthcare again has great need for data storage as there is a lot of churn in terms of patients moving in and out. More importantly, since patients are fairly loyal, data retrieval and management needs are also high. Also, healthcare is a recession-proof business which augurs well for anyone providing Saas services to this vertical. Healthcare has a long tail of clinics and nursing homes which cannot afford sophisticated IT making Saas an ideal model for serving them. Add to that the fact that compared to other SMB owners, doctors are much better educated.

b.      Recommendation: Hospital management is fast becoming popular among smaller nursing homes and Saas is a great model for the same. Patient data management for smaller clinics and hospital resources management for larger nursing homes could be interesting spaces to watch.

3.       Education

a.       Rationale: Education is a recession-proof business and the number of small educational institutions has been on the rise. Process management is important in education institutions but the Saas applications that might have most potential could be in the area of e-learning for education systems to use the internet as a disctrbution channel. Any Saas apps that help them create education modules fast and disburse it over the net  may have good potential. This is especially true while targeting the long tail of individual tutors who might want to look at the internet as an alternate revenue stream.

b.      Risk: Not a deal-breaker but data management problems are not quite as complicated as in BFSI or healthcare owing to lesser churn. Hence, Saas need for internal processes may not be too high.

c.       Recommendation: Saas models that help create e-learning modules could find high adoption.

4.       Retail:

a.       Rationale: Sheer numbers should be enough to make IT vendors run to this vertical. Retailers have huge data churn managing sales and inventory. It is important to understand the use cases that can be solved by Saas and those that can’t. E.g. POS terminals are fairly inexpensive as desktop products and need to have continuous uptime which is why Saas might not be a great model there. Hence, it is important to identify the right pain points for retailers that can be served by Saas.

b.      Risk: Sadly, retail is a largely unorganized industry and it can be very difficult reaching the long tail. Labor is cheap and any Saas model that simply seeks to replace labor without adding intelligence won’t do very well in emerging markets. Most importantly, retailers are largely mom and pop stores and the level of IT awareness is very low compared to the other verticals.

c.       Recommendation: Given that broadband doesn’t exist among the long tail, mobile could be the model of delivery